Showdown over Legacy Costs
Earlier this year more than 17,000 workers at General Electric plants around the country held a two day strike to protest the companyís decision to double employee health care co-payments to $400 a year. The strike sets the stage for what is likely to be the most contentious issue between the United Auto Workers and General Motors, Ford and Chrysler.
Over the last decade the auto companies undertook numerous strategies aimed reducing labor expenses. Outsourcing has largely been completed, though the automakers still bear much of the pension and healthcare costs associated with plant closings, early retirements and divestitures that accompanied decisions to buy parts and components from lower cost suppliers. For brief period in the 1990s the auto companies enjoyed tolerable increases in healthcare expense while a robust stock market beefed up pension assets and lowered annual contributions into the funds.
But this year the UAW and the auto industry are confronting insurmountable challenges that will, determine the viability these companies. There are no more significant non-core assets to sell off and generate cash. There is little outsourcing to be done that could save billions. Suppliers are complaining that they canít tolerate five percent annual price cuts while they themselves are confronting higher expenses. Corporate credit ratings have been slashed close to junk bond status, which has raised the cost of capital. Productivity growth in assembly plants is paltry compared to spiraling legacy costs to say nothing of skyrocketing incentives needed keep vehicle demand from collapsing. The expanding product offerings of European and Japanese automakers are eroding the market share of the traditional Big Three and are now threatening them in the large pickup segment which provides the bulk of their profit.
The domestic assemblers have run out of options that would produce the cash or lower the costs of production by the billions of dollars needed to stay in the game and create a constant flow of competitive product. The UAW negotiated effectively and won unprecedented retirement benefits even while the auto companies were experiencing the cosmic shift in the competitive landscape the 1980s and 1990s. The UAW was able to soften the blow to hourly workers from plant closings, outsourcing and productivity improvements all of which shrank the number of active workers. But no one could have imagined that those benefits could threaten the viability of the companies. That might seem like an over statement to some given the fact that Chrysler can lean on Daimler maybe) or that GM managed to earn nearly $2 billion last year. While that sum seems large it happens to be insignificant in relation to the price of meeting the competitive challenges ahead. Furthermore, it pales against the pension and healthcare benefits paid to its retirees last year that promise to increase again this year.
It is very telling that the UAW has failed to unionize the transplant factories that continue to spring up in the south. Even though UAW members are assembling many vehicles of comparable quality and appeal to those of the Japanese and Germans, the marketplace will not permit them to recoup their higher legacy costs in their prices.
The American consumer doesnít care where a car is built and doesnít care who built it. Toyota Tundras assembled in Indiana are every bit as American as GM SUVs assembled in Arlington, Texas. Few Americans have or can expect the kind of post retirement protection that the UAW has achieved and have no sympathy for retirees whose benefits greatly exceed anything they might hope to have.
The negotiations that take place later this year are probably the most important ever faced by the industry and the UAW. Unless some compromise is reached on these swelling expenses, the current retirees benefits might be paid at the sacrifice of benefits to future retirees.