Labor Could Back This Gm Spin Off

A tried-and-true compromise may ease Delphi's transition

Ever since General Motors Corp. announced the spin-off of its $28 billion auto-parts unit last year, management has braced for a showdown with the United Auto Workers when its labor pact expires on Sept. 14. UAW President Stephen P. Yokich has made it clear all along that he opposes the spin-off, which GM undertook in part because nonunion rivals pay half the $20 an hour Delphi's 46,000 parts workers earn. Even after Delphi Automotive Systems Corp. became a separate company in May, Yokich vowed to hold GM's feet to the fire in this summer's contract talks with the Big Three auto makers.

Now, it's becoming clear how all sides may be able to resolve this thorny issue. To ease Delphi workers' fears, GM and Delphi negotiators say they're amenable to Yokich's suggestion to follow the script used in GM's sale of five unprofitable parts plants in 1994. In that case, GM gave all 7,500 workers the right to transfer back to the security of a GM job, based on available openings. And American Axle & Manufacturing Inc., the new company created by the '94 sale, agreed to pay GM-level wages and benefits to those who stayed with the new company.

Plenty of details remain to be worked out, most notably how long Delphi will commit to such uncompetitive wages in the new labor pact it signs in September. Indeed, Delphi has made no secret of its ultimate objective: to break away from the Big Three labor pacts and bring its pay and benefits more in line with nonunion rivals. But negotiators on all sides say earlier fears of a meltdown have eased. Better yet, an American Axle-style solution also could serve as a blueprint for Ford Motor Co., which is contemplating the spin-off of its own parts unit, Visteon Automotive Systems.

What's more, since GM first announced the spin-off, investors have anticipated that Delphi would have to match GM's high wage levels, at least for now, in order to keep peace with the UAW. So Wall Street doesn't expect the current round of negotiations to have much impact on Delphi's near-term financial outlook.

Of course, the financial impact of any Delphi-UAW contract is smaller than it used to be. Although the UAW remains Delphi's largest union, it represents only about 23% of Delphi's total workforce, down from 44% in 1992. That's because Delphi is opening more factories overseas, where labor is cheaper, as it lines up new non-GM customers. That shift has already led to a significant drop in Delphi's average labor costs. In 1992, Delphi paid workers an average $27 an hour; now the rate is $20. In the U.S., meanwhile, Delphi is already working with the union to improve productivity without cutting wages, and both sides expect that to continue.

Why has harmony broken out? Experts say that in exchange for the union's acquiescence on Delphi, GM has backed off its plans to adopt so-called modular manufacturing techniques, which give more work to lower-wage, often nonunion, suppliers. "The UAW's strategy is to give GM the Delphi spin-off and delay" modular, says University of Michigan labor researcher Sean McAlinden.

Already, GM and Delphi have taken steps to allay Delphi workers' trepidations. As early as December, GM agreed that any Delphi worker who retires before Oct. 1, 1999, gets a pension from GM, not Delphi. Then, afraid of a stampede, Delphi went further and pledged that no matter how the labor talks turn out on Sept. 14, it will match GM's pension for the life of the next contract.

BLUEPRINT. Beyond pensions, the American Axle experience provides a blueprint for managing the future at Delphi or Visteon, which employs nearly 24,000 UAW members. American Axle honored the existing pact and then gave the union three more years of GM-level pay and benefits. Still, nearly half of the 7,500 affected workers opted to return to GM rather than take their chances with a newly formed company. "These people just didn't think there was life after General Motors," says Kevin Donovan, a UAW officer. American Axle declined comment.

Many Delphi workers may feel the same way. Of course, with $28 billion in revenues and 168 plants worldwide, Delphi is no unknown entity like American Axle was five years ago. As one of the world's 30 largest companies, it's not likely to go out of business. Still, even with the new pension guarantees, both union and company officials expect 7,000 or more older Delphi workers to beat a path to retirement before the Oct. 1 pension deadline. And thousands more will likely apply for the right to return to a GM job.

This is where the American Axle example may not set the precedent the UAW would like. In the mid-1990s, GM was in a hiring mode, adding several thousand workers, enough to accommodate most American Axle employees who wanted to go back to the former parent.

NEED TO CUT. Today, GM has all but stopped hiring. GM's workforce is the oldest of the Big Three, with an average age of 48, and its attrition rate is running at nearly 7% a year. Still, GM is shrinking its workforce to fit its smaller market share, so the company isn't replacing most of the 7,000 workers who leave each year. In 1998, for example, it hired just 500 new hourly employees, and absorbed only 1,300 returnees from all its spin-offs. Result: the right to first crack at a GM job opening may not amount to much for all the antsy Delphi workers who might want to return.

Even so, the UAW hopes that American Axle will stand as a model for both Delphi and Ford's Visteon, should it be sold. Since 1994, American Axle has managed to maintain GM-level compensation by improving its manufacturing process and becoming more productive--the $2 billion company moved into the black the year after it was founded.

In the long run, the UAW must face the large pay discrepancy between union and nonunion parts workers. The union expects American Axle to demand pay cuts for the first time when its labor pact expires again next February. The UAW will argue that continued productivity gains can make the company more competitive wIth nonunion peers, says the UAW's Donovan. But what happens then may foreshadow what Delphi workers likely will encounter when their next contract talks roll around three or four years from now.