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The United Auto Workers (UAW) union will do a big favor for the Big Three automakers: It will agree to a landmark labor contract this fall, assuming a large chunk of the health care costs that make it difficult for General Motors (GM), Ford and DaimlerChrysler to compete with Toyota, Honda, Nissan and other automakers.
These lofty health expenses account for about $1500 of the average $3500-per-car cost disadvantage that Big Three plants suffer versus foreign manufacturers' U.S. plants. The UAW deal will narrow that margin by roughly $1000.
But U.S. automakers will still be in precarious shape. The UAW probably won't bite on a number of other cost-slashing proposals, including big pay cuts for new hires and converting some pensions to 401(k) plans. The union frets that such concessions will leave workers with no negotiating leverage with automakers when the contract comes up for renewal again in 2011.
Still, when the smoke clears from the contentious contract negotiations over health care concessions -- which could feature short wildcat strikes -- it will become plain that the accord will be unlike any other the UAW has signed with the Big Three since the union won bargaining rights more than 70 years ago.
The UAW will assume responsibility for health care benefits for more than 1 million active and retired autoworkers, relieving Detroit of more than $100 billion in obligations. In exchange, GM, Ford and DaimlerChrysler will agree to provide as much as $70 billion, collectively, to fund a UAW-run Voluntary Employees' Benefits Association that will pay its members' health care costs.
That won't be cheap, but the carmakers will take the deal because they'll effectively be able to meet their health care obligations at a discount. By reducing their liability, the automakers will help improve their credit ratings, lowering future borrowing costs. The UAW will bet that increased health care premiums for autoworkers, the compounding of interest on money the union receives from the automakers and expected health care benefit cost reductions as retirees die will keep the fund solvent well into the 2020s.
The union has little choice but to take its chances. "Making incremental, tiny concessions is likely to result in one or even all three of the automakers going down, having to file for bankruptcy, and if that happens, [the UAW] knows there will be no health care benefits and no assurance of jobs," says David Cole, chairman of the Center for Automotive Research, an auto industry consulting firm. Health care costs add about $30 to the hourly pay for GM, Ford and DaimlerChrysler production workers, boosting it to $70 to $75 an hour. The compensation for nonunion workers at Toyota, Honda, Nissan and other transplant automakers' U.S. plants, including health care, runs $40 to $45 an hour.
Contract talks are sure to go down to the wire. Odds are 50-50 that the UAW will accept the Big Three companies' stock as partial payment of the health care program buyout. The union always has opposed taking such a stake for fear of being seen as cozy with Motor City business, but is likely to do it this time around to keep the deal from collapsing.
Look for Detroit's automakers to be on slightly firmer ground by 2010 or so, but not out of the woods by a long shot. To regain their financial health, they'll have to reduce operating costs in areas outside of health care -- such as by cutting white-collar staffs and parts-sourcing costs, and increasing automation -- to whittle down the production cost gap with foreign brand rivals. That's a must-do, since their share of the U.S. market for new vehicles likely will drop from about 53% today to 48% by 2010. The Big Three must also start producing more types of vehicles that Americans want to buy.
Ford remains in the most precarious financial position. It lost nearly $13 billion last year, and the company's most optimistic scenario doesn't foresee it turning any profit until 2009. The automaker could face real trouble by next year, despite the UAW's health care concessions and Ford's own belt-tightening.
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POSTED BY: Jim (July 17, 2007 08:22 PM)
I totally agree. the unions bullied the car makers until they were no longer competitive and the union workers could not see it. They killed themselves
POSTED BY: Mark (July 17, 2007 10:56 PM)
A way to level the playing field is to go back to a constitutional taxation system. the constitution does not allow personal income tax.The Federal Govt. is only allowed to tax corporate profits and import tariffs. Tariffs would level the playing field with foreign labor.
Also, hourly wages should not be going down when corporate wages are going up.
POSTED BY: Jim Ostroff (July 23, 2007 05:23 PM)
Hi, This is Jim Ostroff. A national health care system would be of little near-term help to Detroit\'s automakers, since their legacy health care costs are $100 billion and rising. It is relevant to note that \"Detroit\" sells many vehicles at prices that match or are lower than those sold by Toyota, Honda, Nissan, etc. Still, GM, Ford, and Chrysler continue to lose market share. The U.S. Constitution permits the federal government to levy personal income taxes. Anyone who fails to pay federal, state or local income tax due is subject to prosecution for breaking the law.
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