GM Veba on hold
It is perhaps the most significant event in the automobile industry since Henry Ford offered $5.00 a day to build Model Ts. General Motors and the United Auto Workers are stalemated on contract negotiations. Whatever is negotiated between them is likely to form the model for the contract negotiations at Ford and Chrysler. It is not an exaggeration to state that the outcome will determine whether there will be a domestic auto industry in the future.
So, watching the negotiations, or at least as much of them as can be seen through the small cracks in the publicity black-out imposed by each side, is watching history being created.
And there’s a new development. The parties have become so completely stalemated on the key issue that they’ve decided to talk about something else for a while.
The key issue in contract talks between General Motors and the United Auto Workers, establishing an employee voluntary benefit association (VEBA) to take over retiree health care costs, has been set aside for now in negotiations between the union and the company. According to the Detroit News, the decision to table discussions on the issue came after five days of negotiations over the implementation of the VEBA concept produced no significant progress. It has been reported that the UAW has agreed to the concept in principal.
However, price may be a serious sticking point. GM is apparently prepared to pay as much as 65 cents on the dollar, up-front, which apparently isn’t enough to satisfy the union, but is GM’s top price and the highest price analysts have expected. A single percentage difference is potentially a difference of a billion dollars.
But, the union believes that health care costs in the foreseeable future will increase at a rate larger than inflation and wants to be assured that the carmaker contributes enough money to produce an income stream large enough to assure that the fund will have no risk of insolvency. So, it not only wants more money up front, but a guarantee that GM will pay in more money later, should health care costs outpace expectations. GM, rationally, sees that as providing no incentive for the union to intelligently operate the VEBA and isn’t willing to do it.
For now, the union and automaker have decided to address other issues. The union’s top priority is said to be job security. But without resolution of the VEBA issue, it may be impossible to make progress on job security. That’s because GM cannot decide what it will be building in North America without knowing what it is going to cost them to operate here. That, in turn, depends primarily on whether the union agrees to a VEBA and, if so, at what price.
Observers believe that GM has already decided on a maximum number that it is willing to contribute to a VEBA, and which will determine the future of the union, in the process. It is believed that GM will simply move production out of the country if it cannot get the target number.
The irony in all of this is unmistakable.
After years of forcing automakers to pay absurdly high health care benefits, now the union is afraid of taking over the responsibility for those costs because they are afraid they won’t be able to control them, either. Merely imposing a co-pay, a feature virtually every other insurance coverage includes, would solve the problem, but the union has always resisted any effort by the automakers to escape dollar-one coverage.
So, setting aside VEBA issues, for now, is merely a way that both sides are allowed to stall for time without having to acknowledge publicly that they’ve hit an impasse. They can talk about other things for a while – GM wants work rules changed, a 401k for new hires rather than a pension, etc. – but those are subsidiary issues, and mean nothing without the VEBA.
In all of the reports about these negotiations, very little attention has been paid to the key question: at what point does a VEBA become too expensive for GM.
Even if General Motors gets significant reductions in the labor cost of its North American operations, those operations are still going to be more expensive than those in any other place in the world, other than Western Europe. The automobile industry is a capital intensive business – which means that it takes billions of dollars to design and introduce a new car, and that any one of a dozen things can make that new car a failure. Given that the usual lead time for a new platform is six years, even the most brilliant concept can be a disaster by the time it comes to market, all due to the unforeseeable. (That’s what happened to GM with its current crop of SUVs and light trucks.)
GM is going to need a lot of capital to create the new product that is essential to its future. Should it spend so much money on a VEBA that it lacks the capital to compete with the likes of Toyota, Honda, and BMW on new product creation, then there’s no point in the VEBA. They’d be better off letting the UAW go on strike, and just accelerating their move out of the continent.