GM and the UAW Tentatively Agree on New Contract

Earlier this week the United Auto Workers called for a nationwide strike against General Motors, and just two days later a new contract seems to be agreed upon. Details are still a bit sketchy, but for the sake of my friends and family who rely on a paycheck from GM, it is great that this was hopefully resolved without much disruption.

Highlights of the Deal

One of the major benefits of this contract is the retiree health care trust, which has been in discussion for quite a while. With this trust in place, GM would give control of the trust to the UAW, and the company itself would fund 70% of it. This is good news because it will save GM money. It isn’t the best possible solution, but it is probably the only compromise that would work.

The big wild card that hasn’t been discussed is the demand for job security, which was at the focus of the strike. What concessions did GM make in order to please the UAW so quickly? Job security is a difficult thing to promise, and even if you can maintain whatever competitive edge you have currently with domestic plants, who’s to say the market won’t change in five or ten years before we’re at the same point? It will be interesting to see the actual details regarding this.

The Labor Cost Disparity

This is the big point that I was discussing in the comments of the earlier post this week, and that is the union has created an unbelievable labor cost disparity compared to the Japanese automakers. From an Associated Press article this morning:

The company went into the negotiations seeking to cut or erase what it said is about a $25-per-hour labor cost disparity with its Japanese competitors.

That number blows my mind. Most factory workers shouldn’t even be making $25-per-hour, let alone simply a disparity with competitors. I realize that this is is not strictly a disparity in wages, since there are other labor related expenses included as well, but let’s do the math for a second.

There are around 73,000 union employees at GM. If you simply take the $25/hr disparity number and figure the averae employee works a 40-hour week. When you multiply that out, you get a staggering number of almost $3.8 billion per year. That is billion, not million, each year that is simply based on excess labor costs compared to your foreign competitors. Knowing that, is there any surprise as to why GM, Ford and Chrysler are doing so poorly?

Another quote in that same article says that the terms of this contract will close that disparity. While I do think new terms will help, at least in the short-term, with the constantly increasing wages and bonuses, pension and health benefits, this will not be sustainable over time. A perfect example is this bit of information from the AP article:

…two people briefed on the contract told The Associated Press that it also would give workers bonuses and lump-sum payments… Wages would stay the same for the length of the four-year deal, but workers would be given a bonus of $3,000 once the contract is ratified and then bonuses of 3 percent, 4 percent and 3 percent of their annual pay each year for the last three years of the contract, said one person briefed on the contract details.

So, the agreed to give an already overpaid workforce a bonus of $3,000? What for? The company isn’t profitable, so it isn’t rewarding them for that. Is it making up for the 2 days without work? Well it could be, but for most people that would come out to just a couple hundred dollars. So GM has to fork over about $219 million to pay for the first year bonuses, when they lost almost that much money just while the strike was taking place for the last two days.

Lower Wage Structure

The good news from this proposed deal is the lower starting wages. They have agreed to reduce the wage structure for certain job classifications, and even offer buyout packages for early retirement for existing workers in order to make room to hire new employees. This is great news because it begins to reduce some of that absurd wage disparity by getting rid of high-seniority people making far more than they should be for their job, and then open up more positions for new employees which would be on the more appropriate lower wage structure.

The deal also includes language that mitigates the impact of the jobs bank, in which the company pays laid-off workers most of their salary and benefits. This was another huge burden on the company when they had to essentially pay someone that they laid off almost their entire salary and benefits. This is absolutely absurd to have to pay employees that aren’t working. Without knowing details, it is hard to say how big of an impact this will have, but reducing the amount of money laid off workers receive should help.

Will it Work?

It is hard to say. The union has used whatever power they have left to make a point, and it appears as if it may have worked for now. There are certainly some highlights of the new plan that at least address the wage issue, but there is still plenty left on the table that may not hold up. GM continues to struggle, and I don’t know how this will affect the bottom line. It certainly has the potential to save some money, but this looks like only a short-term band-aid that won’t hold up more than a few years.

Author: Jeremy Vohwinkle

My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.

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