A Gleam of Hope for GM

Even in an era when Detroit's car companies are perpetually in cost-cutting mode, General Motors can still justify its age-old moniker "Generous Motors."

GM (GM), its former parts maker Delphi, and the United Auto Workers finally sealed a deal offering all of GM's 110,000 workers and 13,000 of Delphi's between $35,000 and $140,000 to either retire or just plain walk away. The agreement greases the wheels for GM to cut the 30,000-or-more jobs the company said it would slash back in November (see BW, 11/21/05, "Can GM Stop Blowing Cash?"). And it allows bankrupt Delphi to begin its restructuring.

The deal is a good start for both GM and Delphi. If 30,000 workers take the buyouts, GM could easily hit its goal of cutting production in North America by 1 million vehicles, to 4.2 million cars and trucks. Delphi could cut nearly half of its 29,000 union workers, whose $65 an hour wage and benefits package is more than double many competitors (see BW Online, 3/21/06, "GM Rides to Delphi's Rescue").

"This goes beyond what I thought GM could pull off," says David Cole, director of the Center for Automotive Research (CAR) "It lays the framework for them to do what they need to do."


  That doesn't mean it's all open road for Delphi and GM. Delphi still needs to deal with the wages and benefits of its remaining union workers. If an agreement isn't struck, Delphi Chairman and CEO Robert "Steve" Miller will file in bankruptcy court to throw out the union contract and set up a new deal. The union could strike, though UAW insiders say that the buyout deal goes a long way toward heading that off.

GM still needs to get enough workers to buy into the deal. And even if enough of them do, the auto maker will have to pay their retirement benefits on the backs of fewer workers. What's more, GM needs its employees to buy in quickly rather than collect wages on paid furlough -- a contract perk that cost the company upwards of $800 million last year.

The buyouts and restructuring costs could add up to $4 billion to $5 billion when it's all done. "It's a small step," says Thomas Stallkamp, former president of Chrysler and a partner with private equity firm Ripplewood Holdings. "They still have to address retiree costs in the next labor contract." (See BW Online, 3/16/06,"GM's Dwindling Options.")


  At the moment, GM's business is still burning cash. And if there's a recession that hits auto sales before GM completes its restructuring, the company could still be close to bankruptcy, says Cole.

GM already took a $1.7 billion charge for restructuring, which covers some of the cost of the buyout plan. It will also assume $1.4 billion in retiree health care liabilities. Other costs will come in as the buyouts are accepted, and as the company pays remaining workers to move to other plants.

The deal is a generous one. Here are the specifics:

• Workers eligible to retire now get $35,000.

• Those with 27 to 29 years at GM get $2,800 to $2,900 a month of paid leave until they hit the 30-year retirement date. Then they get their pension and retirement benefits.

• Employees with fewer than 10 years experience can get a $70,000 check to leave with only their vested pension benefits, and those with more than 10 years get $140,000 for severing ties with the company.


  Union officials say the deal is a good one, and predict plenty of workers will leave soon. "I've never seen a deal like this," says Art Baker, chairman of UAW Local 652 in Lansing (Mich.) where workers assemble Cadillacs. "Young people with, say, six years [on the job], could just bail out and go to college."

Some UAW workers may prefer to stay on the job, where they can get paid most of their wages even if they're laid off. That plan, called the JOBS bank, is under fire and may be scaled back when GM and the union forge a new labor deal next year. Union leaders say workers may take the buyout, fearing that their plants are at risk of closure and paid furlough won't be such a solid option.

GM hasn't said anything about the JOBS bank publicly. But privately, executives say the lay-off benefit has to be changed or spiked altogether.

The deal also allows Delphi to send 5,000 of its workers back to GM and another 13,000 of its workers are eligible for a buyout from GM. That would allow Delphi to hire new workers at a previously negotiated lower wage of $14 an hour.


 With workers retired or headed back to GM, Delphi can close some plants. If they hire new workers at the second-tier wage rate, they could sell some of those U.S. factories.

The agreement doesn't give Delphi any relief on wages for the remaining employees. Most earn about $27 an hour, while its rivals pay around $14 an hour or even less. Delphi still needs to work out a wage deal with the union, but Cole says today's pact with GM goes a long way toward avoiding a strike that neither Delphi, GM, nor the UAW really wanted.

In the long run, the deal could even allow GM to cut its wage costs. If it can stabilize market share -- a big if -- and enough workers leave through the plan, the auto maker could hire in new workers at lower wages of around $19 an hour, Cole says (see BW Online, 3/14/06, "GM and Ford: Timelines for Turnaround").

It will take a few years to get to that point, but GM has a good start on finally lowering its costs.

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