GM-UAW Contract Talks News 9/19/2007

"Stalled." That's how today's Detroit News describes UAW/GM contract talks. The News reports that GM is unwilling to move from 65% funding of the proposed VEBA, the Voluntary Employees' Beneficiary Agreement. The VEBA is the proposed union-run trust for retiree healthcare, and it is the tail that's wagging the dog in the contract negotiations.

Each 5% change in VEBA funding of the $50 Billion retiree healthcare obligations amounts to $2.5 billion in cash. The range speculated in the press early in the negotiations was 60-70% funding, with 70% the most commonly-used figure in the sources that I read. To get you some idea of what $5 billion will buy you in the car industry. $2.5 billion will substantially overhaul an existing car model. $5 billion will pay for most of a ground-up redo.

The UAW is reluctant to sign onto a VEBA that doesn't plan for major increases in the future cost of health care. GM's main impetus in seeking the VEBA is avoiding being on the hook for future increases in the cost of health care.

GM/UAW Contract Update 9/18/07

According to the Detroit News, in a memo to local union officials, UAW President Ron Gettelfinger and Cal Rapson,the lead union negotiator for the UAW, reported that a they have made substantial progress in their contract talks with General Motors, but "major issues" remain unresolved. The officials broached the topic of setting a firm deadline for the conclusion of negotiations, but no firm deadline was set. Gettelfinger and Rapson warned local officials about the unreliability of leaked information concerning the progress of the negotiation, making reference to a blackout agreed to by the union and the manufacturer.

In a separate news story, the Detroit News speculates that the contract could contain a large signing bonus to seal the deal. Given the difficulties of the issues, the News speculates that the signing bonus may well exceed the $3,000 that was included in the last contract in 2003.

UAW COULD STRIKE GM TONIGHT
General Motors picked as Lead Company in Negotiations

According to the Detroit News, the UAW will let its locals know at 10:00 PM tonight whether it will strike General Motors. Yesterday, the union officially picked GM as its target for this year's contract negotiations. I think the odds of the UAW striking GM in the very short term are about the same as lightning striking, but anything is possible.

Don't ever take a day off . . .

I took the work day off today, and wouldn't you know, there was talk of a strike. I'll try to get caught up.

Rebel Bombing Closes Many Mexican Auto Plants
GM, Ford, Chrysler, VW and Honda affected

A series of coordinated explosions severing oil and natural gas pipelines has idled much of the economy in central Mexico. General Motors, Ford, Chrysler, VW and (not stated in the article) Honda have had to temporarily shut down plants, generally for lack of natural gas. According to the Detroit Free Press, this bombing is the work of the Popular Revolutionary Army, a Maoist group which, unlike the Judean People's Front, is sometimes confused with the Judean Popular People's Front (splitters).

From the Cars We Can Drive to Work file:
2008 Mazda 6

The 2008 Mazda 6 made its debut at the Frankfurt Auto Show. In my opinion, from the pictures, it's one of the best looking midsized sedans out there. According to Mazda, the new generation 6 bucks the modern trend and is actually lighter than its predecessor. It gets correspondingly higher fuel economy and lower emissions despite an increase in power. The new 6 will get most of the upgrades slated for next-year's facelifted Ford Fusion, a more powerful engine, 6-speed transmission across the board and standard stability control.

Best of all, the Mazda 6 will apparently continue to be produced in the UAW-staffed Flat Rock, Michigan factory; and it will therefore qualify for us to drive it to work. Ironically we still won't be able to drive the 6's platform-mates, the Ford Fusion and Mercury Milan, because those vehicles are assembled in Mexico.

There's no word on when the car will be available. If it's truly a 2008 model, the answer should be "very soon". Some earlier spyshots indicated that the redesigned 6 would be designated a 2009 model.

UAW Contract Update
Friday Deadline Likely to Pass

The UAW contract with the formerly Big Three is likely to expire on Friday, September 15 without an agreement. Based on the lack of bombast from either side and a general agreement that some type of VEBA will be necessary to shift retiree health care to the union; I think it is likely that the negotiations will continue past the deadline, and the workers will agree to work without a contract. The alternatives are a strike by the union, or a lockout by management. Neither appears to be in either side's immediate best interests. Other issues on the table include changes to work rules according to the Detroit News.

I've had a couple of retirees complain to me about the UAW abandoning them with the VEBA. I honestly don't think that's accurate. (Though I didn't tell them that.) A VEBA helps the retirees in two ways: (1) it insures that they'll receive some health care over the long term, even if the company goes bankrupt; and (2) It increases the odds that their sons and daughters will stay employed. If the VEBA is only 70% funded as is expected, it will be interesting to see how the UAW administers it. Will the union keep benefits near the current level, drawing down the fund on an unsustainable level, or will the union impose immediate, deep benefit cuts? The union might be tempted to make only minor cuts and hope for a national health care plan to save the day.


