UAW Concedes to GM

After a two-day strike, the auto workers union agreed to a deal that gives ground to General Motors on key issues

For General Motors (GM), a new labor contract represents a step forward. For the United Auto Workers, a big step back.

The two sides came to a tentative agreement on a new, four-year labor pact at 3:05 a.m. EDT Sept. 26, ending a two-day strike. If UAW President Ronald Gettelfinger can get the deal ratified by his 74,000 GM workers in the coming days, the contract will pull the automaker much closer to Toyota's (TM) cost structure. But for the UAW, it will roll back contract benefits and wages won over years of collective bargaining.

In many ways, the union had no choice. Detroit's carmakers have been under siege from foreign competition, which have lower costs in their factories, both in Japan and the U.S. Health-care costs have sapped $1,400 from the profit of any vehicle. GM lost a total of $12.4 billion in 2005 and 2006, and its North American business is running at breakeven this year. GM Chairman and CEO G. Richard Wagoner Jr. cut 34,000 jobs and got health-care concessions in the past two years. But GM still isn't making real money at home. The struggling chairman simply couldn't take anything but a concessionary labor contract to his board of directors.

Early Morning Press Conference

It may be a tough contract for the union, but one that could preserve jobs in the U.S. and give current active workers and retirees minimal, if any, cuts to their pay and benefits package.

The biggest piece of the deal is the creation of a Voluntary Employee Beneficiary Association, or VEBA trust, which the union will oversee and use to cover retiree medical benefits. Gettelfinger didn't provide details of the contract at a 4 a.m. press conference, but said the two sides agreed on a VEBA. In addition to a union-run health-care plan, GM also got the union to agree to a lower starting wage for new hires at GM plants and cuts to the so-called Jobs Bank, a paid-layoff arrangement that gave furloughed workers most of their pay, say sources close to the negotiations.

In exchange, the UAW got guarantees that GM will invest in its U.S. factories, although the sources say GM did not offer specific guarantees on investment dollars, or which factories and vehicles the company will allocate in the U.S. Gettelfinger will also be able to sell the contract to members with the pitch that no active worker's current pay or benefits will be cut significantly. And with the VEBA, his retirees will be protected in case GM falls into bankruptcy. Gettelfinger said early in the week that he believes a VEBA protects union retiree benefits better than a company-held plan.

"It's an agreement we're proud to recommend to our membership," Gettelfinger said at the press conference.

Closing the Gap With Toyota

GM is also handing out up-front signing bonuses and more cash later if the members ratify the deal. JPMorgan (JPM) analyst Himashu Patel estimates that the agreement will give workers $9,000 each over four years.

While the UAW didn't relent on every GM request, the tentative agreement can only be viewed as concessionary. GM executives estimate that the deal will cut its labor cost gap with Toyota by 70% to 75%, says one GM executive who asked not to be named. Currently, UAW workers get $70 an hour in wages and benefits, about $25 to $30 an hour more than Toyota and Honda workers.

Here's how the VEBA works: GM will give the UAW a lump sum of cash and other assets—though mostly cash—that equals about 70% of the company's $51 billion in UAW health-care liabilities. The UAW will take the estimated $35 billion and invest the money. So long as the investment return rate exceeds the annual rate of health-care inflation—which ranges from 8% to 12%—the fund will stay healthy and cuts to individual benefits wouldn't be necessary.

No Details of Jobs Bank Cuts

The two-tiered wage deal is a big concession for the UAW. One of the union's principles has long been that everyone on the shop floor makes the same wage. But now, new hires will be brought in at "a very competitive rate," according to one person close to the deal.

Neither side will say what that rate is. But Japanese plants in the U.S. hire new workers at around $16 an hour and work up to about $26 an hour. UAW workers earn about $28 an hour. That part of the contract could be huge for GM. About two-thirds of its 74,000 UAW workers can retire within five years. That means GM can rehire workers at a much lower cost. Morgan Stanley (MS) analyst Jonathan Steinmetz says that replacing 10,000 tenured workers with new employees at the lower wage could save $300 million a year.

GM also has cut the Jobs Bank. But details were not provided. Traditionally, the bank gave laid off workers most of their pay while GM tried to find work for them. But there was never a limit on the benefit. Some workers have been in the Jobs Bank for more than 10 years without building a car. Under the new contract, there will be limits on how long a worker can stay in the bank. GM may also be able to buy workers out during the life of the new deal without having to negotiate more job cuts.

Until details are made clear, it's tough to say that GM will match Toyota's costs. One GM insider says that the company already has narrowed that gap quite a bit. Now it will be time to see if GM can start boosting revenue with better cars.

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