GM can withstand losses of UAW strike - because of what it stands to gain

GM can withstand losses of UAW strike - because of what it stands to gain
A group of UAW protesters wave to passing cars as General Motors and the UAW open 2019 contract talks for a new national agreement on Tuesday, July 16 at the Detroit Marriott Renaissance Center 2019.

Some analysts estimate the UAW's nationwide strike against General Motors has cost the company about $1 billion so far.

But GM can withstand the financial losses because of what it stands to gain with a new UAW contract: a deep discount to labor costs.

That's a big deal. Industrywide, labor is about 5.1% of the cost of the average vehicle, according to the Center for Automotive Research in Ann Arbor.

"But it’s the 5% of costs that the automaker can control," said Kristin Dziczek, vice president of industry, labor & economics at CAR. "GM has purchasing power (for raw materials), but not that much purchasing power."

The people close to talks said GM wants to lower its labor costs mostly by changing its workforce composition. That means hiring more temporary workers, which is strongly at odds with what the union wants.

Some observers say GM is feeling the pain now and that will worsen if more of its assembly plants in Mexico, where it builds profitable, hot-selling pickups and SUVs, go idle due to the strike causing a parts shortage.

Until then, GM and the UAW continued bargaining Thursday, on day 18 of the UAW's nationwide strike against the automaker. The parties have been in talks every day since Sept. 14, when the UAW's contract expired at midnight.

Separately, UAW negotiators are also bargaining with Ford and Fiat Chrysler Automobiles, which have extended their contracts. In a note to union members who work at Ford, the UAW's lead negotiator said the union had made significant progress, with 18 out of 20 subcommittees having reached tentative agreements or negotiated to the point that only patterned or large economic items remain open for discussion.

The union chose GM as its "target" company with which to negotiate a template that it will take to Ford and Fiat Chrysler Automobiles on major economic and job security issues. It extended the contracts with those two companies.

Endurance test

GM remains mired in its talks and only the automaker knows how long it can hold out against this strike.

"GM does have a lot of cash, so it’s hard to prognosticate," Dziczek said.

Indeed, at the end of the second quarter, GM had $17.5 billion in cash on hand, up from $16 billion at the same point in 2018.

Basically, GM negotiators will do the math and decide whether the cost of giving the UAW a certain gain, say restoring the union members' cost-of-living allowance, will cost the carmaker less than the losses it is incurring from the strike, said Dziczek.

This strike has cost GM just over $1 billion thus far, said JP Morgan analyst Ryan Brinkman Tuesday. He estimated GM is losing $82 million per day, though East Lansing-based Anderson Economic Group estimates GM is losing about $25 million a day in profit.

Whatever the exact cost, GM and the UAW are dug in on their positions.

Harley Shaiken, a professor at the University of California Berkeley who specializes in labor, said GM might be shortsighted in its approach.

Last year, the carmaker made $11.8 billion in North America alone with the union members building its products, so the company's resistance to the union's demands doesn't make sense, he said.

“GM could make money, lots of money with high productivity and a motivated workforce," Shaiken said. "What this set of negotiations is doing is seeking to unwind" longstanding underpinnings of auto companies' relationship with their unionized workforce, seeking to cap labor costs.

"GM knew that and is taking the losses," he said.

He added, "GM may have underestimated the endurance of its workers. The workers feel they gave concessions when times were bad and feel if they can’t regain that now, then when?”

Less labor cost

While the union wants job security, higher wages and a pathway for temps to be hired permanently with better pay and benefits, GM wants to lower its costs.

People close to the talks say GM's preferred approach is to hire more temporary workers. Analysts said GM would want to hire enough temps to chip out at least $5 an hour in total labor costs — the sum of all labor costs divided by all hours worked.

CAR data shows that nonunion foreign automakers that build cars in the United States have an average total labor cost of $50 an hour. They are known to employ a higher number of temps than the Detroit Three. GM's average hourly labor cost in the United States is $63 an hour. Temps make up about 7-10% of GM's hourly workforce, or about 4,100 people.

Shaiken said the union is set to hold out because members believe they are fighting for the middle class and they look at GM's billions in profits over the last four years as proof the automaker can make a better offer.

