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How UAW deal can pull GM even with Toyota

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How UAW deal can pull GM even with Toyota

Analysts: Pact big step in closing the labor cost gap

October 1, 2007

By JOE GUY COLLIER and JEWEL GOPWANI

FREE PRESS BUSINESS WRITERS

The tentative contract between General Motors Corp. and the UAW could quickly wipe out more than half the gap in labor costs between GM and Toyota Motor Corp., pulling Detroit ever closer to its Japanese rivals, industry experts say.

And the gap should shrink further — to about 6 percent by one estimate — as lower-paid workers replace more-senior union members over time.

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GM, Ford Motor Co. and Chrysler LLC headed into contract talks with about $25 an hour more in labor costs than Toyota, Honda Motor Co. and Nissan Motor Co., according to industry estimates.

About $13 an hour of this gap can be attributed to retiree pension and health benefits, which could be dramatically reduced by the proposed VEBA trust fund for health care.

GM, though, has other hurdles to overcome, such as continuing to raise quality and efficiency, experts say. The trends are moving in the right direction for GM, said Aaron Bragman, an auto analyst in the Troy, Mich., office of Global Insight.

“The biggest challenge that GM is going to have right now is convincing American consumers to come back and give their products another shot,” he said. “It’s really the old adage: Nothing trumps product.”

The new deal would put GM “right on top” of Toyota within a few years, said Rod Lache, an analyst with Deutsche Bank. It could reduce GM’s labor costs from $70 an hour to about $50 an hour, Lache estimates. Toyota’s labor cost is about $47 an hour. “It’s a big, big closing of the gap,” he said.

Based on early estimates, the new deal could add at least $800 in profit per vehicle at GM, said Laurie Harbour-Felax, managing director in the Farmington Hills, Mich.,

office of consulting firm Stout Risius Ross.

In 2006, GM lost on average $146 per vehicle sold in North America, according to Stout Risius Ross, while Toyota made $1,977 per vehicle.

“It really positions General Motors in a very good spot to be able to make significant improvement on the gap,” Harbour-Felax said.

GM’s tentative deal, which still must be approved by UAW members, would tackle the company’s massive legacy costs, something the Japanese automakers do not have to worry about because they have few U.S. retirees and less-generous retirement plans.

UAW President Ron Gettelfinger said he expects to reach similar deals with Ford and Chrysler. The effect on these two automakers would be different. GM has an older workforce and more retirees, making health care a bigger issue.

The major source of savings for GM would come in the proposed voluntary employee beneficiary association, or VEBA, a special trust fund to pay for retiree health care.

The VEBA could cost GM up to $29.9 billion, but that is far less than the estimated $51 billion in outstanding retiree health care liabilities GM has on its balance sheet. The VEBA structure also removes much of the risk of rising health care costs going forward for GM.

In addition to health care savings, the proposed contract could save GM money by holding down pay and benefit increases for active workers. It also would allow GM to hire workers for some non-core jobs — those not directly related to production — at lower wages and a separate set of benefits.

GM still has other disadvantages in labor costs, Harbour-Felax said. GM hourly workers have more break time and vacation days than their counterparts at U.S. plants run by Japanese automakers.

In addition, the foreign automakers are not sitting still. In an internal report obtained by the Detroit Free Press earlier this year, a Toyota North America executive outlined concerns that labor costs were growing too fast.

The internal report suggested tying Toyota production wages and benefits to the surrounding region for plants, instead of trying to keep up with the pay scale of the overall U.S. auto industry — one traditionally set by UAW contracts.

Honda appears to be following a similar strategy. When its new plant in Greensburg, Ind., opens next year, Honda plans to start production workers at $14.84 an hour with an automatic $3.71-an-hour raise in 2009, according to report by the Indianapolis Star. The average wage rate for production workers at GM, Ford and Chrysler is about $28 an hour.

“There’s no reason they have to follow a national wage model like the Big Three,” Sean McAlinden, a labor economist at the Center for Automotive Research, told the Star. “Honda and Toyota can be the wage leader in any region where they put a plant and still get the best resumes from three different states.”

GM, Ford and Chrysler also have other areas, outside of labor costs, in which competitive gaps need to be addressed, experts say. Toyota and Honda are at or near the top of most industry studies in quality and efficiency.

The Detroit automakers have made up ground. Buick tied Lexus in this year’s J.D. Power and Associates long-term quality study. Ford’s core brands — Ford, Lincoln and Mercury — all were above the industry average in the J.D. Power initial quality study.

