A retiree healthcare deal astir in Detroit
Detroit automakers, hit with huge losses, may spin responsibility off to the labor union during contract talks this summer.
There's a silver lining in the Detroit automakers' financial distress. Things appear so bad that the companies and their main labor union might agree to something radical.
Right now, a growing burden of retiree healthcare costs is one of the biggest challenges facing Ford, General Motors, and a soon-to-be-independent Chrysler.
That liability – one not shared by competitors like Toyota and Honda – goes a long way toward explaining why German-based DaimlerChrysler views its Chrysler Group as a clunker to be sold no matter the price. And it explains why the private investment firm Cerberus had to offer so little this month to become the buyer.
In this climate, a once-unthinkable idea is being seriously discussed: In effect, spin the healthcare problem off to the labor union. The automakers would each agree to pour billions of dollars into a trust fund to help provide for the retiree insurance. But with that one-time payment, the carmakers would win a cap on their future liability.
"That [liability] will be part of the upcoming negotiations for sure," says Tony Faria, an automotive expert at the University of Windsor's Odette School of Business, just across the Canadian border from Detroit. "The unions fully realize these companies are in trouble."
Unloading healthcare on the union is far from assured. Historically, the radical ideas in auto-industry labor contracts have been concessions to the United Auto Workers (UAW), not by them.
But the current crisis is arguably the toughest in Detroit's history, making possible an experiment that could become a model for other industries.
"The auto companies would provide some major amount of funding," Mr. Faria says. "From there on, they'd be paying at a known rate, rather than an ever escalating rate."
The arrangement, known as a "voluntary employee beneficiary association" (VEBA), is not a new idea. A number of state governments use so-called VEBA trusts to provide benefits for current workers such as teachers, for example. Ford and General Motors already use VEBAs for some retiree health costs.
But the idea of turning to a VEBA as an escape hatch for a full-scale retiree health plan is still novel.
In 2006, a major supplier to the auto industry, Goodyear Tire & Rubber Co., reached such an accord with the United Steelworkers.
Goodyear agreed to put $1 billion into the trust. The amount falls a bit short of the estimated liability. But it's enough that the union saw a fighting chance that the new trust will be able to provide for the beneficiaries.
The steel union doesn't directly control the trust fund, but it plays a guiding role through the appointment of trustees.
"We needed to get a billion dollars for this to be feasible at all," says Wayne Ranick, a spokesman for the United Steelworkers International in Pittsburgh.
That same kind of arithmetic will be at work when the Big Three bargain with the UAW this summer and beyond.
Workers will want to find a balance between preserving benefits and preserving jobs, striking a deal that allows for a healthy company to move forward.
At Goodyear, Mr. Ranick says a key element of the deal was a measure of job security. The tiremaker pledged to invest $550 million in plants and to operate them at a certain manpower level.
For the Detroit automakers, the cost of retiree healthcare isn't the only problem, but it is a major one. The liability totals about $100 billion by some estimates, an amount more than double the stock-market value of the three firms.
Such a number is guesswork, because the future cost of healthcare and the longevity of retirees are uncertain. But the scale, coupled with uncertainty, weighs on the companies and their shareholders.
In announcing the deal to sell Chrysler on May 14, DaimlerChrysler chairman Dieter Zetsche breathed an audible sigh of relief in unloading this liability. It was "especially important," he said, that the retiree costs would be borne by the new Chrysler Corp., not shared with Daimler, which had managed Chrysler since a 1998 merger.
Now, tackling the liability will be crucial for the new owners, helping to determine whether their $7.4 billion investment to buy Chrysler succeeds or fails.
The finances and demographics at the Big Three are scary for workers and management alike.
Their pensions are generally well funded, but the healthcare is not, and the ranks of retirees already outnumber current workers.
Moreover, autoworkers stop young, based on a "30 and out" system in place since 1970, which allows full retirement benefits after 30 years on the job. Such bargaining victories by the UAW, starting in the years right after World War II, helped set a tone for an era in which factory jobs nationwide became tickets to middle class living and secure retirements.
Now UAW bargaining could again help set the tone, this time during an era when unions are struggling to maintain their place amid global competition and a less-friendly policy environment that took root in Washington since the 1980s.
"Corporations really do mimic what other corporations do," says Teresa Ghilarducci, a labor economist at Notre Dame University in Indiana, who serves as a trustee on a GM VEBA.
In that light, she says it's significant that the big three are not opting for bankruptcy as a route out of their current crisis.
The union workers of some airlines have lost their retiree health plans during bankruptcy proceedings (where those liabilities can be discarded).
For the automakers, bankruptcy is less of an option. Where consumers will buy a $400 plane ticket from a bankrupt company, a $25,000 car with years of use ahead is a different matter.
The Big Three also have a tradition of finding common ground, sometimes after hard battles, with the UAW.
Cerberus, the private equity buyer of Chrysler, is expected to push hard for concessions.
But it has made early overtures that its cost-cutting won't become an all-out war on union jobs and benefits.
"John Snow [the Cerberus chairman] is from Toledo. He probably has some credibility when he says he wants to work successfully with unions," says John Paul MacDuffie, a management expert at the University of Pennsylvania's Wharton School.
Mr. MacDuffie points to the success of Wilbur Ross, an investor who has revived battered American steel factories, as an example of how buyouts can involve both profitability and good labor relations.