Who Gets Hurt the Most with a VEBA?
GM Stockholders

The automakers want to pay for a substantial bit of the cost with equity. Given that the cost of a VEBA may exceed the current market capitalization of GM and Ford, if the VEBA is mostly paid for with stock, the retirees could end up with effective control of both automakers. I say retirees, but the plan manager would be the Union. Hmmm, who does GM management work for again? So if the Union's interest in compromising benefits with a VEBA is to insure benefits regardless of what happens to the automaker, how does funding it with equity make sense? Paying for a VEBA with equity seems like smoke and mirrors to me. I don't see how issuing shares to the VEBA makes sense from a union or management perspective. A VEBA could still be funded with equity if GM made a secondary offering of new shares to the public to pay for it, but that leaves current stockholders holding the bag.

There is an article on CNN Money that suggests that GM's stock price does not reflect the benefits of a VEBA. From an investor's point of view, I think that's exactly wrong. GM's stock price is too high especially because of the prospects of a VEBA. GM's big problem with retiree healthcare is that it is an off the balance sheet liability. Assets have not been reserved to fund it, unlike GM's pension liabilities which appear to be properly funded and reserved. General Motors' market capitalization, the total value of all its common stock is about $16 billion, not much bigger than the $12 billion market cap of Harley Davidson, and less than a tenth of Toyota's $211 billion market capitalization. Those analysts that suggest a VEBA will boost GM's share price fail to consider the effects of stock dilution. If GM has to fund a $50 billion VEBA with $20 billion in current assets and $30 billion in new shares, then current stockholders will only own a third as much of the company as they currently do. Moreover, it will be challenging to even fund $20 billion out of GM's assets without negatively affecting working capital, regardless of how the assets are currently shown on GM's books.

If the numbers above leave you scratching your head, it's probably because you're beginning to understand the dilemma that GM is in right now. All of the assets of the company are facing multiple claimants. In a way, GM can't offer equity to the retirees, because it effectively already pledged the company by underfunding the retiree healthcare in the first place. Perhaps GM's last hope will be if it can convince enough GM diehards to buy $50 billion in new stock to (partially) recapitalize the company, while, at the same time it dilutes the worth of its current shares (owned by some of these same loyalists) to a fraction of the current share price.

One couldn't blame a GM shareholder if he/she took the position: "Piss on the UAW, they've already got 90% of my money. Shut down the g-d factories and see how they like losing 90% of their money." Lucky for the Union that the cush jobs of GM managers and executives depend upon the doors staying open and factories running. A big tree takes a long time to die, and lots of creatures thrive in a dying tree.

Given how difficult the issues are, it wouldn't surprise me if the UAW goes many months before it actually strikes a deal. Look how long it took to resolve the Delphi mess. It might make sense to put off everything for a year and a half to see if we can get a political consensus on nationwide healthcare. If so, then the VEBA might not have to be funded at 70%, but rather at 30%. If GM can continue improving its finances in the meantime, maybe it has a chance.

Osama - Does he or doesn't he?
Should he or shouldn't he?

When the recent tape was released showing that it doesn't even take a hairdresser to know for sure that Osama dies his beard, the thought that immediately came to my mind is whether the Quoran allows or prohibits a good Muslim from dying his beard. Somebody at Slate magazine must have been thinking along the same lines because in a slate.com article by Michelle Tsai, the question is answered. Apparently, there is no rule prohibiting the dying of one's beard.

GM Sales UP 6% in August
Toyota's Down
Honda Sets Record

General Motors posted a 6% gain over last year's August sales. For GM, light truck sales increased 17.8%; while car sales declined 7.8%. Much of the sales increase can probably be attributed to GM's new crossovers.

Toyota's sales were down almost 3%. Toyota's pick-up sales were up, but SUV sales were down.
Honda experienced a record month with sales up almost 5%.

Source: money.cnn.com

Dissention in the ranks of the UAW
VEBA is predictably contentious

While it seems a given that UAW officers will recommend a contract that includes a Voluntary Employee Benefits Agreement, "VEBA", that effectively puts retiree healthcare in the hands of the union, there is a vocal opposition within the union. I was forwarded a handout titled "Vandalize Employee Benefits Again" that attacks VEBAs. It appears that the handout came from soldiersofsolidarity.com. Similar rhetoric is available at factoryrat.com.

I'm not taking sides in the UAW's internal politics. I'm merely pointing out that approval by the union doesn't guarantee ratification by the workers.

Ford Sales down 14% in August
Nissan's Sales up 6%

Ford was the first of the automakers to report August sales numbers. The results weren't good, with sales down 14% overall. Ford reported bright spots in its crossover and compact SUV categories.

Nissan reported its results hot on the heels of Ford. Nissan reported sales 6% better than the same period last year.

GM and Chrysler are expected to report sales below last year, I would suspect that GM will do somewhat better than Ford, and Chrysler could go either way.

Nissan's sales uptick shows that though the market may be down overall due to problems in the overall economy, such as a downturn in the housing market, automakers who are selling cars that customers want to buy are still doing well.