Fiat Gives Chrysler Workers an Ultimatum

Auto unions battle for relevance as the U.S. government's deadline for Chrysler's reorganization looms

Fiat (FIA,MI) Chief Executive Sergio Marchionne said in an interview published on Apr. 15 that unless the labor unions representing workers employed by Chrysler in the U.S. and Canada agreed to wage and work-rule concessions in the next two weeks, he will walk away from a proposed alliance between his company and the struggling U.S. automaker.

In remarks reported in the Toronto Globe & Mail Wednesday, Marchionne said he is demanding wages and work rules at parity with workers employed by Toyota and Honda in Canada and the U.S. "Absolutely, we are prepared to walk," Marchionne said.

Chrysler is facing an Apr. 30 deadline to reach agreements with the United Auto Workers and Canadian Auto Workers, as well as banks and hedge funds holding $6.9 billion of the automaker's secured debt. It must also strike a deal with Fiat. If Chrysler's majority owner, Cerberus Capital Management, can't line up the agreements it needs, the White House, which has lent Chrysler $4 billion to keep it from insolvency, will not lend any more. The result is expected to be a Chapter 11 filing for the storied automaker.

If Cerberus can satisfy the White House with a raft of concessions from all parties, then it will get a $6 billion loan, enabling an alliance with Fiat to go forward.

Chrysler Needs Small Cars

Marchione's words were his toughest yet for the union. "The minute you talk to me about historical entitlement in an organization that is technically bankrupt, it's a nonsensical discussion," he told The Globe & Mail.

Fiat is hoping to use Chrysler's distribution network in the U.S. and Canada to sell Fiat and Alfa-Romeo vehicles. In addition, Chrysler wants vehicles developed by Fiat on which it can slap Chrysler, Dodge, and Jeep nameplates. Chrysler also wants to develop distinctly new vehicles using vehicle engineering shared with Fiat.

Each party has its own motivations to get the deal done and satisfy the White House:

• The unions do not want to match the foreign-owned transplant factory wages, rules, and benefits. In the U.S., though, the UAW is willing to take equity in Chrysler in exchange for about $4 billion of the $8 billion that Chrysler owes the union's health-care trust fund.

• Banks that hold $6.9 billion of Chrysler's debt—secured by factories, Chrysler's brands, and real estate—are being asked to take just $1 billion instead. But the banks also want equity in the company to try to recoup their investments if the Fiat alliance works.

• Fiat, in exchange for sharing technology, engines, and vehicle engineering valued at around $10 billion, wants 20% of Chrysler with an option to boost its stake to than 50% later, on top of the concessions from banks and the unions.

It all adds up to a tense game of poker between all parties, with the White House's deadline looming over the negotiating table. It is also a situation that labor unions have seen before: being told to take the deal on the table or the company will go away and take all the jobs and future health-care payments with it.

Unions in a Bind

"The union faces a very tense and difficult outcome here," says Gary N. Chaison, professor of industrial relations at Clark University in Worcester, Mass. "They risk being blamed for driving the company into bankruptcy—and then losing the jobs and benefits on top of that."

But Chaison argues that by giving in to the demands, the union will be validating the arguments of its fiercest critics in Congress. Those critics have been saying for months that wages and benefits demanded by the union are what put General Motors (GM) and Chrysler into the situation of needing government bailout funds or facing bankruptcy in the first place.

UAW officals could not be reached at press time. But Ken Lewenza, president of the CAW, said the union was taken aback by Marchionne's comments. "I woke up this morning to find yet another spokesperson speaking for Chrysler, and someone whom we have not been dealing with at all in these negotiations," said Lewenza. The union chief said he was surprised to hear that the CAW was such a big obstacle to completing Fiat's alliance with Chrysler, since U.S. banks holding the automaker's debt and the UAW had yet to come to terms.

Lewenza said the CAW was against total parity of labor costs with foreign-owned auto plants, but added that the agreement the union struck with GM on salary and benefits for "active workers" was "in the ballpark" compared with non-union plants. "But to compare the costs of maintaining agreements with retirees to the costs at these plants, which basically have no retirees, is comparing apples to oranges," said Lewenza.

In 2007, the UAW agreed to lower sharply the starting wages and benefits for newly hired autoworkers at the Detroit companies, as well as for workers in jobs away from the assembly line, such as janitors and maintenance employees.

But the cuts did not affect most longtime union members, whose hourly pay and other compensation adds up to about $55 an hour. The figure ranges above $70 an hour when the automakers' costs for health care for retired workers and retirement benefits are factored in. By contrast, workers in U.S. plants run by foreign companies, such as Toyota and Nissan, earn about $45 an hour, and the nonunion companies do not have the hefty burdens of future "legacy costs" for pensions and retiree health care that the Detroit companies face.

Chrysler has demanded that CAW workers trim labor costs by 25.7%, to match what it pays at its U.S. plants. So far, the union is offering a concession of only a $7 to $7.25 per hour, a deal it has already given GM.

Puzzle for Union Members

If the unions in the U.S. and Canada agree to total parity with their nonunion peers, it raises a more fundamental question for union members: What exactly am I paying union dues for anyway?

An agreement to total-parity wages and benefits, says Chaison, would greatly affect the union's ability to organize those foreign-owned assembly plants in the future. It would also hit workers in other industries the UAW represents, such as casino and child-care workers—two groups that have been making up, in part, for lost auto-worker members.

Says Chaison: "Workers will be asking themselves what the point of the union is if so much of the outcome is out of their control."

Even if Fiat gets the worker concessions it's seeking, it faces more challenges ahead. "These companies face a huge marketing problem.… It isn't as if people are going to start buying GM and Chrysler cars again because the union is at total parity with nonunion workers at Toyota," says Chaison.

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