Did GM get a good deal? Ask Chrysler
Today, United Auto Workers president Ron Gettelfinger will present the details of the contract negotiated with General Motors to the leaders of local GM/UAW unions. They, in turn, will be expected to sell ratifying that contract to the members. Ratification is expected, primarily because there is no reason to believe they could have gotten a better deal.
We know the union got a good deal.
But did GM?
We won’t know until the UAW starts negotiating with Chrysler.
Chrysler is the company of which the union is afraid. That’s why they’re leaving it to last.
Currently, the insiders say that Ford is up next, but only after the ratification vote on the GM contract. Ford is expected to accept something very similar to the GM pact, so having that contract already ratified strengthens the union’s hand. Moreover, Ford has already said it wants to shed retiree health care costs to a VEBA, the same concept which is the keystone of the GM agreement. So, there’s no reason to believe they won’t end up with a clone deal.
But Ford and GM are publicly held companies run by hired help who must be responsive to stockholders and have a limited stake in the ultimate future of the company, at least compared to the near-term future for themselves. At both Ford and GM, the mentality is one of cutting losses. They are more interested in cutting losses in the United States than they are in regaining market supremacy here. They have other places to invest their money that bring bigger returns than the U.S. It is enough for them that the drag on global profits created by North American losses is minimized.
The mentality at Chrysler is entirely different.
Chrysler is now a privately held company, so it has no need to respond to shareholders. It is also financially strapped, even if it has had an infusion of capital as a result of the buy-out deal. Though it has less retiree health care liability than the other two companies, it also has less money and is clearly further behind in development of competitive new models.
This much is certain: the folks at Cerberus thought about how they would deal with the UAW before they bought the company.
People who borrow money for a living – which is what Cerberus does – have a very solid understanding of its value, both now and later. People who count numbers for a living, which is the background of both GM president Rick Wagoner and UAW president Ron Gettelfinger, tend to see the value of money in terms of money. The Cerberus types see it in terms of opportunity.
To Wagoner and Gettelfinger, buying out a long term liability with a front money payment can make sense if you save enough in the long run. That’s an accountant mentality.
To Cerberus, though, money equals opportunity. They borrow huge sums of money on the bet that they can make more money with those funds than the funds cost in interest. Essentially, they’re betting that the money is worth more today than it would be a year, or two, or ten years from now, because they can use that money to build something far more valuable, then pay back the borrowed funds and have a nice profit left over.
That is a risk-taking mentality.
The top executives recently brought to Chrysler by Cerberus have all been promised equity – huge chunks of it – if they turn the company around. The new boss, Robert Nardelli, gets paid only if it is turned around, and rumor has his payout as being potentially 20% of the entire company.
That is not a pay formula that motivates playing it safe.
If Cerberus decides that it would rather be investing its cash in new products, then it isn’t going to be interested in giving a huge chunk of it away to the UAW. It won’t be interested in a VEBA. Who knows, maybe Cerberus thinks Hillary is a shoo-in and that she’ll get national health care adopted, taking them off the health care hook for free.
So, here’s how you determine whether GM got a good deal.
If, after GM and Ford both settle with the UAW, the union negotiates with Chrysler and Chrysler agrees to that same deal, then GM got a good deal.
If, on the other hand, Chrysler doesn’t agree to the same deal, but negotiates something else with the UAW, then GM did not get a good deal (and its stock price will tank).
Among the three domestic nameplate car makers, Chrysler is best positioned to take a strike. Unlike GM, it does not have pivotal new model introductions occurring this fall. What Chrysler does have upcoming is the new Dodge Ram, but there is nothing in that which can’t be postponed. Unlike GM, they don’t already have $60 million in advertising committed that can’t be pulled. Anyway, this isn’t such a fine time to introduce a new truck – just ask Toyota. Since they’re losing money on every car they produce in the United States, a strike actually saves Chrysler money.
Sure, it’ll hurt market share and squeeze dealers. But Chrysler is already trying to dump dealers right and left, many of whom survive on used car sales, anyway. It doesn’t have much market share left, and the only way that’s going to change is with sexy new models. It can be planning them while the workers picket.
Cerberus hired as chief executive a man who has never dealt with union labor and have twice demoted the one man in the company that had credibility with the UAW, keeping him in place only as their front man in the union negotiations.
When it’s all over, Cerberus doesn’t expect to be a unionized company.