Monday, May 14, 2007

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.

15 Comments:

At 5/14/2007 9:26 AM, Blogger juandos said...

I'm 32 years as a union man in the air transport business...

I for one am a strong believer in unions because I believe in, "collective bargaining" and NOT collective suicide which has seemingly been the goal of unions for at least the last two decades...

 
At 5/14/2007 10:24 AM, Anonymous Walt G. said...

As a UAW representative, I think it's a bit of a stretch of reasoning to blame all the auto industry woes squarely on the UAW. There are a lot of other major factors at play: demographics, globalization, health care costs . . . .

I agree, though, that we are our own worst enemy sometimes, but we’ve had a lot of help getting into this mess. Finger pointing will probably not lead to a solution to these major problems.

 
At 5/14/2007 2:21 PM, Blogger juandos said...

Chrysler Update


DaimlerChrysler AG announced early this morning that it has sold 80.1-percent of the Chrysler - Dodge - Jeep trio to Cerberus Capital Management, a New York equity firm that specializes in turning around troubled companies. Cerberus reportedly paid $7.4 billion to obtain majority ownership, with Daimler AG retaining a 19.9-percent share.

What can Cerberus Capital Management with this UAW legacy costs that Daimler couldn't do?

Or is Daimler just tired of messing with it all?

 
At 5/14/2007 4:18 PM, Anonymous Walt G. said...

The title of this thread is very biased and only serves the purpose of sensationalism. The UAW does not have legacy costs (except for some folks who retire from the UAW International union). GM has legacy costs from a legally binding contract. Since when does a seller get blamed for the buyer paying too much in a contract? Isn’t that Caveat Emptor?

There's blame enough to go around, however, think of this way: Suppose you buy a house and agree on a price with the seller to pay well into the future for the transaction. Would you expect the buyer to still make the payments even if their income goes down? I would. Would you blame the seller for expecting what was promised to him or her and trying to get as much out of the deal as possible? I wouldn’t.

Nobody had a crystal ball and foresaw GM’s market share slide, but GM knew very well they were paying the price by sacrificing the future for the present. I deal with these people daily and they are not stupid.

Now, we have to figure out what to do with the mutually created mess together. We need the blame game to end and innovative thinking to begin. We sink or swim together.

 
At 5/15/2007 2:50 PM, Anonymous Victor said...

walt g. said...
We need the blame game to end and innovative thinking to begin. We sink or swim together.
Where do the changes begin? It seams to me that both GM and the UAW have already poured cement on there own feet in an effort not to budge. Does GM need to make a profit? What is the best way for GM to return to economic prosperity? Are UAW members paid too much? If GM, Ford, Chrysler, and the UAW can not get things turned around, is my tax dollars going to be used to bail out these extravagant retirement packages?

 
At 5/15/2007 4:48 PM, Anonymous Walt G. said...

Victor,

Personally, I'm preparing for another job with more long-term potential. Our union leaders can't get the support of the membership on the floor for concessions in a year that GM rewards record executive pay. And, contracts must be ratified by a vote of the membership. Union officials get highly embarrassed and lose elections when a contract is turned down.

Rightly or wrongly, people must realize that the union was formed by radicals who would rather fight than be taken advantage of. We have a health-care plan that was just negotiated last year and is effective until 2011, so I expect that's where the stand will be made. The window of opportunity for discussion of concessions was closed last month with the doubling of GM executive pay. September’s not gonna be pretty. This is all just my unofficial opinion, and I hope I am just being overly pessimistic.

 
At 5/15/2007 8:47 PM, Blogger juandos said...

walt g. says: "GM has legacy costs from a legally binding contract. Since when does a seller get blamed for the buyer paying too much in a contract? Isn’t that Caveat Emptor?"...

Well walt g. you do have a point, a point not to be dismissed out of hand either...

Consider when many if not most of the so called, "legacy costs" came into play...