“GM has used the $63 figure as a symbol that it can’t compete," Shaiken said. "It was paying $63 an hour last year and it made $11.8 billion in North America. How’d that happen?”

But former FCA labor negotiator Colin Lightbody said GM could save up to a $500 million in future annual labor costs if it can get the UAW members to pay for a bigger chunk of their health care and bring in more temps.

If GM had 20-25% temps in a new workplace composition and increase the amount workers pay for health care to 15% from the current 3%, that would be worth at least $5 an hour in reducing GM's labor costs to improve its competitiveness with Honda, Toyota and Nissan.

"That’s a lot of money and that’s why GM is willing to hold out," Lightbody said.

A person familiar with the UAW contract requests said the gains it is asking for would amount to about $150 more in the price of a large GM SUV, a small increase given GM's billions in profits.

GM's pending danger

So what could end the strike? Look south of the border.

“You have to look at what’s going to break this strike and it’s Ramos Arizpe," Shaiken said. "Last year, GM built 350,000 vehicles there. That’s a big plant running at full capacity building highly profitable vehicles. Now, with that on the line, you’re really going to focus the mind.”

GM builds the new Chevrolet Blazer and Chevrolet Equinox SUVs at Ramos Arizpe. On Tuesday, GM said it idled production at another plant in Mexico, Silao Assembly, which builds the highly profitable Chevrolet Silverado and GMC Sierra pickups.

At that time, GM said Ramos Arizpe, San Luis Potosí and Toluca, continue on normal schedules, but analysts say if the strike goes on another week, that will change. At San Luis Potosi, GM builds the Equinox, Chevrolet Trax and GMC Terrain SUVs. Toluca is a propulsion system and foundry operation.

"With no clear signs of a deal, production losses are expected total 153,000 units at the end of the week as the strike lingers and bites into GM's highly profitable full-size trucks," said Joe Langley, associate director of light vehicle production forecast for North America at IHS Markit.

Langley was surprised that Silao was idled before Ramos Arizpe and San Luis Potosí because GM had tried to make Silao self-contained, but, he said, "I think the Equinox will take it on the chin next."

"So you have some of GM’s best-selling vehicles all down and you’re hitting GM where it hurts," Langley said.

Cost of transformation

But GM is taking a hard line at the bargaining table because it has to spend billions to fund the development of autonomous vehicles and electric vehicles. GM has said it plans for an all-electric future and it is in a race to be first to put self-driving cars on the roads in San Francisco, where its self-driving unit, GM Cruise, has been testing a fleet of the robot cars.

By squeezing labor costs, GM believes it will result in saving billions over the four-year contract and help fund a company transformation.

"It is important for GM to be a successful company, but it will be less productive and less successful by reducing wages and adding more temps," Shaiken said. "They will also start to lose public support. The taxpayer bailout was given to GM to create jobs and expand the U.S. economy."

High wages created greater purchasing power and built profitable companies, Shaiken said. By paying hourly workers good wages, it raises the overall market.

"This, to me, makes no sense in terms of the financial position of GM and its future, but GM has already confirmed it makes sense to them by spending $1 billion," Shaiken said. "German car companies pay even higher wages and they’re profitable. GM has real capital needs for a transformation, but this is a costly way to get there."

Ford's letter to members

Meanwhile, progress is being made across town at Ford. Rory Gamble, vice president for the UAW Ford Department, sent a letter to members Thursday saying his team has "made significant progress in this set of negotiations" with 18 out of 20 subcommittees reaching tentative agreements or negotiated "to the point that only patterned or large economic items remain open for discussion."

The letter said, "We will continue to meet diligently on all outstanding subcommittee issues. Please understand that negotiations are very fluid and is constantly in a state of flux. Therefore, we are unable during the negotiation process to disclose items being negotiated in detail. What I can report for now is that UAW-Ford negotiations are progressing very well."

Bargainers at Ford and FCA have been meeting while GM and the UAW negotiate amid the nationwide strike. Ford and FCA plants continue operating with union labor.

"While the UAW-GM bargaining team continue to set the pattern by negotiating first, we remain ready and able to complete our negotiations when called upon," Gamble wrote. "We are currently developing a plan to deliver a transparent and factual tentative agreement roll out so all members can make an important and much valued ratification decision."