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To save his company, Wagoner will have to persuade the U.A.W. that what's good for GM is good for labor, even if it means shutting down plants and laying off workers. The company can't slim down easily, a legacy of earlier battles with the U.A.W. and labor deals that make it prohibitively expensive to shutter factories. What happens to a GM worker when his or her plant shuts down? Not much. Under GM's contract with the U.A.W., laid-off workers are entitled to 95% of their salary plus benefits for nearly two years. So while closing factories saves money on materials and overhead, it takes quite a while to shave the payroll and bolster the bottom line. Wagoner is expected to pressure the union to modify the severance deals when the contract is renegotiated in 2007.
What really scares Wall Street is the prospect of a Delphi strike. Goldman Sachs estimates that a Delphi work stoppage could shut down GM factories at a cost of $2 billion a month, causing GM to burn through its cash reserves at a deadly clip. "A strike could push them over the edge," says Steven Szakaly, an economist with the Center for Automotive Research. Unions representing Delphi workers have described the bankrupt company's latest offer--cutting wages from an average $27 an hour to $10.50 for production staff--as "insulting," and U.A.W. chief Ron Gettelfinger has described Delphi boss Robert Miller as a "rogue." The U.A.W. last week filed a protest in bankruptcy court over a Delphi compensation plan that would award top execs up to $500 million to stay on the job. GM, caught in the middle of the dispute, is likely to try to broker a deal.
•FIX THE RETIREMENT PROBLEM
Another legacy of GM's pact with the union is its crushing pension burden. Having shed so many workers in previous rounds of cost cutting, GM finds itself in a demographic choke hold--paying for the pensions and health care of 400,000 retirees (plus benefits for their dependents)--with a shrinking company. GM's strongest rivals, such as Toyota and Nissan, haven't gone through decades of downsizing and don't bear that lopsided burden. At GM, each U.S. worker's production has to support 2.5 retirees, adding an average of $2,200 in legacy costs to the price of a vehicle, a steep disadvantage vs. foreign manufacturers. And the fewer vehicles GM sells, the worse the ratio gets.
Wagoner is playing an actuarial waiting game, betting that as the retiree population declines, health and pension costs will fall, helping the company swing to profitability. But on Wall Street, worries about how a smaller GM will pay its retiree obligations have sent its securities plummeting. GM says it owes $89 billion to current and future retirees, and if GM's pension plan were terminated tomorrow, it would be $31 billion short, according to the Pension Benefit Guaranty Corporation. GM says its pension obligations are more than fully funded and it has no intention of terminating its plan. But GM may have to shoulder some of Delphi's liabilities--GM spun off Delphi in 1999. In a worst-case scenario, by GM's estimate, the tab for Delphi's 34,000 workers could hit an additional $11 billion. Without unloading its pension obligations, analysts say, GM must find a way to sell more vehicles at higher prices.
•MAKE SOME HARD CHOICES ABOUT CAR MODELS