Tuesday, October 18, 2005

David Coates / The Detroit News In announcing the deal, GM Chairman and CEO Rick Wagoner tells employees "frankly, these are challenging times for both of us, and we are both being called upon to address issues that are difficult."

Struggles at General Motors

Can UAW deal spur turnaround?

GM wins health cuts, may sell GMAC

By Bill Vlasic / The Detroit News

PROBLEMS • Falling SUV sales and market share in the U.S. are producing wider losses. • Rising health care costs make GM vehicles $1,500 more expensive than rivals'. • GM still has too many plants and high fixed costs. PLAN • Hourly worker and retiree health benefit cuts will mean annual savings of $1 billion, trim long-term retiree liability by $15 billion. • GM hopes to cut material spending by another $2 billion in 2006. PLAYERS • GM CEO Rick Wagoner must give shareholders and Wall Street signs of a turnaround. • UAW President Ron Gettelfinger has to sell health care cuts to members. • Delphi CEO Robert S. "Steve" Miller's bankruptcy move spooked the UAW. WHAT'S NEXT • GM plans to identify plants to be closed in the coming months. • A partner will be sought to acquire a controlling stake in GMAC. • Ford and Chrysler want similar health care concessions from the UAW. GM, UAW health care cuts Hourly workers: GM and the UAW say they have agreed to reduce health care costs for hourly workers by 25 percent, and Wall Street has reacted positively. What's your view? Get results and comments Error processing SSI file Comment on this story Send this story to a friend Get Home Delivery

General Motors Corp. took major steps Monday to stem mounting losses in North America by cutting a deal with the United Auto Workers on health care costs and accelerating plans to slash U.S. jobs and factories.

While the moves could mark a turning point for GM at what Chairman Rick Wagoner called a "critical juncture in its history," serious challenges remain.

GM's unprecedented agreement with the UAW would cut the automaker's health care costs by $3 billion a year before taxes, including annual cash savings of $1 billion.

But after reporting a $1.6 billion third-quarter loss on Monday -- GM's largest quarterly loss since 1992 -- Wagoner acknowledged that health care savings are only a part of the automaker's long, uphill journey to profitability.

Other components of the turnaround plan include the previously stated goal of eliminating at least 25,000 manufacturing jobs and a new plan to sell off a controlling interest in the General Motors Acceptance Corp. financing arm.

Wagoner announced the moves just hours after completing marathon health care negotiations with UAW President Ron Gettelfinger.

The tentative agreement comes against the backdrop of Delphi Corp.'s recent Chapter 11 filing and growing fears about the future of the U.S. auto industry.

The health care deal marks the largest concessions made by the UAW since the early 1980s, when Chrysler Corp. teetered on the brink of bankruptcy.

"Frankly, these are challenging times for both of us, and we are both being called upon to address issues that are difficult," Wagoner said in a closed-circuit address to GM employees worldwide.

Because the agreement was done in the middle of GM's current UAW contract, it has broad ramifications for GM, Ford Motor Co. and Chrysler when their pacts expire in 2007. The sweeping health care changes are ultimately expected to reduce GM's health care liabilities by 25 percent, or $15 billion, going forward, he said.

Gettelfinger said the union conducted an "in-depth analysis" of GM's woeful financial position before arriving at the historic deal.

"The tentative agreement on health care matters is the result of an in-depth analysis of GM's financial situation and many weeks of intense discussion between the UAW and GM," he said in a statement.

Former UAW President Doug Fraser said Gettelfinger and his bargaining team understood that GM needed some relief from the $5.6 billion annual health care bill for its 1.1 million active workers, retirees and other dependants.

"They did what they had to do," Fraser said. "But the bigger issue is that (GM) is not selling the same market share they used to sell."

GM said its market share in North America slid to 25.6 percent in the third quarter, a dramatic drop from the year-earlier level of 28.5 percent. The lower volumes, combined with higher materials costs, slumping sales of big-profit SUVs and special charges, led to its $1.6 billion loss on global revenues of $47.2 billion.

The third-quarter loss in North America alone totaled $1.6 billion, bringing the total losses in GM's home market this year to $4.1 billion.

With U.S. vehicle sales expected to sputter through the end of the year, GM was under intense pressure from shareholders and other constituents to put the brakes on its rising health care costs.

GM's board of directors has been pushing Wagoner to tackle the health care issue since mid-summer. In addition, billionaire investor Kirk Kerkorian, who owns a 9.5 percent stake in GM, is a well-known advocate of aggressive moves to boost shareholder value.

