Detroit's Bitter Pill

About this time every three or four years, when United Auto Workers contracts are renegotiated, domestic auto makers must take stock of their health. And like hypochondriacs, their diagnoses always are grim.

This time it's obesity and possible hemorrhaging, brought on by periodic vision loss.

Who's to blame? According to some, if the Big Three were the city of New York in 1908, the UAW would be Typhoid Mary.

When the contract talks conclude later this year, the prescription for relief will not be pleasant. Detroit's Big Three auto makers have too many plants and will swallow a bitter pill because they can't close as many as they'd like. Meanwhile, the union, which already is struggling with declining membership, likely will be forced to stomach further job losses.

In the background is a topic that is choking the Big Three but remains off-limits for the union: skyrocketing health-care costs.

Pursuing labor-cost reductions has become a “default strategic area,” says Sean McAlinden, economics and business group director of the Center for Automotive Research in Ann Arbor, MI.

“Because there's little else (auto makers) can do. There's a lot of things they should be doing. But they tend to pick on this labor agreement as the place to fix everything.”

What needs fixing? Depends whom you ask.

At General Motors Corp., it's overcapacity. The No.1 auto maker's North American capacity utilization was 91.1% through the first quarter, but it wants to achieve 100% by mid-decade.

The message to the UAW? Borrowing the time-honored phrase used by proctologists the world over: You're going to feel some pressure.

In this case, it will be pressure to close plants.

Ford Motor Co. has been warning for 18 months that multiple amputations are necessary for its survival. On the chopping block are assembly plants in St. Louis and Edison, NJ.

DaimlerChrysler AG's Chrysler Group is the only auto maker to top its agenda with the health-care issue, although the patient is in no mood to talk.

A cordial breakfast meeting held recently with journalists turns deadly serious — if only for a moment — when UAW President Ron Gettelfinger sets his square jaw and glares at a bank of cameras: “Make no mistake,” Gettelfinger says firmly. “We are not going to shift health-care (costs) in negotiations with the Big Three. We are not…going…to shift.”

This despite astronomical sums spent last year to provide health care for Big Three employees, retirees and their dependents. GM forked over $4.5 billion while Ford's total — which includes employees assigned to Visteon Corp. — was $2.5 billion, up 47% from the $1.7 billion it spent in 2000.

Reeling from a health-care bill in the same range as its Big Three competitors, Chrysler is unfazed by Gettelfinger's stand. While the UAW considers company-paid health care a staple that nourishes the relationship between employee and employer, Chrysler views it as a raging infection.

If left unchecked, there are fears such expenditures will increase the $2.4 billion total labor cost advantage enjoyed by non-union auto makers, whose North American presence is expanding.

Still, Gettelfinger doesn't flinch.

“Cost-shifting doesn't work,” he says. “It doesn't control health-care costs and it does nothing to improve the quality of care.”

In the absence of a national health-care program, there are alternatives to upping the ante for workers, the union leader says, referring to a UAW-sponsored program established eight years ago.

Active in eight communities in the South and Midwest, it brings together doctors, nurses, health-care providers, employers and workers. They seek out and eliminate systemic waste while promoting behaviors that foster good health.

“In these communities, we've used the purchasing power of our members and our employers to act as a single payer would in a national system,” Gettelfinger says, noting successes such as a 19% reduction in hospital admissions in a mid-Ohio community.

“An asthma education program (in Anderson, IN) has resulted in a 40% reduction in emergency room visits. These programs are saving UAW employers millions of dollars.”

None other than Ford Chairman and CEO Bill Ford believes, as Gettelfinger does, that the health-care debate belongs in Washington, not Detroit. Doctoring pension plans would yield more cost-reduction opportunities, the auto maker's boss says.

Don't go there either, Gettelfinger warns.

“To be sure, the cost of the pensions and retiree health care is a significant issue for UAW employees,” he tells journalists, adding the union views legacy costs as “a legacy of fairness, a legacy of cooperation between labor and management.

“It's a legacy that was given to us by the generations of auto workers who founded this union…and we intend to defend it.”

Industry observers point with growing anxiety to the situation at GM, where the average hourly worker is 50 years old and has 24 years on the job. This portends a dramatic swing in the ratio of retirees to active employees, from the current 3:1 level, to 5:1 within 10 years.

Gettelfinger dismisses such trends, noting the symbiotic relationship between pension funds and what happens on Wall Street.

“The Big Three pension plan remains actuarially sound,” he says. “Think about this: Since early 2000, the stock market has lost nearly 40% of its value. That's about $7 trillion. But not a single GM, Ford or DaimlerChrysler retiree missed a pension check.”

So what is Wall Street's prognosis for the coming auto talks?

“I think capacity is going to be the big issue,” says John Casesa of Merrill Lynch.

Indeed, overcapacity has become a deep-rooted malaise, if not an epidemic.

Through 2002, Ford led Big Three North American capacity utilization with a 93% rating. GM was right behind with 90% and Chrysler at 89%.

Considering the increasingly competitive climate in which the industry finds itself, there is widespread agreement such excess is not healthy.

“My view is that, in return for gains on capacity reduction, the industry will sign what is basically an extension of the current contract,” Casesa says.

Herein lies the bitter pill.

