General Motors and the United Auto Workers have reached a tentative agreement to reduce GM’s health-care costs significantly.
In a speech to all North American employees on Monday morning, ahead of the announcement of a massive Q3 loss, Wagoner also signalled further factory closures and job cuts and the sale of part of finance arm General Motors Acceptance Corporation (GMAC).
The tentative healthcare agreement, subject to finalised language and UAW-GM member ratification, is projected to reduce GM’s retiree health-care (OPEB) liabilities by about $US15 billion, or 25% of the company’s hourly health-care liability, and cut GM’s annual employee health-care expense by about $3 billion on a pre-tax basis.
Cash savings are estimated to be about $1 billion a year.
The tentative agreement also includes contributions to a new independent Defined Contribution Voluntary Employee Benefit Association (VEBA) that will be used to mitigate the impact of reduced GM health-care coverage on individual hourly retirees. The new independent VEBA will be partially funded by GM contributions of $1 billion in each of three years – currently expected to be 2006, 2007 and 2011. Additional modest funding opportunities are under discussion, contingent on GM’s improved financial performance.
“These negotiations were done in a positive, cooperative, problem-solving spirit,” GM CEO Richard Wagoner said in remarks to employees at GM’s global headquarters in Detroit. “While it may have taken some time to reach this cooperative solution, I think it was time well-spent.”
Specific details regarding modifications to the health-care plan will be shared with affected employees and retirees soon. Wagoner said the modified plan will continue to provide high quality health care for GM’s more than 750,000 U.S. hourly employees and dependents, retirees and surviving spouses.
Additionally, GM and the UAW have agreed to continue to look at other options to further reduce health-care expenses and to improve other areas of competitiveness.
“GM and the UAW have renewed our joint commitment to work together on a broad scale to continue to reduce the cost and improve the quality of health care,” Wagoner said. “We continue to be concerned that this issue is of great importance for the future of overall U.S. competitiveness. We would welcome a more proactive role from elected officials at the national and state levels in broad-based strategies to address the US health-care crisis.”
Other Cost Reductions
GM is committed to 100% or more capacity utilisation of its plants by 2008, to further reduce structural costs. This means the company will need to close additional assembly and component plants and reduce its manufacturing employment levels by 25,000 or more jobs. This would come on top of the million-unit capacity reduction that has been achieved over the past three years.
“Over the past four months, we have done a lot of detailed work on this, and have at this point a reasonably clear line of sight on our overall manufacturing restructuring plan,” Wagoner said. “Our next steps will be to work this plan in detail with the affected unions. We are planning to announce further details on this manufacturing restructuring by the end of this year.”
Wagoner noted that GM already has made significant progress in reducing structural costs, lowering salaried, executive and contract employee costs and improving productivity. US salaried employee headcount has been reduced 30% in the past five years, and continued reductions are planned for 2006.
“We have accomplished this in an orderly way, without disruption to our ability to execute our key business strategies, and we are now at global competitive levels of salaried productivity, although we know we need to keep raising the bar.”
Recently, GM’s salaried U.S. employees and retirees were informed of additional changes to their health-care benefits, including higher medical co-pays. In addition, as announced earlier, there is no programme for salary increases, no bonuses and no enhanced variable pay for 2005 for GM’s salaried employees and executives.
Wagoner acknowledged that these difficult decisions will have an impact on many GM employees.
“We will do our best to minimise this impact on each of you and your families,” he told employees. “We hope you will understand that, with these difficult actions, we will help to ensure a viable and growing GM for the future.”
With all the cost-reduction initiatives in place, GM expects to reduce its structural cost by a $5 billion run rate by the end of 2006. The 2006 full-year impact depends on timing of approvals of the health-care changes.
“While this sounds like a large number, we recognise that it only goes part of the way we need to go to put GM North America in the fully competitive position that is necessary to maintain and enhance our future viability and growth. This is a very big step that we will build on as we go forward.”
In addition, GM is targeting a $2 billion gross reduction in material costs in 2006, despite higher commodity prices and troubled supplier situations, yielding a net reduction of $1 billion after including the cost of significant product enhancements.
These estimates exclude any possible impact from Delphi‘s Chapter 11 reorganisation.
Two major opportunities to reduce material costs are optimising GM’s sourcing footprint with the most competitive supplier sources, and leveraging the globalisation of GM’s product development, Wagoner said.
Wagoner also announced that GM is exploring the possible sale of a controlling interest in General Motors Acceptance Corp. (GMAC) to a strategic partner, with the goal of restoring GMAC’s investment grade rating and renewing its access to low-cost financing.
In addition, GMAC said it will continue to evaluate strategic and structural alternatives to help ensure that its residential mortgage business, Residential Capital Corp., or ResCap, retains its investment grade credit ratings.
Impact Due to Delphi’s Chapter 11 Proceedings
GM’s tentative health-care agreement with the UAW provides former GM employees who became Delphi employees the potential to earn up to seven years of credited service for purposes of eligibility for certain health-care benefits under the GM/UAW Benefit Guarantee. Due to the net effect of reductions in its health-care costs and this expanded eligibility for credited service, GM is revising its estimate of the range of its potential exposure to costs under the Benefit Guarantee from the previously reported $0 to $11 billion range, to $0 to $12 billion.
Although GM management is unable to estimate an amount of loss, if any, that GM may sustain due to Delphi’s Chapter 11 proceeding, and continues to evaluate whether, when and to what extent GM may need to record a related liability, it continues to believe that amounts closer to the midpoint of the range are considered more possible than amounts at either end of the range.