Posted by: David Welch on September 28, 2007
Make no mistake. General Motors Corp. executives are ecstatic about the tentative agreement they have reached with the United Auto Workers. Not only did they get to offload $51 billion in health care liabilities into a private trust, thus saving $1.6 billion or more in cash outlays. The company can also replace retirees with workers who make somewhere in the neighborhood of $14 to $16 an hour. J.P. Morgan analyst Himanshu Patel says that concession should save GM anywhere from $300 million to $1 billion a year. That billion dollars is on the extreme long end; it assumes 24,000 people leave GM in the next four years. Whatever the number, the concession goes against long-standing union mandates that everyone on the assembly line should make the same money. Getting the UAW to agree to a two-tiered wage structure for new line workers isn’t far from getting the Vatican to let priests marry.
All in, says one GM executive, the deal will cut Toyota’s $30 per hour cost advantage by 75%. When I heard that, I replied that GM now has no excuses. There is still Japan’s manipulation of the yen, which has made Toyota’s 1.2 million exports to the U.S. cheaper for consumers. Fine. But the game is now close enough to where GM—and presumably Ford and Chrysler—should quit whining about Toyota’s advantages and just start winning the game. Hopefully, this newly-discovered cash will go toward new cars, more advertising, maybe even buying out dealers from their bloated dealer networks and cutting weak brands that siphon marketing money but don’t deliver sales and profits.
In other words, now comes the hard part. GM will have to continue fixing brands, waking consumers to improvements in its cars, and for that matter, making better cars. They also could use some cash to accelerate hybrid and fuel cell development. Maybe GM could seize the technology lead from Toyota. These are all things GM said they couldn’t do given the labor cost disadvantage. Now unencumbered, let’s see Detroit catch up.