At Chrysler, a carbon copy of the existing UAW agreement would spark a 2.7% total labor cost hike — an increment of $1 billion — over its life, which could be four years instead of the traditional three. Ford and GM also would suffer.

Meanwhile, the union would have to agree to a concession.

The current contract contains a plant closing moratorium letter the UAW wears like a proud tattoo. To reach an amicable settlement, the Big Three contend this letter must go away — and it won't be easy.

Dick Shoemaker, UAW vice president in charge of GM negotiations, tells Ward's a draft of a new letter already exists in the union's bargaining dossier — all it needs is a second signatory.

Industry observers suggest any such talk is bravado. Ford, in part to cushion the blow to its workers, has openly stated it has targeted five U.S. plants — four for closure, one for sale.

Edison and St. Louis are victims of Ford's North American flexible manufacturing initiative. Edison, scheduled for closure next year, builds Ford Ranger and Mazda pickups; while St. Louis — the focus of intense, last-minute lobbying by government officials hoping to stave off a mid-decade shutdown — builds the Ford Explorer, Mercury Mountaineer and Lincoln Aviator.

Vulcan Forge in Dearborn was idled in April. And Ford hopes to shutter its aluminum casting plant in Cleveland early next year.

Mothballing is not an option, a source says, because it does not satisfy — in strictest terms — Ford's mandate to reduce capacity.

Meanwhile, a casting plant in Woodhaven, MI, is on the market. Offers are under consideration.

In total, these moves will affect about 3,000 workers — considerably less than the total number of GM workers whose jobs are threatened by closure talk. While discussions with Ford are expected to be heated, negotiations with GM could be equally tense.

That's because the prospect of plant closures — GM would settle for one, though it likely would prefer more — comes as a mild shock. The target is the auto maker's assembly site in Baltimore, MD, where the aging Chevrolet Astro/GMC Safari rear-wheel-drive minivans are built.

Looming over these talks are suppliers. Delphi Corp. and Visteon, as former divisions of GM and Ford, respectively, are required — with limited latitude — to adopt “mirror” versions of the Big Three master agreement. At least for this round.

Delphi will be released from its obligation after this next contract expires. Visteon's fortunes will be tied to the Big Three talks through the following second set of negotiations in 2006 or 2007.

Suppliers are “very active bystanders,” McAlinden says. “They're not allowed at the table. But they're really there.”

The supplier community is a source of interest, and hope, to the UAW. Non-union suppliers are high on Gettelfinger's agenda as potential areas of membership growth, and he's made no bones about his plan to intensify organizing efforts.

This could give the Big Three some bargaining power. A poison pill, of sorts, for suppliers.

Says McAlinden: “Some of the negotiators for the (auto) companies have told me, ‘That's all we really have to give the union is pressure on the (non-union) suppliers to take the union. There's nothing else we can give the union that's really important to them.’”

This has given birth to “a lot of fear and loathing” among suppliers, he adds.

“One reason they're angry is purchasing's been smashing them for years now. The final straw to break the camel's back is to force them also to take on this UAW labor.”

But, as with any course of treatment, there is the risk of allergic reaction. Once organized, Gettelfinger could tell suppliers, “‘You take our membership cards and when they want a price giveback, you tell them to come to me first,’” McAlinden surmises.

A beleaguered Gettlelfinger shakes his head. “One thing we're not short of in this business is rumors,” he says, rejecting the notion that the union will seek the Big Three's backing for its supplier sector organizing.

But he appears to leave the door open to more subtle lobbying.

“We do have concerns about good corporate citizens,” Gettelfinger says. “We do have concerns about those employers that the Big Three do business with and the way that they treat their employees.”

So, if the union disagrees with the way a parts maker treats its employees, expect the UAW to recommend they be quarantined from Big Three supply contracts.

On both sides of the negotiation table, optimism abounds.

There will be no strike “unless something really goes haywire with the economy,” Casesa says.

Adds McAlinden: “The market's made (strikes) illegal right now. Big blowups are not going to happen. Everybody's assured me of this. These are all experienced people. We've got to get our product renewed on the car side or we're cooked anyway.”

Contract Talks: Donor Rejection

Tell employees they will have to pay more for health care, then stand back and watch their blood boil.

That's according to a Towers Perrin survey on health-care consumerism.

Employees consider health-care costs to be a problem, but they believe someone else should fix it, says the human-resources consulting firm.

“Our poll reveals serious disconnects between employee and employer perceptions,” says Jim Foreman, Towers Perrin managing director-health and welfare.

The challenge for employers, Foreman adds, is “convincing their employees to change behavior around utilizing health care, while their workforces feel they already pay a fair share of health-care costs and view themselves as effective health-care consumers.”

The survey suggests 63% of employees agree rising health-care costs negatively impact employer profits, but less than half — 48% — believe employers are powerless to stop the bleeding.

Strongest opposition comes from workers who are 35 and younger. Just 28% of this group believe it's fair of employers to increase health-care costs. Meanwhile, more than 50% of workers aged 35 and over believe increased contributions are worthwhile.

Through an effective communication strategy, employers can “provide employees with the tools they need to become better consumers,” says a United Auto Workers union statement.

“Health-care consumerism is a shared employer-employee responsibility,” Foreman says. “Employers provide employees with the tools they need to become better consumers. Employees, in turn, agree to share in the costs and make informed decisions about lifestyle and health-care choices.”
- Eric Mayne