Will the UAW Bury GM in Upcoming Negotiations?

Earlier this month, the Wall Street Journal reported that the United Auto Workers union (UAW) was drawing up contingency plans to strike if upcoming negotiations with General Motors, Ford and Fiat Chrysler Automobiles do not satisfy UAW officials. The UAW is leveraging the good timing of the negotiations, which are occurring at the same time as the auto industry’s cyclical top.

Will history repeat itself with GM eventually driven to a second bankruptcy if the UAW is successful in raising labor costs at the automaker? The stage seems to be set for the UAW to further put unionized automakers at a disadvantage to automakers with lower labor costs in a very competitive industry. The current US hourly labor cost at GM is already one of the highest in the industry at $58 per hour. That compares to the US wages at Toyota and Volkswagen of $48 and $38 per hour, respectively.

According to a Reuter’s article, the increased labor cost at GM (as well as at Ford) translates to about an additional $250 in cost per vehicle. That is an obstacle that can be overcome during an industry peak, which we are currently in. However, the higher labor costs are one of the reasons that profit margins remain thin at GM, even during the top of the sales cycle which has seen record sales for automakers. When the inevitable sales slow-down comes for the industry, it is likely that GM will burn through whatever remains of its taxpayer-supplied “cash hoard.”

The hype that GM is in such great financial shape will now hurt the automaker during negotiations with the UAW. You can’t blame the UAW for trying to maximize pay for its members as GM claims to be so profitable that it can afford to spend billions of dollars on share buybacks while paying out millions of dollars in stock option incentives to executives at the company. The UAW hasn’t done too badly to date with members receiving $9,000 bonus checks earlier this year.

Another warning sign that the UAW will be playing hardball during negotiations was reported by The Detroit News, which questioned the timing of some unexpected resignations of two key negotiators as follows:

A month before Detroit’s automakers officially begin critical contract negotiations with the United Auto Workers, top labor negotiators with General Motors Co. and Fiat Chrysler Automobiles NV have abruptly retired.

Fiat Chrysler on Tuesday said its North American labor relations chief, Alphons Iacobelli, 55, elected to retire, effective immediately. GM on Tuesday also confirmed to The Detroit News that its top bargainer, Rex Blackwell, 60, quietly retired June 1…

Industry experts speculate the unprecedented timing of the retirements of Iacobelli and Blackwell could be a sign of just how difficult the upcoming negotiations are going to be. This is the first contract since GM and Chrysler emerged from post-bankruptcy government restrictions; automakers are reporting record profits; and union leaders have made it clear they want to share in the wealth…

Another story by Automotive News reported that GM CEO, Mary Barra, will be directly involved in the negotiations. GM shareholders should not view this as a positive given Barra’s lack of negotiating experience along with her close ties to the UAW-friendly Obama Administration that orchestrated the GM bankruptcy process.

Despite continued assertions that the UAW sacrificed much as GM took its trip through bankruptcy court, the truth is that they have benefited more than parties like Old GM bondholders that should have had equal standing as creditors of the company. The facts speak for themselves as UAW benefits remained intact and workers soon began receiving thousands of additional dollars in bonuses when the dust cleared. UAW members did, however, sacrifice some of their time campaigning for President Obama during his reelection bid. That was a small sacrifice considering the generous treatment they received from the President.

One misconception regarding UAW sacrifices pertains to retiree health benefits, which the UAW agreed to be responsible for as a “Voluntary Employee Beneficiary Association” or “VEBA” was formed. This deal has sometimes been assumed to be one of the “sacrifices” made by the UAW as part of the bankruptcy process. In fact, this deal was put together prior to the bankruptcy and was scheduled to go into effect regardless of the bankruptcy outcome.

It was the approximate $30 billion VEBA funding that GM agreed to that was one of the primary forces which drove GM into bankruptcy. While GM did not have the money to fund the account, the deal that President Obama’s Auto Task Force put together assured that the account received adequate equity and cash when GM resurfaced as a new company. The approximate $30 billion owed to bondholders was subordinated as those less politically-favored creditors received a fraction of the amount.

Despite the generous funding of the VEBA by GM, it is questionable as to how well-funded the account will continue to be. The fund currently is one of the largest holders of GM shares. It would not surprise me if the VEBA funding goes back on the negotiating table, perhaps with GM agreeing to repurchase some of the shares at a premium.

So we now approach a key turning point at GM. It will not be long before the auto industry sales cycle again slows. Labor obligations and costs are poised to grow as the Obama Administration has set up a scenario that gives the UAW leverage to maximize member pay. The likelihood that GM takes a second trip to bankruptcy court will be proportional to the extent to which the UAW succeeds in raising labor costs at GM. If or when that likelihood comes to pass, history may take a different view regarding just how successful President Obama’s auto bailouts were.

Mark Modica is an NLPC Associate Fellow.