Those factors, among others, spurred Wagoner to pull out all the stops to get a meaningful health care agreement with the union.

"Was it enough? Well, it's a really good start," said David Cole, director of the Center for Automotive Research in Ann Arbor.

GM's sense of urgency on health care, Cole said, was clearly shared by the UAW.

"Without this kind of crisis, it would have been very difficult to get this kind of a deal," he said.

No details were released by GM or the UAW on how the annual health care savings will be achieved. Industry analysts said they expect the deal, which must be ratified by rank-and-file workers, will call for higher co-pays for doctor's visits and prescription drugs.

While a deal with the UAW had been widely anticipated, Wall Street analysts said the savings surpassed their expectations.

"The health care savings are a lot larger than expected and clearly an important step for GM," said David Healy of Burnham Securities.

Even with the massive third-quarter loss, investors were impressed by the automaker's new direction. In trading Monday on the New York Stock Exchange, GM shares closed at $30.09, up $2.11

Healy said the Oct. 8 bankruptcy filing by Delphi, GM's largest parts supplier and former parts division, had galvanized GM and the union to act together before the automaker faced a cash crisis of its own.

"It's like they are finally acknowledging that GM has too many people, too many models and too many costs," Healy said. "I guess the Delphi bankruptcy got everybody's attention."

Wagoner hardly understated the size of the tasks ahead as GM moves to downsize its U.S. operations while launching a series of important vehicles.

"This is a critical juncture in our company's history," Wagoner said. "I'm asking everyone to stay focused on the critical tasks at hand."

Wagoner said the health care changes were only a part of GM's turnaround strategy.

The Detroit News reported earlier this month that GM told its salaried workers that they will assume higher medical co-pays, and that white-collar jobs will continue to be cut. The automaker has already reduced its number of salaried employees by 30 percent over the past five years.

Moreover, Wagoner said GM will speed up plans to reduce manufacturing costs by closing assembly and parts plants, and reducing factory employment by 25,000 or more jobs.

Cole said that at least two or three assembly plants could close to bring GM's production in line with its vehicle sales volume.

"It's a new era and a new business model for GM," Cole said. "Rick tends to be a pretty conservative guy, but he has stepped up to the plate on this."

In addition to the health care savings and job reductions, Wagoner said he also has set a target of reducing materials costs by $1 billion a year.

"In total, we are now confident that the initiatives we have in place will reduce structural costs by $5 billion ... by the end of 2006," he said.

A possibly more far-reaching change is GM's decision to explore the sale of a controlling interest in GMAC, the consumer-credit lending arm that generated third-quarter net income of $675 million.

Selling off 51 percent of GMAC could raise more than $10 billion in cash, analysts say, and allow the finance unit to achieve a better credit rating than GM itself.

GMAC's rating has been dragged down by the automaker's overall problems, making it more expensive for the finance unit to borrow money on the open market.

Wagoner said that GM has not yet approached any banks or other financial institutions to buy a controlling stake in GMAC. But such a deal, he said, would benefit GM because GMAC could borrow money cheaper and provide more competitive loans to GM customers.

"We would have a more secure source of funding to support our automotive business," he said.

GM has rolled out turnaround plans in the past, but none with the potential impact of Monday's moves. Wagoner said the predicted $5 billion in annual savings would be "the single biggest cost reduction we have ever been able to achieve."

Beyond that, the deal with the UAW marks a profound step forward in the union's relationship with its biggest employer.

Noting that negotiators all "have bags under our eyes" from the late-night talks, Wagoner praised Gettelfinger and UAW Vice President Richard Shoemaker for their efforts.

"These negotiations were done in a positive, cooperative, problem-solving spirit," he said. "While it may have taken some time ... I think it was time well spent."

One labor expert said the Delphi bankruptcy and the looming showdown over wages and jobs at the auto-parts giant helped bring GM and the UAW to the bargaining table on health care.

"These are clearly unprecedented times, and GM and the union came to an unprecedented agreement," said Harley Shaiken, a professor of labor at the University of California-Berkeley.

GM may face other large liabilities in connection with its spin-off of Delphi in 1999. Wagoner said Monday that its pension obligations to Delphi workers could run as high as $12 billion.

Questions also remain on how the UAW will handle requests from Ford and Chrysler for similar adjustments in their health-care obligations to union members.

"It's almost like the 2007 contract talks have started already," said Healy.

You can reach Bill Vlasic at (313) 222-2152 or bvlasic@detnews.com.