UAW Taps GM as Lead Negotiator
Role May Put Auto Maker
In Better Position to Forge
Deal on Health-Care Costs
By JOHN D. STOLL and JEFFREY MCCRACKEN
September 14, 2007; Page A3
General Motors Corp. is in the driver's seat in tackling the core
issue of Detroit's labor negotiations.
The United Auto Workers late yesterday chose the No. 1 U.S. auto maker
by output as lead negotiator on a new four-year contract. Meanwhile,
GM rivals Ford Motor Co. and Chrysler LLC agreed with the union to
extend indefinitely the current contract, which was to expire today.
GM, as lead negotiator, didn't receive an extension and has until
about midnight today to reach an agreement, according to people
familiar with the matter. At that point, it can either ask for an
extension or the union could strike -- a move considered unlikely by
industry observers.
Despite being the target of pressure to reach a deal, GM won a victory
in taking the top role in the talks. GM is Detroit's leading proponent
of creating a union-controlled trust that would lift much of the
burden of retiree benefit obligations from the auto makers' books. The
auto makers are trying to close the labor-cost gap between themselves
and Asian rivals, much of which is caused by medical expenses owed to
UAW retirees and their families.
Shares of the auto maker surged 10% yesterday to $33.29 in 4 p.m. New
York Stock Exchange composite trading after the news that UAW
President Ron Gettelfinger had signaled to his bargaining team that he
is open in principle to creating a union-controlled benefits trust.
Such a trust -- known as a VEBA, for voluntary employees' beneficiary
association -- would allow GM, Ford and Chrysler to unload billions in
retiree health-care obligations. Now GM, which has been fund raising
for two years in order to restructure health-care benefits, may be in
an ideal position to see its demands for revisions on medical expenses
become a reality.
A person close to the negotiations said GM was picked as the target
because the auto maker said more things that Mr. Gettelfinger and the
UAW wanted to hear. Specifically, the auto maker addressed the goal of
a "steady stream of money to keep a VEBA solvent." Among the fears the
UAW had in agreeing to the VEBA was that the money would eventually
run out because of the rapid inflation associated with health care or
that the fund's investments wouldn't return as much as projected.
Because of the progress on the VEBA issue, the UAW and the auto makers
are now beginning to include other issues in the negotiations,
including wages, job security, pensions and active employee health
care, this person said. One of management's requests is a shift to a
defined-contribution health-care plan from a defined-benefit plan for
active workers. Under a defined-contribution plan, which is seen as
less expensive, the company would have more certainty over health-care
expenses.
No one is making as big a bet on success as GM, which has amassed a
considerable pile of liquidity that could be used for purposes ranging
from research and development for new vehicles and technologies to
share buybacks or special dividends. GM has held on to much of its
money in an effort to fund an overhaul of health-care liability as an
important part of its turnaround plan. GM's obligation adds up to an
estimated $51 billion of the Big Three's combined $95 billion in
liabilities.
"This is a huge opportunity for General Motors," said KeyBanc Capital
Markets Inc. auto analyst Brett Hoselton. "They need to do something
or they could be waiting a long time to be in this position again....I
think shareholders will be extremely disappointed if they don't get
this deal done."
GM has several levers it can pull to forge a creative solution, people
close to the negotiations say, including a pension account overfunded
by $17 billion. For example, GM could potentially tap the pension
fund, which is separate from the health-care-benefits fund, as a way
to offset health-care-benefit cuts that may be needed if a VEBA is
formed, said Citigroup auto analyst Itay Michaeli.
For GM, the road to a VEBA has been a strategically plotted course
that gained considerable traction in 2005. At that time, the company
turned up the volume on the need for an overhaul, insisting it was
unable to indefinitely carry the weight of an annual tab on medical
expenses that would reach $4.7 billion in 2006.
Early in 2005, the company went public with demands on the UAW for
health-care cost concessions. It eventually won a compromise with the
union, gaining $1 billion in cash savings and a $15 billion cut to its
long-term liabilities for UAW retiree medical expenses. It was
considered a historic concession on several fronts.
During those negotiations, the UAW suggested GM and the union consider
setting up a VEBA that the union would run, according to people
familiar with the talks. GM declined to pull the trigger because the
UAW wasn't willing to give GM a generous enough discount on its
liability. At the time, GM had about $20.5 billion in available
liquidity.
Since that time, GM has been in fund-raising mode, making a big
divestiture in 2006 when it sold 51% of GMAC Financial for more than
$13 billion. GM followed that up with moves that more directly raised
cash, including pledging the remaining stake in GMAC to obtain a $4.1
billion line of credit and selling its Allison Transmission unit for
$5.6 billion.
Now, the auto maker could be in a position to have $32.5 billion in
cash at the end of September. According to Citigroup, GM will need the
additional $12 billion it raised in the past two years and then some
to fund the VEBA. The UAW is expected to demand about $36 billion from
GM in total for the trust, and Citigroup estimates $13.5 billion will
need to come from cash.
Write to John D. Stoll at john.stoll@dowjones.com and Jeffrey
McCracken at jeff.mccracken@wsj.com