When Richard Nixon was in the Oval Office... Richard Nixon in many ways was the father of price controls...

 
At 4/11/2008 6:10 AM, Anonymous ilanit said...

The world of Los Angeles private equity funds is a fairly rarefied world. The vast majority of these funds are organized as limited partnerships (LP) where the investors are principally institutional investors such as pension funds, banks, and high net worth individuals.The general partner (GP) identifies the opportunity, calls money from its lLP's (also called a drawdown or takedown) up to the amount committed and can do so at any point until the fund is liquidated. When an investment is liquidated, the GP distributes proceeds to the LP's in kind or in cash. The compensation from LPs to GP's consists of a management fee, plus a fraction of the profits called the carried interest.

 
At 11/19/2008 9:16 AM, Anonymous Anonymous said...

the big 3 and the unions have brought their own demise. Extravagance works for awhile, until you have to live with it long-term. Change or go under

 
At 12/07/2008 9:07 PM, Anonymous Anonymous said...

i say if the company can't make it as a business it should go under. why should my tax dollars go to people who are getting an awesome deal. the train has come to a stop and everyone off the easy train. welcome to the real world. it does not matter if they go under. the world will keep going without them and there will be cars to buy. everyone at the companies are not willing to give up what it will take to survive. everyone points the finger to someone else and the end result will be that either major changes will happen to all and reality will come crashing down or everyone will just be out of a job making nothing until they find another job and go to the unemployment line like everyone else. Survival of the fittest. Nobody liked what neutron Jack did with GE at first, but now it is a great surviving company. Jack said let the auto companies fail if they can't make it on their own.

 
At 12/13/2008 8:25 PM, Anonymous Anonymous said...

I don't think the last writer understands that if the big 3 go down the legacy pensions will be picked up by the TAX payer due to the Pension Guarantee Corporation.

Be careful what we ask for!!!!!!!!

 
At 12/14/2008 12:48 PM, Anonymous Anonymous said...

a post to the guy above that when the uaw is not willing to move to make things better and always planned on TARP money or another white house option then they had no intention of bargaining even though Ron put up a good blah blah blah report. you have 7 workers retired for every 1 person working today. You do the math.

 
At 12/14/2008 1:06 PM, Anonymous Anonymous said...

the end result will be thousands and thousands of jobs lost in order to survive ( no matter how this plays out ). Major changes will happen to all like it or not one way or another. The auto industry needed to change a long time ago and has not, and is now being faced with forced changed or adios.

 
At 12/19/2008 12:37 PM, Anonymous Anonymous said...

i say it is good that the big three got the bridge loan. Now lets give them more money at the end of march. We waste money on worthless stuff why not give it away to the big 3 so they can keep bleeding money and keep everyone working even though the rest of the world is feeling the effects of the recession. Why not just let them coast through the recession and continue to employee everyone and keep everything the same. Lets go ahead and give them cost of living increases and better benefits. As far as legacy costs why not just fund that also. Lets go ahead and give billions to that fund and take it away from the big 3 burden. Hell, i don't have benefits for life and have to pay for my insurance, but lets give it to them. Let goverment give billions more and use it to finance the people who want to buy american vehicles. They say 25% of people want to buy but cant get credit. Lets let anyone who want to buy american cars from the big three be guanteed a loan by the goverment. The big three are a broke entity, but why try to fix it. We can get them thru the next 2 three years and let them limp along after that. No need to pay the brigge loan back and the golden gate bridge loan to come in the furture. I myself could use a new auto and even though i am out of a job let the goverment fund my new auto and i will work on a plan to be viable to pay it back and if i do not that is fine. I say it is good to sprend money on the big three and me. Ron would be proud if goverment did all this for the big 3.

 
At 1/05/2009 7:44 AM, Anonymous Anonymous said...

Just get rid of the mobbed up UAW, problem solved. Of course someone from the UAW will come on here and tell you different, that's their job.
They should have died off when the mob did

 

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