The new four-year labour contracts agreed on last week may give Detroit’s ‘Big Three’ US car makers some needed concessions from the United Auto Workers’ union, but, for investors, nothing much will change, two analysts said in reports cited late on Monday by Dow Jones Newswires.
The new contracts, tentatively agreed by General Motors, Ford, DaimlerChrysler‘s Chrysler Group and suppliers Visteon and Delphi, are still subject to ratification by union members, Dow Jones noted, adding that negotiations went smoothly this summer as both sides worried about their future – the car makers face increasingly tough competition from Asian and European competitors, who are gaining US market share each year, while the UAW has seen its membership decline.
While details have been slow to emerge, “we doubt the substance of the new UAW agreement is meaningfully positive for investors,” analyst Gary Lapidus at Goldman Sachs wrote on Monday, according to Dow Jones.
Automakers may have gained some ground in their recent tug-of-war with the union over wages, benefits and job security. But that doesn’t address the root cause of “profitless prosperity” in the industry, Lapidus wrote, the news agency said.
The union appears to have made “significant concessions” in the areas of wages and health-care costs, analyst Rod Lache at Deutsche Bank Securities Inc. wrote in a report cited by Dow Jones. He reportedly said changes in wage inflation and healthcare costs should be ” modestly accretive” to company earnings.
According to Dow Jones, in the new contract, the union agreed to a wage freeze in the first two years, when workers will receive lump some bonus payments, though they’ll get raises of 2% and 3% in the last two years of the pact – in the previous contract, workers received a 3% raise each year. Current employees will now pick up more of the cost for prescription drugs, although other aspects of health plans for workers and retirees remain the same, the news agency added.
According to Dow Jones, Lapidus wrote that the increase on drug payments is likely to represent only a 1% to 2% savings in the companies’ “enormous” health-care spending. “Once again,” Lapidus reportedly wrote, “health care has proved itself to be the ‘third rail’ of labour negotiations. ‘Touch it and you die.’”
According to the news agency, analyst Lache believes car makers fared best with their new ability to close plants, which will reduce overcapacity in the industry.
“The UAW appears to have adopted a much more pragmatic policy with regard to industry restructuring,” Lache reportedly wrote. The previous contract contained a “no close” clause, Dow Jones noted.
Citing a Monday report in The Wall Street Journal, Dow Jones said the union gave GM permission to close three facilities, Ford said it got approval to close or sell four plants and Chrysler got union clearance to close or sell five of nine plants it said are not competitive. About 4,700 Chrysler workers are affected, Dow Jones said, citing the newspaper.
Citing an industry consultant, analyst Lache reportedly said as many as 18,000 jobs could be cut at Ford and Visteon and 12,000 at GM and Delphi in the next two to four years, according to Dow Jones.
“While this certainly sounds dramatic, we fear that it may not be enough,” Lache reportedly wrote, adding: “Unless the Big Three break their pattern of deflation and market share losses, it is likely that each of them will experience reductions in profitability despite their restructuring efforts.”
“Plant closings, i.e. labour productivity, won’t increase auto company profits, ” Lapidus wrote, according to Dow Jones. The root cause of the industry’s “profitless prosperity” is increasing excess supply, which is causing price deflation, he reportedly wrote, adding: “Removing capacity is not the same as removing supply. The Big Three have no intention of lowering their production (supply); they intend to lower their fixed costs associated with that production. It’s better than nothing, but not necessarily the solution.”