UAW Postpones Negotiations with GM as Fiat Threatens to Pull Out of Deal with Chrysler

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Researched by Industrial Info Resources (Sugar Land, Texas)--Ever since the Obama administration rejected the viability plans of both General Motors Corporation (NYSE:GM) (Detroit, Michigan) and Chrysler LLC (Auburn Hills, Michigan) last month, the majority of the press has surrounded the potential bankruptcy of GM if they cannot come up with a revised plan by June 1. However, Chrysler has potentially found itself in an even more serious set of circumstances. Earlier last week Fiat SpA (OTC:FIATY) (Turin, Italy) CEO Sergio Marchionne announced that the Italian automaker was more than willing to walk away from its tentative deal with Chrysler if significant concessions were not granted by both the United Auto Workers union (UAW) (Detroit, MI) and creditors of the smallest of the Detroit-Three. The UAW has now placed its ongoing negotiations with GM on hold as it focuses on coming up with a new contract with Chrysler.

Marchionne has indicated that there is a 50% chance that Fiat will walk away from the recent agreement with Chrysler if certain concessions cannot be granted. Fiat and Chrysler had signed a non-binding agreement, specifying that Fiat would not inject any cash or take on any of Chrysler's outstanding debt. However, if an arrangement regarding significant reductions in labor costs cannot be reached with the UAW by the government's April 30 deadline, Fiat will walk away from the agreement.

The UAW and Chrysler will sit back down at the bargaining table on April 20 to try and hash out some kind of agreement suitable to both parties. However, for this to happen, the UAW will certainly have to change its historical strategy of how it deals with the automakers. Traditionally, the union has been reluctant to grant identical concessions to each of the Detroit-Three based on how well the company is doing financially. In this round of negotiations, that strategy will obviously not work. Chrysler and GM are both floundering and teetering on the brink of bankruptcy despite receiving billions of dollars in taxpayer-funded relief.

The Canadian government, much like the U.S. government has done, is willing to support the Detroit-Three with monetary aid, but again if significant concessions are not reached, it will pull its aid from the struggling automakers. In addition, Chrysler has threatened to pull out of Canada entirely unless the Canadian Auto Workers union (CAW) is willing to make serious concessions in this round of negotiations.

In the end, a limited amount of automotive manufacturing will end up taking place in Canada regardless of what happens by April 30. All three U.S. automakers are currently maintaining too many operational assembly and manufacturing plants in both the U.S. and Canada, not to mention Mexico. For GM and Chrysler to survive in a reduced form, many of these plants will certainly be forced to close. The Detroit-Three have overbuilt their infrastructure for years, and the time has finally come to pay the piper.

In order to become viable entities once again, GM and Ford Motor Company (NYSE:F) (Dearborn, Michigan) will have to make significant production, model, plant and employment cuts, while Chrysler, the smallest of the three, will have to make serious cuts as well. Chrysler is banking its future on Fiat and its smaller line of more fuel-efficient cars, something Chrysler itself does not currently produce. Fiat has stated that it would, pending the finalization of this agreement, relaunch the Alfa Romeo brand in North America and start selling its remake of the Fiat 500 as well. In addition, Chrysler would develop its own small-car line based on the Fiat platform.

The bottom line for Chrysler, the union and the creditors is that they have reached do-or-die time. Concessions are required immediately, or Chrysler will cease to exist as a standalone automaker in the near future. Bankruptcy is right around the corner for the proud manufacturer, and this time around the U.S. government is not in a financial position to completely bail them out.

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