2007 GM – UAW Labor Agreement

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October 25, 2007

The dust is finally settling on the recent GM-UAW (United Auto Workers Union) labor agreement just ratified by the union and announced by GM on October10. This could very well be the capstone to over two years of more recent restructuring and the finale to 30 years of problems at the company. This also appears to be a significant milestone in GM-UAW relations and can very well secure the future of the corporation by reducing its direct labor and legacy (pensions and health care) obligations. Recent reports are beginning to outline the details of the agreement.

GM needed a landmark deal with the union in 2007 just to survive in this ever increasingly competitive global environment. Over the past 30 or so years, for many reasons, GM became a welfare corporation producing vehicles to fund their retired labor. In that time, GM would spend almost as much on health care ($5 Billion) as they would spend on capital investments ($8 Billion).

As a result, my expectations were this contract needed to somehow cap or control GM’s every increasing health care cost for retirees. GM needed to reduce their legacy burden to increase their capital investments and reduce the approximate $4 billion disparity with Toyota. Toyota spends about $12 billion a year on capital investments into new plants and vehicle programs.

GM also needed to align the UAW benefits with their white collar staff. As the contract stood, GM’s UAW employees would receive generous guaranteed pensions and health caer benefits while their US white collar employees received what is now a more traditional 401k retirement savings and health insurance based upon co-pays and premiums.

Another big item was GM needed the flexibility to structure their work force as needed. This includes having the ability to temper the job bank program (when laid off worker would be placed in a pool). Up until recently, GM would pay workers close to 100% of their earning not to work when plants were temporarily closed or permanently idled. So GM had a strong incentive to keep the plants running even if they were loosing money.

From looking at the specifics of the contract, I will say it appears the significant issues have been resolved for GM.

 

The following are the Contract Highlights from GM’s October 10, 2007 8K:

- Independent VEBA Trust established for retiree health care obligations

- Two-Tier Wage agreement established for non-core employees and new hires

- No base wage increases

- Reduced COLA escalations

- Increased pension benefits for current and future retirees

 

On a whole I am very please with what GM outlined in their filing. My one major concern was how is GM going to fund the new Independent VEBA Trust? GM will have to contribute $46.7 billion of their total $64.3 billion obligation over time. The Independent VEBA only covers the UAW and not GM’s retired salary staff and those retirees represented by other unions. Of that $46.7 billion, GM will contribute approximately $32 billion by 2011 at present value. This includes a transfer of funds from an existing VEBA, cash payments and a convertible note indexed to GM’s share price. There seems to be many financial assumptions based upon rate of return on interim investments and the potential increase in GM’s share price. GM expects a contribution $2 – 9 billion after 2013 to the VEBA.

In their document it is clearly stated this Independent VEBA is permanent and the UAW cannot renegotiate the terms. Once fully funded, GM can wash its hands of these obligations. I still have some concern with regard to GM’s obligations but at this time it is too early to tell if those concerns are justified. In any case this agreement seems reasonable and it appears it can be fully funded over time. The net result is, GM’s liability is now a fixed cost and more than anything puts GM’s escalading health care cost to rest. Finally, GM expects a net increase in cash flow of $3.3 billion in 2011. This will go a long way in improving their ability to invest in new vehicle programs, advanced powertrains and overseas manufacturing capacity.

Also, we are seeing the first indications the new contract has given GM the flexibility to now cut production to align with the demand in the market. Previously this was not the case without penalty. Recent announcements detailing layoffs and production cuts at three Michigan plants soon after ratification of the contract indicate as much. This will result in the temporary dismissal of approximately 3,000 employees. In reviewing GM’s presentation it is not clear if the company will continue to pay wages to lay off workers or in the Jobs Bank. But these announced lay offs show GM did not hesitate to align production to demand. This is something GM has hesitated on in the past.

The last notes of interest are GM stated currently 65% of their workforce is eligible to retire. This increases to 75% in 2011. With GM’s new two-tier wage structure for non-core personnel, they have the incentive to offer early retirements to those eligible and place new hires at a substantially reduced hourly rate and benefits package for these manufacturing support positions (currently 16k positions). New hires will only be eligible for a 401k defined retirement savings, small pension, and health care spending accounts. For core manufacturing positions, GM has capped their wages.

Also, GM received the flexibility at some plants where work is currently not assigned to allot work based upon future economic conditions. Unlike past contracts, the union is currently aware and has accepted GM might permanently close some plants. This has given the company the ability to downsize their US operations if needed.

Overall, I still have many questions as this is a very complex agreement but overall I am left with this assessment; GM’s 2007 UAW Contract may give GM a chance to fully restructure the company after three decades of systemic problems in the US. Two years ago as the company was imploding I was told GM CEO Rick Wagoner stated, 'He will fix GM for the last time.' After this contract, he might be on the cusp of doing just that. Something many thought impossible!

 

Entire contents © 2007 - 2009 The Automotive Lyceum All Rights Reserved

 



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