How Labor Could Fix Detroit

GM, Ford, and Chrysler could create a workers' health-care fund in a cost-saving move—and the UAW may well go along

by David Welch

Detroit is at a crossroads. The Big Three carmakers and the United Auto Workers can bargain this summer for a new, four-year labor deal that gives the 100-year-old U.S. auto business a shot at being competitive, or they can walk away with an incremental deal that ensures years more of struggle until one of the companies goes under.

The word is that this time around, the UAW has some willingness to negotiate some real changes. Two sources close to UAW leadership say that the union is willing to negotiate a deal at least on health care that would greatly reduce the $1,500 to $1,800 per car disadvantage in health-care costs that General Motors (GM), Ford Motor F, and Chrysler Group (DCX) each suffer (see BusinessWeek.com, 6/7/07, "Toyota, Take the Wheel").

"A Transformational Agreement"

Big Three executives have not yet made a proposal on a deal. But there are high-level talks in progress between top brass and UAW leaders seeking a pact that would split out the health-care plan into a fund that is managed by the union.

Executives at all three companies also want to put some kind of limit on the paid-layoff clause for workers (known as the JOBS bank), they may ask for more job cuts, and they may seek a 401(k)-style retirement plan for new hires. "We're looking for a transformational agreement," says Sean McAlinden, chief economist for the Center for Automotive Research in Ann Arbor, Mich.

Detroit's negotiators are pushing for it already. "The Big Three have come to the UAW," says one source familiar with labor negotiations. "The message is clear. They all want a separate health-care fund."

Protecting Medical Benefits

Here's how it would work. GM, Ford, and Chrysler would each give the union billions in cash, stock, and convertible debt equal to 60% to 80% of total health-care liabilities. Depending on the deal, this could be either a one-time payment or amortized over time. Since the Big Three collectively have roughly $100 billion in health-care liabilities, they would collectively have to set up a fund with at least $60 billion.

In GM's case, the company would give the union at least $36 billion to start the fund, 60% of the $60 billion health-care liability.

The union must then manage the fund and invest the proceeds to offset health-care inflation and grow the assets so that workers and retirees have guaranteed medical benefits. But the UAW would evade the risk that its workers might lose medical benefits should one of the companies end up in bankruptcy court.

Executives at each of the Big Three agree that a separate health-care fund is a top agenda item, says one source close to the talks. That's an important accord because the UAW tends to negotiate a deal with one of the companies and use it as a template for the other two. In some years, the lead company has cut a deal that met addressed own concerns but didn't meet the needs of its rivals.

GM: Cash Flow Boost?

On the health-care issue, the carmakers are on the same page. They may even set up one giant fund and turn the assets over the UAW. They would require the union's consent, but there are signs the union may be willing. In 2005, when the UAW gave GM health-care concessions as part of the auto giant's restructuring, the union offered to accept a health-care fund.

But they wanted cash and assets valued at more than 90% of the liability. GM thought that was too rich but was willing to use that as a negotiating point. Getting a deal done was taking too much time, according to two sources familiar with the talks. GM Chairman and Chief Executive G. Richard Wagoner Jr.