The new national labour pact agreed in the early hours of Wednesday morning is a game changer for both General Motors and the United Auto Workers (UAW), according to Global Insight auto analyst Aaron Bragman.

"The union receives as-yet unspecified guarantees of new investment in US manufacturing that will safeguard and expand employment, while GM receives a far more competitive cost structure that enables it to make such guarantees," he said in a research note on Thursday (27 September).

"At first glance, it seems to give GM nearly everything it needed to restore the viability of manufacturing vehicles in the United States, thanks to serious concessions by the union," Bragman added.

A ratification vote by the union membership is expected to come this weekend and Bragman expects the contract "to pass muster".

"The challenge now is to take the same agreement to Ford and Chrysler, where different financial conditions and goals could potentially lead to challenges to the document," he cautioned.

He said the tentative agreement reached after marathon all-night marathon negotiations between automaker and union has resulted in a new four-year contract that "at first examination, appears to be the game-changing transformational contract that was necessary in order to secure the future of unionised auto manufacturing in the United States".

VEBA

Bragman said the new contract, like the old one, is a four-year deal that expires in 2011 which shifts responsibility for the $US50bn in retiree healthcare liabilities to the UAW, in the form of a Voluntary Employee Benefits Association (VEBA) which GM reportedly will fund at US$0.70 on the dollar, requiring a payout to the fund of nearly $35bn.

"How that amount will be funded has not been detailed, but a combination of cash, stock, and bonds is expected," Bragman said, noting that the UAW maintains that the VEBA will be sufficiently funded to guarantee retiree benefits for the next 80 years.

There will be no wage increases for the duration of the contract, nor will there be any cost-of-living adjustments. In return, workers will instead receive a $US3,000 lump sum payment this year as a signing bonus, plus lump sum payments equal to roughly 3% of annual pay the second year of the contract, 4% the third year, and 3% the final year.

In exchange for giving up the cost-of-living increases, medical co-pays (the proportion a GM worker pays towards the cost of any treatment provided under a healthcare programme) will be locked in at current levels.

For new workers, GM has now won the ability to begin a two-tier wage system, allowing the company to pay new non-manufacturing hires (maintenance, janitorial staff and similar) a lower wage than current employees receive. Current average UAW wage is $27.81 an hour; the new hire wage has not yet been made public.

Bragman said almost 4,100 temporary workers at GM would be changed to permanent status, but paid at the new lower rate. A new round of buyouts is coming with the hopes of clearing the ranks of senior workers in order to make room for new hires.

The controversial status that allows laid-off workers to still keep collecting pay and benefits despite being idled has been changed, but not eliminated. The ranks of those on the so-called 'jobs bank' list has been drastically reduced thanks to buyouts earlier this year, and the bank has now been changed to expand its geographical requirement from 50 miles to a new, as-yet undisclosed distance.

Job security

"While the details of the contract are still slowly coming out, what has not yet been released is the part about job security that UAW president Ron Gettelfinger says has been addressed by GM," Bragman wrote.

"No information is yet known about possible work-rule agreement changes at the various plants either. A major point of contention has been new investment in US production, especially at the Lordstown (Ohio) and Kansas City (Kansas) plants. While GM has stated that significant new investment will be committed to North American manufacturing, no specific details are yet available as to where that investment may be placed.

"But it does follow that since GM has gotten what appears to be a landmark deal that has achieved significant concessions from the UAW, that a dramatic change in US manufacturing cost structure has enabled it to once again consider US production in a competitive light.

"GM's efforts in internationalising its operations and coordinating production sources for global platforms has paid off in this regard; unlike previous years, threats of moving production offshore should US manufacturing costs remain uncompetitive were quite valid this time around."

The analyst said the contract should help address the cost gap between the Asian transplant automakers operating in the United States and the Detroit 'Big Three' but, even if it does not eliminate the gap entirely, the reduction in costs is significant enough to have a major impact on the health of the automaker.

The biggest win for GM according to Bragman: the VEBA. By eliminating $50bn in liabilities and $3.3bn annually in payments, GM will dramatically improve its cash flow, its balance sheet, its earnings-per-share, and a host of "other metrics".

"But beyond that, the ancillary effects will help GM even more. Gone will be the approximate average $1,200 out of every car that GM pays for retiree healthcare; that money now goes into GM's coffers to fund development, research, new models, and eventually, dividend payments.

Fundraising

Noting that GM reportedly was able to secure the VEBA deal at US$0.70 on the dollar, Bragman said that was on the high side of most estimates, and more than the reported US$0.63-$0.67 that GM was reportedly offering.

The automaker will now have to come up with $36bn to fund the VEBA, an amount that will likely consist of financing, cash, and securities.

Bragman noted that the credit market has been very tight lately as a result of the sub-prime mortgage market meltdown earlier this year, as Cerberus Capital Management discovered when it went to try and sell its debt in order to purchase Chrysler.

"But most financial analysts have said that they do not foresee a difficult time ahead for GM in securing financing for the VEBA funding, since the $36bn one-time payout creates a much healthier company than an amorphous $50bn liability that is almost certain to increase. Beyond the elimination of the liability, GM's credit rating could also improve, leading to lower borrowing rates and enabling the company to fund everything less expensively than before."

What next?

According to Bragman, the big question now, and one that is likely to be answered by the end of Thursday, is who will be next: Chrysler or Ford?

He said that Ford had publicly hoped that it would actually be the UAW's primary negotiation target while the union has said it plans to follow the pattern bargaining tradition, and will be taking the contract as it stands to the other two automakers.

"Whether or not the other two automakers will accept it as-is or attempt to renegotiate all or part of the contract remains to be seen, but with the initial details of the contract frankly looking very favourable to the automakers, it could be accepted with few changes at Ford," Bragman said.

"Ford currently has roughly $31bn in total retiree liability, while Chrysler reportedly had approximately $19bn.

"Ford's biggest challenge is likely to be how to fund the VEBA; the company is already mortgaged to the hilt just to fund its operations while it attempts to effect a turnaround plan that is moving slower than most observers are comfortable with. However, just like at GM, Wall Street is likely to look favourably on a deal to eliminate uncertain liabilities, and may provide some expeditious funding for the venture."

But he thinks "Chrysler may be a different story". The shift in ownership to private equity fund Cerberus Capital Management has put Chrysler's stance on things like the VEBA deal in an uncertain light. With the company's new focus on cash flow and not balance sheet health, eliminating those liabilities to benefit long-term owners in return for a significant cash flow in the short term may not be in Chrysler's game plan.

"Whether or not Chrysler accepts a deal like this will give the industry a peek into Cerberus' true plans for Chrysler ownership," Bragman concluded.

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