GM's Aches Are the UAW's Pains

With the carmaker's North American unit staring at billions in losses, the union is working feverishly to find a solution. It won't be easy

By David Welch

When General Motors (GM ) asked the United Auto Workers to accept cuts to its health-care plan earlier this year, union leaders balked at first. They knew the carmaker was in trouble, especially in North America, but they weren't sure how bad things really were. UAW President Ronald Gettelfinger refused to rewrite the current labor contract to radically change the health-care provisions. He even brought in investment-banking firm Lazard Ltd. to comb through the books to get an independent read of GM's troubles.

Now, its results are coming in, and the preliminary conclusion is that GM faces a big challenge. Lazard hasn't finished its analysis, but the firm thinks GM-North America could lose as much as $5 billion in its home market this year and next, BusinessWeek Online has learned.

That's what UAW Vice-President Richard Shoemaker told union local presidents at a meeting in Chicago last week, according to several UAW leaders who were in attendance. Shoemaker also said he doesn't expect a serious profit recovery at GM until 2008. "The UAW is taking this seriously," says one local president in Michigan. "Inside, our leaders are working feverishly to find a solution."


  GM has given no earnings guidance for the rest of this year or 2006. But the auto maker's North American business lost $2.5 billion in the first half of 2005, as high gasoline prices and aging products have slowed sales of GM's profitable SUVs.

Throw in rising health-care costs and expensive steel, and GM has had one rough year. Some Wall Street analysts expect it to lose at least $4 billion in North America this year, followed by smaller losses next year.

Union leaders at the meeting also said they're worried that GM will continue to lose market share to the Japanese. And they fear that gasoline could hit a national average of $3 a gallon. That could trip up GM's much hoped-for recovery in SUV sales when its remodeled Chevrolet Tahoe, GMC Yukon, and Cadillac Escalade hit showrooms starting early next year. "It was all bad news," lamented one union local leader from Ohio.


  That sentiment has risen to the union's top brass. While Shoemaker and Gettelfinger have been adamant that they won't reopen the current union contract, both sides have hinted that a deal on health care is in the works. Says one union leader: "Shoe made it clear that they'll do everything they can to help with health care."

GM Chairman and CEO G. Richard Wagoner Jr. has consistently said GM will address its health-care costs this year. In a presentation to analysts and shareholders on Aug. 30, he showed a slide with a green arrow up for health-care costs in 2006. When asked how he would achieve these savings, Wagoner told analysts his projection assumes a deal with the union this year. "We're moving to reduce costs and address the health-care burden," Wagoner said during his presentation.

GM proposed that the union allow the company to cut $20 billion from its $77.5 billion long-term health-care liability, union sources say. That would slice roughly $1 billion a year from GM's annual $5.6 billion health-care tab, says UBS analyst Robert Hinchliffe. But Shoemaker said at the Chicago meeting that the UAW won't give as much as GM wants.


  Maybe it won't, but GM will still likely get some real savings. Without opening the agreement, the UAW could let GM eliminate some of the alternative health-care plans, sending more workers to Blue Cross/Blue Shield. That would reduce medical options for union workers, but they would still be covered, and GM could save more than $500 million a year, says Sean McAlinden, chief economist at the Center for Automotive Research in Ann Arbor, Mich.

Boosting co-pays, premiums, and deductibles saves even more. "When you weigh job security vs. co-pays and a change in benefits, job security is more important," says one of the local leaders.

There's another sticking point to getting a deal. While GM and the union have had plenty of discussions over what GM will get, the two sides have not talked much about what GM will give the union in return.


  That point has been discussed at length at the UAW's headquarters in Detroit, says one source familiar with negotiations. The union could ask for many things, and one is that GM take back some workers at Delphi Corp., its former parts maker.

Delphi is losing money. Its new chairman and CEO, fix-it specialist R. Stephen Miller, has threatened bankruptcy if the UAW and GM don't help Delphi -- which GM spun off in 1999 -- with a restructuring plan.

Miller says Delphi needs to shed workers, cut wages and benefits, and dump some unprofitable operations to remain viable. He has made heavy demands on the UAW, which hopes that GM could rescue some of Delphi's workers from inevitable concessions by taking them back at its own plants.


  The problem is that GM isn't exactly in hiring mode. Wagoner said at the company's annual shareholder's meeting in June that he plans to cut 25,000 union jobs -- many through attrition -- by 2008.

That makes it awfully hard for GM to find jobs for a few thousand Delphi workers. But GM can help Delphi by taking some employees back, buying some out, or even paying more for some of the $15 billion a year in parts it currently buys from the supplier. That may not give Miller all that he wants, but in the end it would still be a giveback for the UAW.

Welch is BusinessWeek's Detroit bureau chief

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