Developments in the labor contract talks between the General Motors, Ford, and Chrysler and the United Auto Workers have been occurring rapidly while the car world’s attention has been diverted by Frankfort’s glitz. But what’s happening in Detroit’s negotiations may mean a lot more to the future of the industry and even to the types of products enthusiasts will be able to buy, than the dreams on display in Germany.
Word is that the automakers and union have agreed in principle on the VEBA, i.e., voluntary employee benefit association, to take over retiree health care options, but haven’t agreed on the price. It’s also unclear whether Chrysler is part of this, as earlier reports have suggested that Chrysler has different ideas. 
What Chrysler wants and what Chrysler gets may not be the same, as the union has clearly focused its energies toward the other two, Ford and GM. Yesterday, the union agreed to extend “indefinitely” the contract with those two automakers. In this context, however, “indefinitely” doesn’t mean much: either side can cancel the extension on three days notice. The contract with all three automakers expires September 14th. The union also announced that its Executive Board had voted to make General Motors the strike target, should contract talks fail.
The net effect of that is to make the GM contract the contract that will be negotiated first. The pattern in the past has been for the lead contract to be the one that determines how the other contracts will read, as well.
There have been reports that GM is insisting, in addition to a VEBA, to a “two-tier” pay scale. Under that plan, newly hired workers would be paid less than those currently employed and would receive less in benefits. Two-tier pay arrangements exist with several auto supplier companies, as well as the so-called “temporary” workers that the union has allowed GM to hire at some plants. The union, however, has asserted that the suppliers were in a different circumstance – bankruptcy – than the automakers. Of course, that’s foolish posturing by the union leadership: the time to act is before automakers go bankrupt, not after.
It isn’t clear whether the two-tier pay scale is a negotiating tactic designed to push the union on the VEBA issue, or whether it is sincere. Alone, a VEBA doesn’t close the cost gap between the automakers and their foreign nameplate competition. 
The union’s apparent willingness to accept a VEBA is not, however, complete. Reports have the union wanting to be able to go back to the trough, the automakers, for more money if health care costs rise more rapidly than expected. The automakers are not willing to agree to that, even if the union would take less money in the VEBA up front. The possibility that the automakers would have to pony up more money later for retiree health care will depress their stock price for the foreseeable future, and would also leave them with a huge potential liability hanging over the companies indefinitely. That’s not so different from where they are now. Of course, this notion may also be nothing but a negotiating tactic by the UAW.
The Detroit Free Press reported in its Friday edition that talks between the union and the automakers stalled on Wednesday, and that union members had already constructed picket signs. Despite that, both industry observers and union members still believe that a strike is unlikely, as both the membership and manufacturers have too much to lose.
The real question, however, may not be the VEBA concept. Health care has long been an expected issue in these talks, and the VEBA concept has benefits for both sides, as it protects the retiree health benefits if the companies themselves end up in bankruptcy. It also gives the union something meaningful to do in a future that is likely to offer far less generous wages to its members. 
The real question is whether the automakers will push hard enough to get concessions on wages and benefits for current employees. Were the VEBA concept to be fully implemented, each automaker would still be faced with about $1500 higher costs of production per car than Toyota, Honda, and other competitors. The union has strenuously argued for some time that these costs were not labor costs, and that the union workers are at least as efficient as workers at non-union automakers. Taking a cut in wages or health care costs for current members is probably unacceptable to the union and might be so unacceptable to its membership that a contract on those terms could not be ratified. The top wage scales at GM, Ford, and Chrysler work out to over $60.00 per hour.
This is why the “two-tier” concept has potential: current pay for current employees is preserved, so members have no short-term interest in voting against it. The automakers, however, can look forward to lower costs over time. 
For its part, the union wants to be able to guarantee that there will be jobs here. So, the union wants assurances that production will remain in the United States, both at the manufacturers and the suppliers, and not be outsourced overseas.
The continued existence of jobs is the real number one priority of the union, though it isn’t the one its leaders have publicly identified. (Publicly, they’ve said number one is preserving wages and health care benefits.) Automakers have real incentives to invest their money in other markets. Foreign markets are likely to be more profitable, particularly if the Congress and state legislatures add more regulations to be met by carmakers. As the various state and federal regulations are imposed and increase the cost of developing vehicles, the automakers are increasingly likely to do the development and assembly of those vehicles elsewhere. GM’s development, including design and engineering, of Buicks in China for construction in China shows how easily they can do this. 
The autoworkers now need the automakers more than the workers need the companies.

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