GM: Flirting With The Nuclear Option

It must cut health costs, but paring UAW retiree benefits risks all-out war

General Motors Corp. (GM ) and the United Auto Workers seem to be playing a dangerous game of chicken. GM Chairman G. Richard Wagoner Jr. said recently that he prefers a cooperative deal with the UAW on health-care issues rather than a fight, but he added: "Either way, it is crystal clear that we need to achieve a significant reduction in our health-care costs and to do so promptly." The implication: If the union doesn't make big concessions to help slash GM's $5.6 billion in health costs, management will cut them regardless. For his part, UAW President Ronald A. Gettelfinger says: "It would be a huge mistake" for GM to reduce retiree medical benefits without his say-so. "Legally, they can't do it."

Things may yet escalate. Wagoner is under tremendous pressure to get cost concessions from the UAW, and analysts and some GM insiders think that while Wagoner hasn't said so outright, he may even be considering a "nuclear" option to cut health costs. A 1971 U.S. Supreme Court case, Chemical Workers vs. Pittsburgh Plate Glass Co., ruled that retiree medical benefits are not protected by a union labor contract, which only covers active workers. Bolstered by that ruling, GM could reduce or even cancel costly medical benefits for its union retirees without consent from the UAW. "That gives GM a lot of leverage," says Sanford C. Bernstein & Co. (AC ) analyst Brian A. Johnson, "especially since a strike over retiree benefits could be illegal."

If only it were that simple. True, slicing medical benefits for GM's 340,000 union retirees -- and its 111,000 workers -- would save $1 billion a year. But going after retiree benefits unilaterally would also spark a labor war. Union officials dispute the interpretation of labor law that gives GM an easy out on retiree benefits. Indeed, unions have won several similar cases in circuit courts, says Stanford University Law School labor law professor William B. Gould IV. UAW leaders warn that they could sue or strike if GM tried to abrogate retiree health benefits. "The cost of unilateral action would be high," says Harley Shaiken, a professor at the University of California at Berkeley and a labor studies expert. "There is widespread support within the UAW to bend to help GM, and threats like this could squander it."

Winning a labor war would be tough, in any case. Caterpillar Inc. (CAT ) endured a five-month strike in 1992, then hired replacement workers. Eventually, Caterpillar got lower wages, and today UAW members there pay at least $80 a month in medical premiums, while their Big Three colleagues pay none. But the UAW didn't have the grip on Caterpillar that it has on GM. And with the No. 1 auto maker's huge size, a companywide strike would drain an estimated $2 billion a month in cash, says Sanford Bernstein's Johnson. GM's last major strike, in 1998, cost it $2 billion over 54 days.

Despite all the tough talk, neither side wants war. In all likelihood, both are posturing to get a deal. UAW leaders need to sell concessions to their members. If there is enough saber-rattling about slashing retiree medical benefits, an increase in co-pays or premiums might seem easier to swallow. For Wagoner, it's crucial to move now. GM is losing money, but its long-ailing European operations are rallying, and profits at home could improve with new vehicle launches next year. That could dissuade the UAW from concessions during the 2007 contract talks.

At the same time, there's tremendous pressure not to bend. GM's board gave the UAW a June 30 deadline to come up with a deal, though that could slide into July. Lurking in the background is billionaire Kirk Kerkorian, who owns 7.2% of GM and wants to see decisive action that will bring profits back.


On the union side, Gettelfinger can't make major concessions the year before he's up for reelection, especially since retirees -- who make up more than half of the UAW's Big Three membership -- are allowed to vote. Moreover, half of GM's current workers are eligible to retire by 2008. Plus, the UAW usually gives each of the Big Three the same deal. Chrysler Group (DCX ) is profitable, so its union workers won't be amenable to concessions. This puts more pressure on Gettelfinger to deliver a deal his entire union can live with.

For those reasons and more, the two sides appear far apart. Leaders of union locals from around the country met with UAW Vice-President Richard Shoemaker on June 9 and gave him permission to make some concessions on health care. But many said later they could swallow cuts for hourly workers but not retirees. Partly, they're motivated by loyalty to people who are often fathers or aunts. In addition, with so many current workers near retirement themselves, they take future benefits seriously. "The retirees worked hard and earned their benefits," says Dave Peterson, president of UAW Local 31 in Kansas City, Kan. "We'll do whatever it takes to protect them."

Getting big savings without touching retirees will be difficult. Analysts expect GM to lose $4 billion in North America this year. If GMAC makes its predicted $2.5 billion in profits and if international operations break even, Wagoner will need at least $1 billion in savings to approach profitability. To get there, it could raise co-pays and deductibles on some of its nontraditional HMOs and PPOs, as Chrysler did earlier this year. That alone could save GM about $200 million, analysts say. Further paring the doctor network to eliminate high-cost health-care providers could save up to $400 million a year, Johnson says.

GM also could eliminate many of its nontraditional plans. Getting nearly all UAW workers and retirees in GM's Blue Cross/Blue Shield plans -- in which half of GM's union members are already subscribers -- could net the company a bigger bulk rate, says Sean P. McAlinden, chief economist at the Center for Automotive Research in Ann Arbor, Mich. If the UAW agrees, he estimates that the carmaker could save at least $500 million a year.

The problem: GM's 10% per year health-care inflation on $5.6 billion in costs would eat up half of the gains even with $1 billion in savings. That may be why some GM insiders don't think a UAW fix will solve the company's problems in any case. As long as management negotiates with that in mind, the two sides may avoid a labor war neither side really wants to wage.

By David Welch in Detroit

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