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Health care costs are key for GM, Ford; quick savings is Chrysler goal
By Jeff Bennettand Jeff Green Bloomberg News Service
Published on Sunday, Aug 26, 2007
A split in the ranks of the three U.S. automakers could jeopardize efforts by General Motors Corp. and Ford Motor Co. to save $2.5 billion a year in health care costs.
For decades, the United Auto Workers union has wrung almost identical agreements from GM, Ford and Chrysler as the union added benefits or agreed to concessions.
Maybe not this year. GM and Ford want to cut costs by transferring retiree health benefits to a union-run fund. Chrysler LLC, now owned by the privately run Cerberus Capital Management LP, has different priorities, according to people with knowledge of the situation. The smallest of the three automakers needs to negotiate more immediate savings to raise cash for operations, said the people, who don't want to be named because the discussions aren't public.
The divided front might make it harder for automakers to get the concessions they want from the UAW, which represents 180,681 workers, or about a third of the companies' global work forces.
GM and Ford, the biggest U.S. automakers, need to stanch losses and meet investors' expectations for successful talks that had helped their shares gain more than 10 percent this year before the recent global stock decline. By contrast, Chrysler is focusing on short-term cash flow.
''Chrysler is really the wild card because of private-equity ownership and the possibility they want to maximize short-term returns on a minimum investment,'' said Gary Chaison, a professor of industrial relations at Clark University in Worcester, Mass.
The UAW is in talks with GM, Ford and Chrysler to replace four-year contracts that expire Sept. 14. GM spokesman Dan Flores and Ford's Marcey Evans declined to comment on negotiating strategies.
Chrysler is ''clearly focused on cash'' in the talks, said Al Iacobelli, vice president of union relations at Chrysler Group, on July 20. ''That will be a center point of our discussions.''
The companies have exchanged preliminary offers with the union, people familiar with the talks said without providing details.
''The pressure at Chrysler is to cut costs quickly, and they do not have the same pressures as GM and Ford,'' said Bill Smith, president of Smith Asset Management in New York, which holds about 70,000 GM shares. A union contract with unique provisions for Chrysler ''could be dire consequences for both GM and Ford.''
Retiree health-care liabilities totaled $64 billion at GM at the end of last year and $31 billion at Ford, according to company filings. The three U.S.-based automakers spent $12 billion last year on medical care for 2 million employees, retirees and dependents, GM CEO Rick Wagoner said in June.
The benefits contribute to a labor-cost gap with Toyota Motor Corp., which has few retirees and a nonunion work force in the United States. The U.S. automakers say they pay $25 to $30 per hour more than Toyota for American labor.
The gap helped Toyota, Nissan Motor Co. and Honda Motor Co. earn an average of $3,814 more in profit per vehicle last year than GM, Ford and Chrysler, analyst Laurie Harbour-Felax of Chicago-based Stout Risius Ross Inc. said this month.
GM, Ford and Chrysler lost a combined $15 billion last year, while Toyota, poised to overtake GM as the world's largest automaker in 2007, made a profit of about $14 billion.
GM and Ford would benefit from shifting health care costs to union-run funds because the obligations amount to negative net shareholder value under new accounting rules.
Shifting to a health care fund would add as much as 73 cents a share to GM's earnings and 25 cents a share at Ford, while adding a combined $2.5 billion net of the costs to pay for the funds to the automakers' cash flow by 2010, JPMorgan & Chase & Co. analyst Himanshu Patel wrote in a June report from New York.
A split in the ranks of the three U.S. automakers could jeopardize efforts by General Motors Corp. and Ford Motor Co. to save $2.5 billion a year in health care costs.
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