But many U.S. consumers continue to place Toyota well ahead of the domestic automakers because of previous experiences, said Erich Merkle, director of forecasting for Grand Rapids, Mich.-based IRN Inc.

GM, Ford and Chrysler will have to improve their quality for years to come and also come up with distinctive designs to win customers back, he said.

“They’re still trying to outrun their ghosts of the past,” Merkle said.

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But many U.S. consumers continue to place Toyota well ahead of the domestic automakers because of previous experiences, said Erich Merkle, director of forecasting for Grand Rapids, Mich.-based IRN Inc.

GM, Ford and Chrysler will have to improve their quality for years to come and also come up with distinctive designs to win customers back, he said.

“They’re still trying to outrun their ghosts of the past,” Merkle said.

Here's one analyst I'm hoping will disappear within the next 5 years.... "those than can... do... those that can't.... analyze"

Just a matter of getting consumers to actually look at the products. I don't think there's any more distinctive design than the Saturn Sky.

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Fixed

Good point. If the future doesn't some how brighten for the other 2, GM may need to some how diffeentiate themselves from them.

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ive been looking at fords line up since the new body style mustang came out... and there really hasnt been anything that is stellar and decent sellers other then F150 and Mustang... and of course your Fleet King, Tortuse... i really dont think its in fords best intrest to cut back on fleet... it is currently keeping them stable...

or it was...

until they have better product, they really cant afford to pull out of any markets...

they need a car guy... pres might have been the guy for them, but who knows maybe mr boewing can turn things around for ford as well...

we will see with the union contracts... if he fails with the UAW... i see a failed ford, and Ford seems to be tanking fast, without anything to grab onto...

Chrysler on the other hand, has very very deep pockets... although really off limts... chrysler only can go up... via private management Chrysler can design and sell whatever it wants... Pres really doesnt need chrysler, nor does chrysler need him... but as long as Chrysler has someone who is in the veto chair like bob lutz... and put the designers back to work... we'll see a growing chrysler...

Ford... I will be sad to see them go, but if their finances dwindle... krik might appear on the radar and save the day... he's been praying to own a auto company for a while... Renault might have intrest in Ford, since they cant have GM... and GM might help its comrad out...

if Ford could break its concept to product cycle, they might be able to buck their spiral... something lutz had trouble with when he first came aboard... GM's management was perfect before lutz got there... so efficent... except for one thing... it dumbed down any creativity and style, because they were litterally put through study groups till death

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ive been looking at fords line up since the new body style mustang came out... and there really hasnt been anything that is stellar and decent sellers other then F150 and Mustang... and of course your Fleet King, Tortuse... i really dont think its in fords best intrest to cut back on fleet... it is currently keeping them stable...

or it was...

until they have better product, they really cant afford to pull out of any markets...

they need a car guy... pres might have been the guy for them, but who knows maybe mr boewing can turn things around for ford as well...

we will see with the union contracts... if he fails with the UAW... i see a failed ford, and Ford seems to be tanking fast, without anything to grab onto...

Chrysler on the other hand, has very very deep pockets... although really off limts... chrysler only can go up... via private management Chrysler can design and sell whatever it wants... Pres really doesnt need chrysler, nor does chrysler need him... but as long as Chrysler has someone who is in the veto chair like bob lutz... and put the designers back to work... we'll see a growing chrysler...

Ford... I will be sad to see them go, but if their finances dwindle... krik might appear on the radar and save the day... he's been praying to own a auto company for a while... Renault might have intrest in Ford, since they cant have GM... and GM might help its comrad out...

if Ford could break its concept to product cycle, they might be able to buck their spiral... something lutz had trouble with when he first came aboard... GM's management was perfect before lutz got there... so efficent... except for one thing... it dumbed down any creativity and style, because they were litterally put through study groups till death

Ford has been scary for quite a while. They need a very favorable deal from the UAW to stay in the game at all. Personally I love the fact Chrysler is private and they are not beholden to anyone. The UAW can't get their hands on profitability numbers so Chrysler can tell them to go pound sand or at least they can play the negotiation game all the while slowly easing their operations out of the UAW stranglehold. GM was the natural target for the UAW because they're the most visible and profitable of the big 3.

The UAW needs to absorb the fact they need to focus on Toyota and Honda. Until then, they have no credibility with anyone.

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