Thursday, September 27, 2007

GM: The Strike and The Settlement

I would be remiss if I let the week pass without commenting on one of the biggest news stories about corporate America- the GM-UAW strike and subsequent contract.

A few weeks ago, I wrote about GM's stock price surge, here, suggesting that it is the product of speculation, rather than consistently excellent performance.
As the nearby Yahoo-sourced price chart of GM and the S&P500 for the last three months clearly shows, even the recent spike in GM's price, due to the UAW contract, only brings it to rough parity with the Index. For much longer periods, such as more than 2 years, the picture still looks even worse, as in that prior post.
However, leaving aside the immediate ramifications of the contract on GM's market value, there are two other aspects to this deal I wish to discuss.
The first comes by way of Wall Street Journal editorialist Holman Jenkin's excellent piece in yesterday's edition. He notes that the brief strike of the UAW GM workers called by Ron Gettelfinger may well have been so he could get them in the right head space regarding the sacrifices they are going to be asked to make in the new contract. Rather than it being a product of the negotiations, Jenkins reasonably theorizes that Gettelfinger, presiding over an ever-shrinking, less-important union, is worried that they won't accept the new contract, sending the near-term status and health of the union, with GM, into free fall.
That alone tells you something about the severity of the situation in Detroit right now.
But there's so much more to it. Many articles and pundits are trumpeting the new pact as a sea change in the American worker's situation.
This is because of the key element of the new contract, wherein GM finally exits the employee medical care guarantee business, in which it, and other firms, have been since WWII, by way of a $51B payout to a new union healthcare trust find.
Sure, GM is out of the business of yet another benefit provision. Along with defined contribution plans, rather than the older, now nearly-extinct defined benefit pension plans, healthcare is returning to its rightful place- as the province of the worker, paid for with cash from his own pocket.
However, given the context of the GM deal, instead of going right to the worker, the UAW-administered trust fund idea was used. It's necessary because of the mixed durations of claims by so many former and current GM workers on the company for healthcare.
Look at what this does. It now makes the workers' own union, the UAW, responsible for any healthcare shortfalls, service gaps, funding shortages, etc. Responsibility has hit the union movement at last. It's as if they returned to an ancient medieval guild structure, wherein they have provided in common for their retirement and healthcare.
I have several observations on this. First, the $51B number seems suspect to me. If the same minds that usually mess up healthcare cost management and estimation were involved, and it's hard to imagine who else would have been, it stands to reason that this amount will, ultimately, prove unequal to the claims made on it. Look out if you happen to succeed Ron Gettelfinger as UAW chief.
Second, there's a subtle, but important, aspect to the timing of this change. Right in the middle of a Presidential campaign featuring many Democratic candidates calling for more government-run universal healthcare, you have the major US union, the UAW, reverse course and take on the responsibility for its own healthcare insurance provision.
Will a major, blue-collar Democratic voting bloc now get a taste of individual control of their own health insurance, and lose their appetites for HillaryCare 2.0, as well as other Democratic health insurance plans which promote socialism?
It's an interesting thought.
Jenkins mentioned another interesting aspect of the deal. By moving the union's healthcare administration to .....the union.....the UAW has assured its existence and relevance for a little while longer, assuming they can get the contract passed by the membership. Because, now, the union has to exist to administer the healthcare benefits.
Otherwise, the UAW was in danger of simply being outsourced out of existence, as GM, Ford and Chrysler slowly lose market share and jobs in the US.
Finally, there's GM itself. What does this UAW pact do for it? Is it now going to soar like an eagle, with the dreaded healthcare burden about which Rick Wagoner has complained for his entire tenure as CEO finally lifted?
Well, first, as some have pointed out, GM has to actually fund the new UAW healthcare trust fund. Then there's the sad fact that being quit of some legacy expense base bears no relationship to an inability of GM to design and build cars which sell at prices for which a sufficient number of people will pay the sticker, in order to make the necessary profit per vehicle to stay in business for the long run.
Like draining a swamp, and still having to wrestle the alligators, this healthcare trust fund deal may simplify matters for GM, but it by no means solves its toughest market-related survival issues.
It will still take several years of consistently superior total return performance for me to judge GM as having "turned around." And, frankly, I just don't see that coming down the road for many years- UAW contract, or not.

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