- The Washington Times - Sunday, May 27, 2007

DETROIT — This summer’s contract talks between the Detroit automakers and the United Auto Workers promised to be more contentious than ever, with the Big Three losing billions of dollars and their market share in a slump.

But the recent 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 say.

“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.”

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, Mich.

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 leverage in the talks, analysts say, because it can threaten to break up Chrysler or take it into bankruptcy protection, leaving workers with no health insurance and uncertain pensions.

Yet Cerberus Chairman John W. Snow, former U.S. Treasury secretary, says the workers’ fears are unfounded. He said Cerberus is different from other private equity firms because it holds companies much longer to turn them around.

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 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 left two of its biggest markets.

But Mr. Snow said Cerberus works well with organized labor, pointing to his relationship with unions while he was 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 fairly with labor under Mr. 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,” Mr. Brunkenhoefer said. “It definitely deteriorated after he left.”

The union didn’t give up or gain anything major while Mr. Snow was its leader, he said.

Regardless of who is at the table, they will have to deal with the retiree health care costs or the U.S.-based auto industry will collapse, Mr. Cole said. The UAW’s four-year contract expires in September.

“Companies can’t survive with that obligation, spotting competitors a couple of thousand dollars on every product,” he 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 Mr. Cole.

“A $100 billion liability in a hugely competitive market is unbelievable,” Mr. 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 must be dealt with. But in an essay written for Business Week, he said it would be naive to think that a struggling company won’t have to make cuts.

“With new contract negotiations set to begin this summer, many workers fear they’ll be forced to make huge concessions,” Mr. 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.”

Chuck Rogers, president of the UAW local at a General Motors Corp. transmission plant in Ypsilanti with more than 2,000 workers, 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,” Mr. 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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