What Goodyear Got From Its Union

The USW brought a plan to revitalize the ailing tire maker to the negotiating table

When leaders of the United Steelworkers union sat down last April to negotiate a new labor pact with Goodyear Tire & Rubber Co. (GT ), they knew they were headed for trouble. After all, the nation's largest tire maker had lost $1.1 billion in the previous year as rivals selling cheap tires made in low-wage countries sliced its market share by three points, to 19.5%. Just as bad, a revolving door of top executives had racked up a crushing $5 billion in debt by investing in acquisitions and new tire products that didn't pan out. The union's options? Allow Goodyear to replace some of its 14 U.S. plants with ones in Asia, or fight the company with a strike that could force it into bankruptcy.


Instead, USW President Leo Gerard came up with a third choice. Tapping the expertise of former Lazard Frères investment banker Ron Bloom, who joined the USW as a strategy advisor in 1996, the union hired a boutique Wall Street firm to devise a long-term strategic plan for the company. The goal: to make Goodyear globally competitive in a way that would preserve as many of the union's 19,000 jobs as possible.

In the end, that's just what happened in a new contract ratified in mid-September. The USW offered to slash labor costs by $1.15 billion over three years and to cut 3,000 jobs. In exchange, Goodyear promised to keep -- and invest in -- all but two of its U.S. factories and to limit imports from its factories in Brazil and Asia. The company also promised to go along with the more aggressive debt restructuring timetable the USW's Wall Street advisers recommended as a way to rein in management. In fact, to hold the company's feet to the fire, the USW got Goodyear to agree to pay $1,000 to each union worker and $500 apiece to all 22,000 retirees if the debt goals aren't met by 2007. "We told Goodyear, 'We'll make you profitable, but you're going to adopt this strategy,"' says Bloom. Says Jonathan D. Rich, president of Goodyear's North American tire business: "We got what we needed" to become competitive again.

The innovative Goodyear pact is a reprise of the strategy Gerard used to help restructure the ailing U.S. steel industry in the past year (BW -- Feb. 3). Foreign competition has savaged steel even worse than tires, driving several steelmakers into bankruptcy or liquidation. To stop the hemorrhaging, the USW agreed to massive job and benefit cuts, which have helped stabilize leading steelmakers. Now Gerard hopes to use the Goodyear deal as a model to pull off the same feat with other tire makers. Instead of making tires in overseas factories, he wants Bridgestone/Firestone Inc. (BRDCY ) and Continental Tire North America Inc. to invest in their U.S. plants and compete via higher productivity. "We're trying to bargain public policy," says Gerard.

BREATHING ROOM. It's an ambitious goal, given the huge wage differentials with other tire-producing countries. In Brazil, Goodyear pays workers just a fraction of the $22 an hour it pays USW members. That's why the union took some painful medicine to try to put Goodyear's U.S. factories back on a competitive footing. In addition to the job cuts, USW members won't get a raise for three years. Plus, union workers and retirees will pay more for health-care coverage, saving $50 million a year. Management also agreed to limit executive salaries, including options, and to cut the salaried workforce by 15% more than the hourly staff.

Will even all this be enough? UBS Warburg (UBS ) analyst Saul Rubin says Goodyear needs to close several plants, not just the one the union agreed to shutter, with a possible second closure if productivity targets aren't met. Plus, the $1.15 billion in cuts slice only $450 million off existing expenses, with the remaining $700 million coming in future wage and benefit hikes the company now won't have to pay.

Still, Goodyear clearly has won some breathing room. The other U.S. tire makers, whose USW pacts also expired last April, are suffering too and may be willing to go along with a similar approach. If Goodyear and the USW can figure out how to keep up as globalization drives down costs, there may be some hope that this old-line manufacturing industry can be competitive -- and remain in the U.S.

By David Welch in Detroit

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