General Motors Death Watch 37: Get Shorty
Details of The General's highly-touted secret accord with the United Auto Workers (UAW) have finally filtered out. Even a cursory glance at the fine print– which promises to get finer in the days to come– reveals that the "landmark" deal is not the company-saving "historic giveback" the mainstream media, UAW and company officials would have us believe. In truth, it's not even too little too late. It's nothing at all.
The UAW's new agreement with GM stipulates that 118k active union members forgo a $1 per hour pay increase scheduled for '06. That works out to about $2000 per worker, per year. So, by not paying its workers an extra buck an hour, GM saves $236m. Only "saves" isn't the right word. It's more like "redirects". The $236m that won't appear on GM workers' payslips will now go straight to… healthcare. In other words, GM "saves" the money by spending it on healthcare rather than wages, and its workers go right on enjoying the free and full benefits they've enjoyed since tires were ply.
Even if we operate on the assumption that this money counts as an economy because The General won't have to dig into its pockets for ANOTHER $236m, it's still not the stuff of which corporate turnarounds are made. The amount represents just over 4% of The General's current annual health care bill. As costs in the health care sector are rising by well over 4% per year, it's actually a loss. Anyway, where's the rest of that supposed billion dollar UAW give back?
GM has 500,000 retired employees receiving free health care for both themselves and, where applicable, their family. The new GM – UAW agreement asks them to start carrying some of the financial burden through increased co-pays, slightly larger deductibles and exclusions for "lifestyle drugs" like Viagra (I kid you not). This extra expense works out to be roughly $370 per year for an individual retiree, to $752 for a family. (Workers who receive less than $8k per year from their GM pension still get a free ride.) And there's your remaining $750m in health care savings. Or not.
If you were laboring under the impression that the UAW would give up benefits for the good of General Motors– in the sense that even a blood-sucking parasite knows to drop off the host before it dies– think again. As part of this arrangement, GM will create a special fund for retirees to help them pay for their additional health care costs. The amount going in is… wait for it… a billion dollars. And that's just the first year. In the second year of this scheme, GM will pay in… another billion dollars. And guess who gets the interest on the $2b?
Add it all up and GM saves nothing on healthcare for the next two years. Nada. If you consider the fact that GM also agreed to assume $12b worth of pension liabilities tied to UAW workers left high and dry by Delphi's bankruptcy– PLUS a $1b sweetener– they've actually lost money on the deal. Or, if you prefer, GM and the UAW have successfully negotiated an increase in The General's labor costs.
Not to put too fine a point on it, who cares? Whenever GM's critics lambaste the company for its gi-normous "legacy costs", management always points their finger at health care; that's what's weighing us down! Well, it ain't necessarily so. Just ask CallmeSteve Miller. Delphi's President is asking his UAW members to take a 70% pay cut. That's not what I'd call pissing around. Pissing around is arguing for months about 1/6th of your health care bill, and then paying it anyway. GM and the UAW have done nothing more than paper over the tectonic cracks that threaten to swallow both of them, whole.
Meanwhile, the family silver sale continues. Majority interest in The General's GMAC Golden Goose is still on the block, with both corporate raiders KKR and uber-shark Kirk Kerkorian browsing the catalogue. Hot on the heels of the Fuji Heavy Industries sell-off, GM has announced that they're selling a majority interest in their Australian truck business to Isuzu. South Africa is next. Perhaps GM is building a war chest for the upcoming UAW strike of parts maker Delphi, which will shut down GM's production lines. In any case, Rabid Rick Wagoner recently went on record to say bankruptcy isn't an option. He's right: it's a certainty. Now's the time to short GM stock.
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