AFX International Focus, May 18, 2007, Friday
Copyright 2007 AFX News Limited
AFX International Focus
May 18, 2007 Friday 11:35 PM GMT
HEADLINE: Cerberus may bring trouble for UAW
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DETROIT (AP) - With Detroit automakers losing billions and their market share in a slump, this summer's contract talks with the United Auto Workers promised to be more contentious than ever.
But Monday's announcement that Daimler would sell most of Chrysler to private equity firm Cerberus Capital Management LP likely means the union will face even deeper demands for givebacks as the automakers try to pare costs to compete with Honda and Toyota.
Cerberus is seen wielding a big bat when it comes to the bargaining. Because it bought Chrysler for relatively little, it can threaten to sell the company off in pieces or take it into bankruptcy. It also will be looking for a quick return on its $7.4 billion investment for an 80.1 percent stake in Chrysler, many analysts said.
'What Cerberus does is bring to the forefront the real possibility, if the union doesn't agree to real major changes in the legacy costs, they would face bankruptcy rather than just an incremental adjustment' in wages or benefits, said Harry Katz, dean of the Cornell University School of Industrial and Labor Relations who has studied the auto industry for 25 years. 'It brings home kind of the atom bomb scare.'
The mystery of Cerberus was on the minds of many Chrysler hourly workers this week after the sale was announced, with fears that wages as well as pension and health care benefits could be cut. And worries about an industry outsider running an auto company have made their way onto the floors at other automakers' plants.
'I know I'm nervous about it,' said Chuck Rogers, president of the UAW local at a General Motors Corp. transmission plant in Ypsilanti with more than 2,000 workers. 'I'm getting to the point where I'm ready to retire. I'm afraid if an outside company takes over, the UAW won't have any control over it.'
Chief among demands from the Detroit Three will be reduction or elimination of their long-term liabilities for retiree health care, which together total about $100 billion, said David Cole, chairman of the Center for Automotive Research in Ann Arbor.
With a declining U.S. market stifling top-line growth, the only option to return Chrysler to profitability is to cut costs, especially the estimated $19 billion retiree health care obligation, according to analysts.
Cerberus has a lot of leverage in the talks, analysts say, because it can threaten to dismember Chrysler or take it into bankruptcy protection, leaving workers with no health insurance and uncertain pensions.
Yet Cerberus Chairman John Snow, a former U.S. Treasury Secretary, said the workers' fears are unfounded. He said that Cerberus is different from other private equity firms because it holds companies much longer to turn them around.
In an interview with The Associated Press, he said the characterization of Cerberus as a corporate raider that will split up a company to make money is contrary to Cerberus' history.
'We never invest in a company with any plan other than what can be done to enhance the company's competitiveness and enhance its performance,' he said. 'We invest in undervalued companies where there are good management strategies, where there's a committed work force and good management teams.'
Cerberus, he said, has no exit strategy for Chrysler and has faith in its management's turnaround plan. The firm, he said, will hold companies indefinitely.
'We buy with the clear intention to help turn the company around, help it achieve its potential,' he said.
Cerberus bought Vanguard Car Rental, which operates the Alamo and National Brands, out of bankruptcy in 2003, and was criticized for swiftly moving the corporate headquarters and cutting hundreds of jobs. It wasn't long after the 2004 acquisition of the Mervyn's department store chain that Cerberus shuttered 80 stores and exited two of its biggest markets.
But Snow said Cerberus works well with organized labor, pointing to his relationship with unions while chairman and chief executive officer of railroad operator CSX Corp.
James Brunkenhoefer, national legislative director for the United Transportation Union, CSX's largest labor group, said CSX dealt with labor fairly under Snow, treating the union as an equal partner in solving problems.
'We had the best relationship with CSX under his tenure than we have had at any of the major railroads in the 25 years that I've been full-time with the union,' Brunkenhoefer said. 'It definitely deteriorated after he left.'
The union didn't give up or gain anything major while Snow was its leader, Brunkenhoefer said.
Snow also points out that Chrysler management, not Cerberus, will bargain with the UAW. Brunkenhoefer said Snow didn't do the bargaining for CSX, either, but did set the tone for management.
Regardless of who is at the table, they'll have to deal with the retiree health care costs or the U.S.-based auto industry will collapse, says Cole.
'Companies can't survive with that obligation, spotting competitors a couple of thousand dollars on every product,' Cole said.
Wages and benefits, which for the Detroit automakers are about $25 per hour more than Honda Motor Co. and Toyota Motor Corp. pay at their U.S. plants, are secondary to the long-term health care liability, according to Cole.
'A $100 billion liability in a hugely competitive market is unbelievable,' Cole said. 'Unless there's a huge attack on that by both labor and management, these companies are not survivable over the longer term.'
Former Chrysler Chairman Lee Iacocca agrees that the legacy costs are the problem that must be dealt with. But in an essay written for Business Week, he said that problem existed long before Cerberus entered the business. It would be naive to think that a struggling company won't have to make cuts, he wrote.
'With new contract negotiations set to begin this summer, many workers fear they'll be forced to make huge concessions,' Iacocca wrote. 'But that fear existed before the sale. If Cerberus is serious about reviving Chrysler, it will have to take care of the employees who build the cars and the dealers who sell and service them.'
To resolve the health care liability, the Detroit Three are talking about jointly putting money into a giant trust and letting the union run its health care operation, similar to a solution worked out between the Goodyear Tire & Rubber Co. and the United Steelworkers.
Still, any such change will be a difficult sell for workers.
Rogers, the Ypsilanti local president, said workers know the realities yet struggle with givebacks because executives are paid millions. GM Chairman Rick Wagoner received compensation that the company valued at $9.57 million during 2006.
'We don't want GM to go under because it hurts everybody,' Rogers said. 'We have to be realistic, but the corporation should be realistic in the wages that they are making and paying each other.'
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AP Business Writer Joe Bel Bruno in New York contributed to this report.
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