GM could save $3B a year after new auto deal

DETROIT - If United Auto Workers ratify a groundbreaking new contract with General Motors Corp., its provisions likely will save the company $2 billion to $3 billion per year which it can pump into the development of new products like electric cars, according to several industry analysts.

The savings estimates, made largely on news reports since the contract provisions haven’t been released, show that the biggest savings would come from shifting the cost of retiree health care from GM to a union-run trust called a Voluntary Employees Beneficiary Association or VEBA.

GM says it now pays about $3.3 billion per year for retiree health care, most of it for retired hourly employees and their spouses. That cost will be erased with the new contract, but those savings will be offset by other terms in the deal, such as a provision to hire temporary workers and pay them at the full-time rate.

Shelly Lombard, senior high-yield credit analyst at New York-based bond research firm GimmeCredit, estimated the VEBA alone would save GM $3 billion per year. But she said the savings could be larger because the contract will in some way modify the jobs bank, under which the company pays laid-off workers most of their salaries.

The contract also includes lower wages for some new hires and offers early retirement and buyout packages to entice higher-paid workers out of those positions, according to a person who was briefed on the contract but requested anonymity because the details haven’t been released.

Those changes would further increase GM’s savings. It has spent millions on the jobs bank alone, Lombard said.

JPMorgan analyst Himanshu Patel, in a note to investors Thursday, estimated the annual savings at $2 billion, with the VEBA making up 60 to 70 percent.

Under the deal, GM would pay the union about 70 percent of its total retiree health care obligation over the life of all current and potential retirees, another person briefed on the talks said. That person also didn’t want to be identified because the details have not been released.

GM says its unfunded obligation is about $51 billion for all retirees, and analysts estimate that the company would pay the UAW around $35 billion.

“The funding is expected to come mostly from cash and in staggered payments over two years,” Patel wrote.

GM was seeking to cut or eliminate what it says is a roughly $25-per-hour labor cost disparity with Japanese automakers that have U.S. plants. GM wouldn’t say how much the gap was closed, deferring comment on the contract until after 74,000 UAW members vote on the contract. But GM Chairman and Chief Executive Rick Wagoner said in a statement that the pact helps GM “close the fundamental competitive gaps that exist in our business.”

Kevin Tynan, senior automotive analyst for Argus Research Corp., estimated that the deal will cut $12.50 to $15 from that gap, probably not enough to make GM completely competitive with its chief rival, Toyota Motor Corp.

Still, the contract would help close the breach and allows GM to invest more in car and truck development, which should help the company return to at least a small profit in North America, Tynan said.

“It’s not necessarily the silver bullet, but the feeling is that it gives them a little bit of financial flexibility,” he said.

GM, he said, has no choice but to reinvest any savings it realizes into products so it can stem its market share decline. Over the last 30 years, GM’s market share has fallen by nearly half to 24 percent.

“That’s what should be your focus, being the best automaker. Product drives everything,” said Tynan, who believes GM has been out of touch with what consumers want.

Among the future vehicles on GM’s drawing board is the Chevrolet Volt, a pure electric vehicle with a backup piston engine. GM unveiled a prototype of the Volt earlier this year and said the car could be on the market by the end of 2010. GM also is in the midst of a revival of its Buick nameplate with the hot-selling Buick Enclave crossover.

GM has raised its capital spending, which primarily goes for new products and manufacturing, from $6.6 billion in 2003 to a projected $8.5 billion to $9 billion this year, Lombard said.

In past years the company didn’t generate enough cash to cover those and other costs, so the money had to come from asset sales or borrowing, she said.

“Typically, you would certainly hope that the vast, vast majority of those savings drive to the bottom line, but of course if they invest more in product, that would drive stronger performance to the bottom line,” said Michael Robinet, vice president of global forecast services for CSM Worldwide, an auto industry consulting company based in Northville.

Local union presidents, who are due to assemble in Detroit on Friday to be briefed on the deal, said their members will vote on the contract next week.

UAW President Ron Gettelfinger said he expects it to pass despite some members’ concerns about its terms.

Gregg Shotwell, a GM worker and frequent critic of the UAW, was urging fellow workers to vote against it. Shotwell said the agreement to pay lower wages to some workers is discriminatory and destructive to the union.

“If sacrifices are necessary, they should be shared equally by all classes and all generations starting with the captains of industry,” Shotwell said in a memo posted on the Web site of the dissident union group Soldiers of Solidarity.