The Crippling Burden of UAW Legacy Costs

Chrysler lost $600 million last year, and now private equity firm Cerberus will buy a majority of the struggling Chrysler Group for $7.4 billion, breaking up a transatlantic car union that never lived up to its billing as a marriage made in heaven.

From today's WSJ: "The proposed deal would allow the German auto giant to shed Chrysler's $18 billion in retirement and health-care liabilities and could open the door to further restructuring of the nation's unionized auto makers.

A private-equity takeover of Chrysler would mark a watershed for the industry, which is struggling under the weight of massive pension and health-care obligations to its union workers. Those debts and the cash required to fund them have hobbled GM, Ford, and Chrysler in the face of relentless competition from Asian and European rivals."

The crippling UAW legacy cost problems are not unique to Chrysler, and they are going to get a lot worse in the future for all of the Big Three automakers.

In 2005, GM provided health and income benefits to more than 450,000 retirees and their surviving spouses, and retirees and their dependents outnumbered the company's active workforce by three-to-one. This imbalance will continue to grow as more and more retirees are supported by fewer and fewer workers, especially since a) nearly a third of GM's hourly workforce signed up for payout packages in 2006, resulting in even more retirees and fewer active workers, b) GM continues to lose market share (see graph above), and rising legacy costs get spread over fewer and fewer vehicles.

Bottom Line: The UAW is the most successful union in U.S. history, at achieving both higher-than-market wages and below-market productivity for its members, in the short run. But that very union success has now created the seeds of a powerful destruction that we are witnessing today, and in the long run the success of the UAW is destroying thousands and thousands, and maybe millions of union jobs, and is destroying many of the very companies that employs its members (GM, Ford and Chrysler).

The UAW's golden era is over. Unless its leaders and members concede that it's been overtaken by economic reality and begin to act accordingly, both the UAW and Big Three will go the way of the dodo bird.