In the lobby of Solidarity House, the United Auto Workers’ headquarters on the fringe of downtown Detroit, a large banner proclaims: “Good jobs are worth fighting for.”
The UAW has been in the forefront of that fight since 1936, when it staged a sit-down strike at a General Motors plant in Flint, Michigan. After turning fire hoses on the police, the fledgling union prevailed over GM, opening the way for the unionisation of the industry. Its members soon gained a reputation as the aristocrats of the labour movement.
These days, however, the jobs are not as good as they used to be. The union is on the defensive as closely watched talks start this week on a four-year labour contract with GM, Ford Motor and Chrysler, which is soon to be controlled by Cerberus Capital Management, the private equity fund.
The three carmakers are determined to bring down labour costs – most notably their huge unfunded liabilities for pensioner healthcare – as part of a drive to cut losses in their core North American market and gain a competitive edge against vigorous Asian rivals led by Toyota. They will be looking to reduce some of the costs they say put them at a disadvantage of as much as $2,000 (€1,450, £980) per vehicle.
The talks will be tense, though they will at least start courteously: at a ceremony in Detroit on Friday, the chief executives of Ford and Chrysler are to shake hands with UAW leaders. A similar event with GM will take place next Monday.
These are also testing times for the UAW. Its membership has shrunk by two-thirds since the Detroit industry’s heyday in the early 1970s, to a postwar low of 538,000 at the end of last year. The figure could drop below the half-million mark this year as tens of thousands take redundancy.
The UAW has sought to stanch the outflow by diversifying into other sectors; most recently, it signed up croupiers at two Atlantic City casinos. But it has failed to organise any plants owned by Japanese and other foreign carmakers in the south of the US, where jobs have been growing.
In the four years since they last sat down for contract talks, all three Detroit carmakers have swung from profit to loss and ceded market share in virtually all vehicle segments to foreign competitors. Unable to cut their manufacturing operations fast enough to match a shrinking market, they pumped up sales incentives for their cars and trucks in a vicious circle that further eroded profits. Many of their parts suppliers, operating on even more tenuous finances, filed for bankruptcy.
Yet amid these grim parameters of retrenchment and retreat, a sentiment unseen in recent years in Detroit is emerging: cautious optimism about the industry’s future. GM’s and Ford’s share prices have risen in recent weeks as some leading analysts raised their recommendations. GM’s shares are now roughly double their low in early 2006, when the company appeared to be heading for bankruptcy. (Pending the expected close of the Cerberus deal, Chrysler is still owned by DaimlerChrysler, whose main businesses are its profitable Mercedes truck and car units.)
Goldman Sachs recently added GM to its “buy” list on expectations that the UAW would make significant concessions in the talks. JPMorgan upgraded its ratings for the two companies’ stock amid strengthening signs that the UAW would “engage in radical changes” to the carmakers’ benefit. UBS asked whether the UAW was a “spent force” and whether GM and Ford might become “aggressive about pay and benefits” in a way that improved their competitiveness.
Some industry insiders and analysts are more cautious, pointing to the gulf that remains between the carmakers and the UAW’s historically intransigent rank and file. The employers have a history of acquiescing in generous settlements rather than risk a damaging work stoppage.
A deal would be complex and costly, given the large sums and emotive issues at stake: GM’s unfunded healthcare obligation for retirees at end-2006 was $51bn, while for Ford the figure was $26bn. Although the carmakers would fund only a portion of that amount, any comprehensive deal would still run into the tens of billions of dollars. But based on statements by the carmakers and the union, most believe the talks will pave the way for some kind of agreement on healthcare.
If this frees up more money for the Detroit producers to devote to turning around their businesses, the talks could mark a big step towards long-term viability for the industry. “They’re going after a fairly revolutionary restructuring in their healthcare benefit programmes,” says Himanshu Patel, a JPMorgan analyst.
With tens of thousands of jobs in the balance, the UAW and other unions have lately proved willing to agree pragmatic deals. At Goodyear this year, the United Steelworkers union agreed to assume management of a healthcare liability worth some $1.2bn in exchange for a $1bn payment from the tyre producer into a type of trust known as a voluntary employee beneficiary association. The steelworkers and the UAW signed a similar deal this month with Dana, a bankrupt Ohio parts manufacturer.
As long ago as 2004, the UAW agreed to a two-tier wage structure for existing workers and new hires at Delphi, the parts maker spun off by GM in 1999 and which filed for bankruptcy protection in 2005.
“The UAW is very innovative in the good times but it’s also very innovative in the bad times,” says Gary Chaison, a professor of industrial relations at Clark University in Massachusetts. Says JPMorgan’s Mr Patel: “They have no incentive to give everything away tomorrow, but they also have no incentive to make these companies go bankrupt.”
