GM, Ford & Chrysler Begin Pivotal Negotiations with UAW, Could Impact Capital Spending Plans

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Researched by Industrial Info Resources (Sugar Land, Texas). The posturing is over and the rhetoric is done. Its time to roll up the sleeves and get down to business for the Big 3, as they begin what many consider the most pivotal negotiations since the 1950’s with the UAW (United Auto Workers) (Detroit, Michigan). Chrysler (NYSE:DCX) (DaimlerChrysler AG) (Stuttgart, Germany) and the UAW had their ceremonial handshake on Friday July 20, 2007, while General Motors Corporation (NYSE:GM) (Detroit, Michigan) and Ford Motor Corporation (NYSE:F) (Dearborn, Michigan) will follow suit on Monday July 23, 2007, and then the serious business of negotiating new contracts will begin in earnest.

The existing UAW contracts are due to expire in September 2007, and the automakers are hoping to get some serious considerations at the table this year. Following the completion of the UAW’s negotiations with Delphi Corporation (Troy, Michigan), after over a year of hard fought and sometimes bitter talks, the Big 3 are going to try and reduce labor costs by at least $20/hr, a move that the union will no doubt try and block.

However, after being forced to give major concessions to Delphi, the Big 3 appear to be in a better position coming into these negotiations. The UAW and Delphi agreed to cut wages almost in half as well as offer $7 billion in buyouts, make annual payments of $35,000 a year for three years to workers who stay at the reduced wage and provide some workers with the right to flow back to GM as work becomes available. These major concessions on the part of the union were only made possible because Delphi took the stance that either the union accepted terms more favorable to the auto supplier or Delphi went bankrupt, putting thousands more union members out on the streets jobless.

The Big 3 will attempt to use the concessions granted to Delphi as a baseline for the type of deals they are also hoping to get from the union. The Big 3 maintain that in order to compete with foreign automakers such as Toyota Motor Manufacturing North America (NYSE:TM ) (subsidiary of Toyota Motor Corporation), Nissan North America Incorporated (Smyrna, TN) and Honda of America Manufacturing (NYSE:HMC ) (subsidiary of Honda Motor Company Limited), they must have these reductions in labor costs. The union will attempt to not give away the store and protect as many jobs as possible while maintaining the high level of wages they have managed to negotiate in the last 30 years.

What is truly at stake here with these negotiations are not only the tens of thousands of union jobs at the Big 3’s facilities in North America, as well as billions of dollars worth of retirement and health benefits, but also a large portion of the over $12 billion worth of capital and maintenance project activity that is currently in the planning stages across the continent.

Currently Industrial Info is tracking over 550 future capital and maintenance projects worth in excess of $27 billion within the automotive sector in North America. Of those projects the Big 3 account for 85 projects worth $15.5 billion while the foreign automakers make up an additional $5.5 billion. The balance of the project work falls under the category of tier suppliers to the industry.

Click the image at right to view Automotive Sector Project Spending Analysis Graph.

The main difference between what the Big 3 are planning in terms of capital projects versus the foreign automakers is the number of retools and expansions. The Big 3 are in the midst of a well publicized program of reduction in terms of the total number of assembly plants that they operate in North America. At the same time they are retooling and expanding a number of existing facilities to convert them to newer models, to lean manufacturing practices and to adopt a flexible manufacturing program where multiple models can be produced on a single production line.

Meanwhile, foreign-owned automakers are constructing grassroot facilities that, as with all of their existing facilities, are already geared to lean and flexible manufacturing concepts - one of the reasons they are taking over the automotive market in North America. Some of the key new plants under construction or planned by the foreign automakers include the $1.2 billion assembly plant in Georgia with KIA Motors of America, Incorporated (Irvine, California), the $1.3 billion assembly plant in Mississippi with Toyota, the $950 million assembly plant in Woodstock, Ontario, also with Toyota and the $550 million assembly plant in Indiana with Honda of America Manufacturing Incorporated.

On the Big 3’s side of things, Chrysler is currently planning to spend more money then either GM or Ford in North America. Chrysler, which is in the process of being sold to Cerberus Capital Management LP (New York, NY), is planning to construct new plants in Michigan ($730 million engine plant & $700 million axel plant), as well as expand its engine plant in Wisconsin to the tune of $500 million and build a new $570 million engine plant in Mexico, while retooling both of its facilities in Saint Louis, Missouri at a combined cost of $1 billion, and spending an additional $1.7 billion retooling plants in Ontario, Michigan and Ohio.

GM is expected to expand a quartet of plants in Ontario, spending a total of $1.84 billion, as well as expand a pair of plants in Mexico to the tune of $912 million, expand a trio of plants in Ohio for $932 million, build a new research lab in Michigan for $385 million while also expending $332 million on a transmission plant expansion and $152 million on a power train plant upgrade, also in Michigan. In addition, GM will spend $400 million retooling a pair of engine plants in New York and another $300 million on a pair of expansions at its Fairfax facility in Kansas City, KS.

Ford has also opened its pocketbooks somewhat and is planning to expand a pair of plants in Mexico at a cost of $3.3 billion, spend $508 million on expansions of a trio of plants in Michigan, and will spend $200 million each on a retool in Ontario and an expansion in Ohio.

While the focus of these negotiations will be on reducing labor costs to allow the Big 3 to return to competitive form with the foreign automakers, the negotiations will also affect all three company’s capital and maintenance plans for the next several years. If they are not able to get at least a marginal reduction in costs, they may well be forced to scale back their spending plans, a move that will, no doubt, put them even farther behind the foreign automakers in the never ending race the all too elusive North American market share. These negotiations will be watched closely not only by union members and stock market analysts but also by the equipment suppliers, contractors and engineering firms who typically rely on automotive capital projects to make their living each year as well. To say these negotiations are pivotal may well be a gross understatement but the coming weeks will certainly be telling and far reaching as the negotiations run their course.

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