Why Chrysler, UAW Settled So Fast

A strike by the United Auto Workers against Chrysler that many expected to last at least a few weeks lasted only about six hours before the two sides tentatively agreed to a plan to off-load the automaker's future health-care cost liability for workers and retirees onto the union.

Expectations among workers and informed analysts were that Chrysler's new majority owner, private equity firm Cerberus Capital Management, was prepared to hold out several weeks to guarantee the fewest number of jobs in future and the lowest possible payout to the Voluntary Employee Beneficiary Assn., or VEBA, which will administer health-care benefits. Actual details of the agreement won't be known until rank-and-file members vote on the deal later this month.

Avoiding an Expensive Siege

Though Chrysler is sitting on an oversupply of vehicles that might have sustained dealers for a month-long strike, both sides had plenty to lose from a prolonged work stoppage. Cerberus paid $7.4 billion to acquire 80.1% of the automaker [BusinessWeek.com, 5/14/07] from Daimler (DAI), while the German automaker retains the rest. Auto companies have massive overhead costs and cash-flow needs, and a prolonged strike could have put the private equity firm in a hole as it tries to restructure the company, which lost $680 million last year, and return it to profitability. Meantime, Chrysler's 45,000-plus hourly employees live mostly in high-unemployment areas where real estate values are plummeting.

The deal with Chrysler follows one the union struck with General Motors (GM) last month. In the GM deal, the automaker agreed to pay nearly $30 billion into the VEBA [BusinessWeek.com, 9/27/07] to rid its books of a $50 billion future liability. GM also agreed to build several future products in the U.S., thus guaranteeing jobs the union is desperate to keep. The UAW was looking for Cerberus to kick in $8 billion to $11 billion to its VEBA, a figure the equity firm thought was too high, say industry sources.

Cerberus also was looking to minimize future job commitments to the union, because it wants to off-shore more of Chrysler's manufacturing to reduce costs. "GM was able to make more commitments to the UAW because they are much further along in their recovery and their product plans are far more set than Chrysler's," says Mike Snapper, a partner and head of Grand Rapids [Mich.] law firm Barnes & Thornburg's Labor & Employment practice. Indeed, Chrysler's new management team, led by former Home Depot (HD) chief, Robert Nardelli, is re-evaluating the product plan put in place by DaimlerChrysler and isn't in a position to make many promises.

Chrysler Battles High Costs, Unpopular Products

Cerberus is looking to cut Chrysler's hourly labor costs, which rank as the highest in the industry. Chrysler puts its average cost of paying wages and benefits to a UAW-represented worker at $76 per hour, compared with $48 for industry-leader Toyota Motor (TM). Chrysler, since Cerberus took control of the company in August, is already planning on cutting an additional 1,500 white-collar positions, on top of 2,000 it announced earlier this year to reduce overall costs.

Chrysler's high costs are compounded by a weak product portfolio and a cool reaction -- from customers and the auto media -- to many of its most recently redesigned or all-new models, which are requiring heavy discounting.

The company needs plenty of cash to fund new models and a marketing makeover. Several of the company's freshest models have been disappointing. The company has a 71-day supply of vehicles, with several recent new designs selling like they are already a few years old. Edmunds.com tracks how many days it takes for new models to "turn," or move off dealer lots. The Chrysler Sebring takes 84 days; the Jeep Liberty takes 107 days; the Dodge Caliber takes 73 days; the Dodge Ram pickup takes 86 days; and the Chrysler minivan takes 97 days. Chrysler has just one vehicle considered a "hot" seller: the Jeep Wrangler, energized by the new and very popular four-door version. The Wrangler takes just 28 days to move off dealer lots.

Chrysler CEO Nardelli is looking to cut costs far and wide, in addition to off-loading health-care liabilities to the union, while his management team tries to get Chrysler's product lineup and marketing fixed. That could easily take five years, an eternity in the world of private equity. Since the UAW contract gets negotiated only every three years, Cerberus was out to grab all the concessions it could get.

The UAW will begin negotiating next with Ford Motor (F), which is also looking to establish a VEBA and close down U.S. factories.