General Motors'tentative deal with the United Auto Workers to cut $3 billion a year from health-care benefits and reduce retiree health-care liabilities by 25 percent seems much more dramatic than it is. For as large as they seem, it's unlikely the cuts alone are remotely deep enough to rescue the company from its slow death spiral. The GM deal will marginally hurt workers. At bankrupt Delphi, the one-time unit of General Motors that supplies GM with auto parts, by contrast, CEO Steve Miller is talking about slashing unionized workers' salaries and benefits by 70 percent!
So, why is GM doing so little to save itself? Its half-measure is the sort of move a company might make if it faced a very strong union. But GM doesn't face a strong union. The UAW is under assault. Its membership has fallen from 1.5 million members in 1979 to 620,000 members today. Many of the companies at which its members work are bankrupt. Powerful forces—CEOs, the federal government, and the global economy—are arrayed against industrial unions. They're on the receiving end of a giant, multiyear cram-down. As Delphi CEO Steve Miller said of UAW head Ron Gettelfinger, "I wouldn't want to be in his shoes for all the tea in China. He's going to have to help half a million of workers get used to the idea that globalization has taken away the ability to have someone who mows the lawn or sweeps the floor get $65 an hour."
And yet GM can't bully its way to financial health like Delphi because, given its current strategy and structure, it's too scared of the UAW. GM simply can't afford to run the risk of a strike.
GM has a pathological need to produce and sell cars—even at a loss—because it needs the revenues. For decades, GM has fought a vicious—and losing—battle against domestic and foreign competitors to maintain its once (and still) leading market share in the all-important North American market. In recent years, GM's leadership has repeated the mantra that if GM could only retain market share in the short-term, many of its long-term problems will go away.
A company that has high structural costs, pays a healthy dividend, and has made large investments in infrastructure needs to have all its factories running to the fullest extent at all times. A strike, even for a week or two, would prove devastating. It would halt production and screw up the just-in-time delivery system. Some dealers would have fewer cars to sell, or lose out on expected sales. Rivals would rush to capitalize on GM's woes by offering incentives. And as the last few decades have shown, once GM's customers go elsewhere, they tend not to return. GM wants a 28 percent market share in North America, but it's down to 26.1 percent so far this year. A strike would drop that number even lower.
There's another reason GM can't afford a strike. It's no secret that GM is essentially two companies: an unprofitable car-making company, saddled with poor products and high operating and legacy costs, and a profitable lender, General Motors Acceptance Corp. For the past few years, GMAC has been more profitable than the car-making operations. In the third quarter, GMAC turned a $675 million profit.
GMAC, which was started to help customers buy GM cars, has evolved into a diversified lender. It's a huge force in the home-mortgage and construction-loan business, for example. Indeed, in the third quarter, the mortgage operations accounted for about 60 percent of the unit's profits. But GMAC's bread and butter is still financing the sales of GM cars. To a degree, the company produces the cars at a loss so GMAC can finance them at a profit. A strike that halts production and throws a wrench into sales would thus be a double-whammy for GM. It would lose the revenues from car sales, and it would lose the profits from financing those sales.
And given the parlous state of GM's finances—Standard & Poor's has assigned a junk-credit rating to GM—a significant disruption in either phase of its business—the money-losing car operations or the money-making lending arm—could prove disastrous. Ford faces essentially the same predicament.
So, it's not that surprising that GM's stock has fallen since the announcement of the deal on Monday. Investors don't think it goes very far toward solving GM's long-term financial problems. And they're right. Detroit may be full of tough talk toward labor these days, especially from the CEOs of bankrupt companies, like Delphi's Miller. Ironically, the bankrupt guys can afford to draw lines in the sand against the union. They have nothing left to lose. But executives like GM CEO Rick Wagoner, who want their companies to remain solvent, will have to tread a little more lightly when it comes to dictating terms to the UAW.
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