Global Insight Perspective | |
Significance | Reports indicate that the United Auto Workers (UAW) union has selected Chrysler LLC as its next negotiation target, with Chrysler spokespeople confirming that the two sides met throughout the weekend, and are "making progress" on a number of issues. |
Implications | Chrysler's private status makes it uncertain as to how it will approach the deal proposed by the UAW that was tentatively agreed with General Motors. With Chrysler and owner Cerberus Capital Management having very different goals to GM, the likelihood of an identical contract is low. |
Outlook | How Chrysler and Cerberus approach the negotiations and the contents of the final agreement should offer the industry a peek into what the private equity owner has planned for the company in the longer term. |
The next target for the United Auto Workers (UAW) union has been announced. Chrysler began negotiations in earnest with the UAW late last week, with reports suggesting that talks continued throughout the weekend (6-7 October). Chrysler spokesperson Michelle Tinson said that the two sides were "making progress", while numerous sources say that the two sides are continuing to speak at the subcommittee level on a host of topics. Chrysler is the second of the Detroit “Big Three” to be targeted by the UAW; General Motors (GM) workers are currently voting on a new contract that would establish a new four-year arrangement, while Ford will now be the last of the three to enter into talks.
An Early Roadblock: Marysville Axle
The UAW has publicly stated that it is seeking a pattern bargaining agreement for all of the automakers, taking the GM contract to Chrysler and Ford as it stands. However, differences in the needs of the three automakers are sure to lead to different approaches to the negotiations. One early report has surfaced suggesting that a fight may be brewing over a previously planned axle plant. Under the Chrysler Recovery and Transformation Plan, a US$700-million axle plant had been scheduled to be built in the economically depressed area of Marysville (Michigan), roughly an hour north-east of Detroit. Now, however, Automotive News reports that the plant may be scrapped, along with nearly 900 jobs, as the company is now taking bids from at least three suppliers to build the axles under contract. American Axle & Manufacturing, Dana, and Linamar are reportedly bidding on the business, according to Automotive News, although none of the suppliers has commented.
The union, which has made job security a key part of the GM contract, may attempt to defend the jobs that were previously thought to be safe. Further complicating the matter is the role of the chief negotiator for the UAW with Chrysler, national vice-president General Holyfield, who was the head of the Local 961, which encompassed Chrysler's Detroit axle plant. That Detroit plant is scheduled to close, with the workers previously thought to be heading to the new Marysville plant. With the future of the plant in question, the security of those workers who were previously under the responsibility of the UAW's chief Chrysler negotiator may become a hot topic.
Outlook and Implications
It is too early to tell what path the Chrysler negotiations may take, but Global Insight's view is that there is almost sure to be some sort of different arrangement for both Chrysler and Ford to that agreed to by GM. Chrysler is in a very different position to GM—it has a new, wealthy owner that keeps its financial data very close to its chest. That owner, Cerberus Capital Management, has begun sweeping changes at the company aimed at improving cash flow. Reports suggest that there are even daily cash-flow reports generated. It has hired several high-profile executives who have come with large price tags; new CEO Bob Nardelli and President Jim Price were both very high-ranking officers in their previous roles.
However, the big question is how Chrysler will respond to the idea of a voluntary employee beneficiary association (VEBA) under Cerberus' stewardship. In light of the focus now on cash flow and Cerberus' likely short-term, three-to-five-year ownership plan for Chrysler (if it sticks to typical private equity schedules), it seems unlikely that the company would commit to a large cash expenditure now for a plan that would not begin paying out until after 2010. With far fewer retirees than Ford or GM, Chrysler has a smaller liability bill than either of those companies—roughly US$19 billion in retiree healthcare liabilities are being carried on Chrysler's books. Even at US$0.70 on the dollar, roughly what GM was able to negotiate with the UAW for its portion of a VEBA trust fund, Chrysler would still need to come up with nearly US$13.3 billion in cash and securities. With so much financing having already been pumped into the company in order to fund new projects, and the credit market continuing to be more conservative in the wake of the sub-prime mortgage meltdown crisis, it may be difficult to come up with another US$13.3 billion when the company is now privately held. Wall Street is likely to be more willing to help fund GM and Ford in their efforts to come up with cash for a VEBA, as doing so would help the stock prices of those publicly held companies by eliminating a big liability, restoring shareholder equity, and locking in a set amount of debt instead of a more amorphous "potential" future retirement cost liability.
The only real reason why Chrysler and Cerberus may want to go for the VEBA deal is to make the company potentially more attractive to a future buyer. Cerberus will not be Chrysler's owner forever; that is not how private equity funds work. The Chrysler arrangement is an investment, and like all for-profit ventures, Cerberus will want a return on its investment eventually. That long-term divestment plan, whether it is to sell Chrysler whole to another entity, break it up and sell off brands, or even take it public with a stock offer, will determine whether or not Chrysler and Cerberus entertain the possibility of paying for a VEBA.