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GM’s Deal with Delphi and the UAW Will Not Resurrect Carmakers Competitive Prowess

Prof. Peter Morici - 3/25/2006

General Motors has reached a deal with the United Auto Workers to offer generous buyouts to its 113,000 unionized workers, and 13,000 employees at its parts supplier Delphi, which currently resides in Chapter 11 bankruptcy. Shaping a deal that would satisfy the UAW to downsize both GM and Delphi’s work forces is a key part of GM Rick Wagoner’s efforts to align GM’s headcount to its shrunken market share, and get down GM’s costs for parts.

Sadly, it is an expensive deal, and it is hardly enough to reestablish GM’s competitiveness.

Depending on seniority, workers that opt for the buyouts will receive between $35,000 and $140,000 and significant pension benefits. Many will forsake important retirement health care benefits, and GM will save on some workers pensions but the net cost of the deal will still cost GM billions.

However, the deal leaves many labor issues unresolved. Most notably, what will Delphi pay its remaining employees when the company emerges from Chapter 11, and will GM be able to cut its hourly labor costs when it negotiates a new contract in 2007?

GM pays its workers more, gives them better benefits and more time off, and permits them to retire sooner than does Toyota and other foreign companies operating in the United States. GM is bound by more rigid work rules and job classifications.

The average hourly wage at GM and Delphi is about $27 but including all these benefits, average factory labor costs are about $67 an hour. These bloated costs are the consequences of a long history of management miscalculation in the face of UAW demands, and are but one piece of GM’s $7000 competitive disadvantage vis-à-vis Toyota.

It will be tough for workers, not yet eligible for pensions, to take a big check and then settle for much lower pay elsewhere. After all, the GM’s Jobs Bank awaits workers laid off but not wishing to relocate. At the end of 2005, GM was paying 5200 furloughed workers more than $500 million plus to play checkers, do charity work and the like. If not enough GM workers in the right locations take GM’s buyout offer, then the GM army of sinecures will grow further.

Rick Wagoner has managed to play his most attractive card in labor talks—generous buyouts for the employees he does not need—without getting concessions on these vital issues. I doubt the buyout deal will shave more than $1000 off GM’s fundamental cost disadvantage.

Rick Wagoner was under a lot of pressure to avoid a strike at Delphi. Its CEO, Steve Miller, threatened to seek cancellation of his union contract from the bankruptcy court and the UAW was poised to shut the supplier down. This disruption in parts production would have crippled GM but temporary labor peace has been purchased at a high price. Having played his trump card, Mr. Wagoner is unlikely to find a way to make GM’s labor costs competitive with Toyota anytime soon.

Beyond labor costs, GM’s famously bureaucratic management, confused marketing and inept product design have resulted in vehicles customer will only buy at discount prices and prone to break too often. In Consumer Reports’ most recent ranking of five-year reliability, Chevrolet, Pontiac and Cadillac ranked 22nd, 26th and 29th out of 30 brands.

GM brands lack clear focus on key demographic groups. For example, it does not have a credible answer to BMW and Lexus sedans, nor does it have a youth label with the pizzazz of Scion. It is not an effective player in the mini van market.

Without much more fundamental change at GM, it is difficult for a middleclass family to buy a GM product with confidence that the company will stay out of bankruptcy long enough to honor the full term of the vehicle’s warranty.

As for GM’s stock, it has no place in a moderate-risk or conservative investment portfolio. Any money manager that wants to put its stock in your mother’s retirement account should be shown the door just as quickly as GM’s board should pull the plug on Rick Wagoner.

When can only wonder why GM’s board remains so slow to move.