Another factor pointing toward a deal on healthcare is the improved liquidity of the carmakers. Ford is net cash positive after lining up a $23.4bn financing package last year. It could raise even more through the sales of its Jaguar, Land Rover and possibly Volvo brands. GM last month announced the $5.6bn sale of its Allison Transmission unit to two private equity firms, the latest in a string of disposals.
This bolsters their cash reserves ahead of a possible settlement. “We think there will be some sort of a solution addressing healthcare,” says Bob Schulz, an analyst at Standard & Poor’s. “There are enough people looking at the Goodyear situation and enough liquidity.”
GM, Ford and Chrysler are expected to follow Goodyear’s and Dana’s example by offering a one-off payment for relief on their healthcare liabilities, calculated at a discount still to be negotiated. But the carmakers are likely to stop short of demanding cuts in wages.
In addition to cash, the companies might finance a healthcare deal through new debt or shares; GM also has an overfunded pension plan. “There are a lot of cards that can be played and a lot of things they can put in the basket,” says Bruce Clark, a Moody’s analyst.
Leaders of the UAW have a tricky course to steer. On one hand, they need to recognise the carmakers’ difficulties if they are not to face further plant closures and job losses. Indeed, the union’s awareness of its dependence on the carmakers’ health is evident in the parking lot at Solidarity House. Every car is a GM, Ford or Chrysler product; the union even frowns on staff who buy Mexican-built vehicles, such as the Ford Fusion saloon.
Nonetheless, as elected officials, the union leaders dare not risk being seen by their members as pushovers. Contracts hammered out in the talks must be ratified by the UAW’s rank and file. A small but vocal group of militants is urging them to stand firm. Workers at Ford rattled the leadership in 2005 by approving an initial round of healthcare concessions – also granted to GM – by only a 51-49 per cent margin. “The UAW’s leaders can do what they want but they have to sell it to the membership,” says Ronald Tadross, an analyst with Bank of America Securities.
Ron Gettelfinger, the UAW’s ascetic president, has so far taken the pragmatic stance that one might expect from a former chassis line repairman at a Ford plant who also has an accounting degree. While making strident attacks on executives’ pay packages and forceful promises to stand up for his members, he has also made significant concessions.
Under the deal agreed with Ford and GM in 2005, workers began contributing more to their healthcare plans and gave up a cost-of-living increase to soften the blow on retirees. Mr Gettelfinger has indicated a willingness to extend these arrangements to Chrysler after it parts ways with its deep-pocketed German owner. The UAW has also accepted more flexible work practices at numerous plants.
In one modest but symbolically important concession, the UAW agreed to GM’s proposal this year to unwind a “jobs bank” covering 400 skilled workers at two of its Michigan plants. The jobs bank is emblematic of the privileged American car worker: for the past two decades it has enabled thousands of idled workers to continue receiving full pay and benefits. Their only obligation is to show up at the plant each morning or perform community service. About 4,000 workers are currently in the bank – roughly one-third of the level of two years ago, before GM, Ford and Chrysler began offering packages to buy out jobs.
Under the deal at the two Michigan plants, GM can give workers who refuse a buy-out the choice of retraining, moving to an unskilled job or relocating to another plant. Remaining in the jobs bank is no longer an option. The union beat a further retreat in an accord at Delphi last month. Wages for skilled workers will drop from $27 an hour to a maximum of $18.50; benefits will also shrink.
However, canny brinkmanship by the UAW forced Delphi to retreat significantly from its original demands. The parts maker agreed to lump-sum payments over the next three years, which will soften the blow of lower wages. By then, the union estimates, all but about 100 of the 4,000 high-wage workers at Delphi will either have retired or “flowed back” to GM. The union also takes credit for having persuaded Delphi to keep some plants open and convincing GM to continue buying parts from it until at least 2015.
Still, Mr Gettelfinger and his colleagues are unlikely to succumb easily. The UAW has insisted that the Delphi settlement cannot be seen as a template. But a crippling strike is not thought likely; JPMorgan’s analysts put the chances of this at no more than 10 per cent. While most expect some concessions on healthcare, many think these will be limited. “I don’t believe it’s going to be a transformational change,” says John Kollar, a credit research analyst with HSBC. “I think there will be concessions and they will be different company by company.”
Privately, an executive at one of the carmakers notes the complexity of setting up a healthcare deal, the size of the funds needed and the difficulty of getting all sides to approve it, adding: “I don’t know if we’re going to get there.”
The current contracts expire on September 14, but that deadline could come and go with neither a settlement nor a strike. Experience in the previous round of healthcare negotiations, and in the talks at Delphi over the past 18 months, has shown all sides that patience is a virtue.