For a generation, executives at the Detroit auto companies have complained that the huge cost of providing generous benefits for its unionized workers put them at a competitive disadvantage with surging foreign car companies like Toyota and Honda.þþNow, with a new contract agreement with the United Automobile Workers reached before dawn yesterday, General Motors has taken a momentous step toward eliminating much of that burden, a step likely to be followed by Ford Motor and Chrysler.þþThe contract’s main feature — a health care trust called a voluntary employee benefit association, or VEBA — means that G.M. will no longer have to carry the debt it will owe for employee and retiree health care benefits on its books. Earlier this year, G.M.’s chief executive, Rick Wagoner, referred to those obligations as “very large and frankly formidable.”þþThat debt is estimated at $55 billion for the next 80 years. So G.M. will establish the trust with about 70 percent of that amount, making an upfront payment of cash, stock and other assets. The difference is expected to come from gains on investments by the trust. þþIn return, the union won guarantees that medical benefits for hourly workers and retirees and their families will remain in place for the next two years. G.M. will also invest money in its American plants, and will maintain its current union work force of 73,000, according to Ron Gettelfinger, the U.A.W. president.þþ“It’s a big step forward in dealing with this problem that’s been quite intractable,” said John Paul MacDuffie, a management professor at the Wharton School of the University of Pennsylvania. þþInvestors cheered the deal, bidding up G.M. shares more than 9 percent yesterday. þþ“This is a landmark contract,” said John A. Casesa, an auto industry analyst with the Casesa Shapiro Group.þþBut Detroit also faces a new challenge. The American automakers will no longer have the excuse that their health care burden is a barrier to successfully battling Japanese auto companies in the United States. þþInstead, analysts say, they will have to deliver on their promises that they can create a New Detroit, with lower costs, leaner and more efficient factories and, most important, can build vehicles that more consumers want to buy.þþ“This agreement helps us close the fundamental competitive gaps that exist in our business,” Mr. Wagoner said in a statement.þþFor the union, which struck G.M. for two days after negotiations bogged down, there are victories in the new contract that go beyond the details of its terms. þþReducing G.M.’s health care burden increases the chances that the company can pull off its turnaround effort, which could lead to more job security for members, Mr. Casesa noted. þþThat burden, combined with G.M.’s pension expenses and wages, means its hourly rate for union workers is about $80. Toyota’s labor costs in the United States are less than $50 an hour. þþIt is also a wise public relations move for the union, Mr. Casesa said. “It sends the message that the union is playing ball and you can’t blame us anymore if G.M. can’t compete,” he added.þþEven so, there is already opposition within the union. In an interview yesterday morning on WJR-AM radio in Detroit, Mr. Gettelfinger acknowledged the debate in the union over shifting health care obligations from G.M. to the trust, which would be independently administered.þþ“There will be those who will mount opposition to that,” Mr. Gettelfinger said. “I’ll be glad to stand up in front of anybody and defend that VEBA and show that they’re going to be secure with their retirement benefits. I’m not afraid of that battle at all.”þþThe burdens will not be lifted right away. The VEBA plan requires approval from courts as well as the Securities and Exchange Commission, a process expected to take about two years. þþDespite the expense of setting up the VEBA, expected to cost more than $30 billion, G.M. can save in other ways. The change may improve G.M.’s debt rating, which is deep in junk status. Indeed, Standard & Poor’s Ratings Services said it was considering a possible upgrade for G.M.’s debt.þþAn higher grade would lower the overall cost of borrowing money, making it less expensive to develop new cars and trucks.þþInvestors are also wary of unknown and growing liabilities, like long-term health care costs. G.M.’s burden is one reason its stock price, more than $90 a share in 2000, has languished.þþYesterday, however, G.M.’s stock jumped $3.22, to $37.64, on word of the deal, which was reached at 3:05 a.m. Eastern time. þþFord said it was pleased that G.M. had a deal with the U.A.W., whose local leaders will learn details of the contract at a meeting tomorrow. After that, workers will begin to vote on the contract. þþWith a G.M. vote concluded, the union would pick either Ford or Chrysler as the next company for negotiations. If the union holds to its tradition of a pattern contract, both are likely to agree to similar health care deals.þþThat would mean different things to each company.þþAt Ford, the need to fund a health care trust to address its roughly $25 billion liability would increase the pressure on the company to sell its Jaguar, Land Rover and Volvo brands quickly. An investment on a par with G.M.’s would cost Ford about $17.5 billion.þþEven though Ford raised $23 billion last year, by mortgaging everything from its plants to its blue oval logo, it needs that money for product development and to pay for its reorganization plan. That would mean finding another source for the billions it would need to invest in a VEBA. þþFord is hoping to complete a list of bidders for Jaguar and Land Rover by Sunday, and to announce a winner next month. It still is assessing whether to sell Volvo, but people involved in the sale say it, too, could be sold by year’s end.þþAt Chrysler, now owned by the private equity firm Cerberus Capital Management, the health care trust would take over Chrysler’s $18 billion cost burden, meaning an investment of about $12.6 billion likely to be required. þþChrysler’s previous owner, DaimlerChrysler, took responsibility for its pension burden when the company was sold. Absent either of those burdens, Chrysler could again become one of the industry’s more nimble companies.þþBeyond the bookkeeping effect of VEBAs, the health care funds could create a kind of incentive for Detroit companies and the union to modify their behavior. þþPaying the high borrowing costs caused by their low debt ratings meant the Detroit companies had to keep wringing profits from big vehicles like sport utilities and pickups, rather than shifting to the smaller models with better fuel economy that consumers were demanding.þþLikewise, U.A.W. members, assured of health care benefits that were the envy of the labor movement, had little incentive to take better care of their health, since their generous coverage would pay for most any ailment.þþBy contrast, Toyota, which pays premiums only for workers, not their families, has fitness centers at its factories and requires newly hired workers to exercise two hours a day during their training period.þþNow that outsiders will administer health care when the VEBA trusts come into being, the companies may move more swiftly to transform their lineups, and, in the case of G.M. and Ford, make greater use of smaller more efficient vehicles developed overseas. Outsiders will play another pivotal role as the industry moves forward, too. Ford’s chief executive, Alan R. Mulally, who came from the Boeing Company, and the former Home Depot chief executive Robert L. Nardelli, now at Chrysler, have spent just over 13 months between them in the American industry. þþThe old excuse, ‘that’s how we do it here,” holds little water with either executive, both charged with reshaping their companies for Detroit’s future, not preserving its status quo. þþMr. Mulally “sees a company that was distracted” from its core business, “and his job is to get them refocused,” said Mr. MacDuffie, the Wharton professor. þþ“Six months ago, a VEBA would have been a very hard sell” to union members, Mr. Casesa said. “But Detroit’s problems actually have given Detroit a lot of leverage. It took a crisis to create change.”þþ
Source: NY Times
