US carmakers at crossroads

Detroit's big three must downsize to survive, experts say.

Charles Knox braved the chill November winds this week alongside hundreds of union colleagues in this blue-collar city to send a signal to auto industry management: We're not going down without a fight.

But Robert "Steve" Miller, CEO of Delphi Corp., is sending an equally stern signal to workers: The giant partsmaker could go down unless you make big concessions on wages and benefits.

On one level, the dispute here over massive pay cuts demanded by a company threatened by bankruptcy is a classic battle between the forces of labor and management that goes back long before the United Auto Workers union was founded in the 1930s.

But now the balance of forces is being tested across America's auto industry by a new kind of financial squeeze. Compared to travails in the 1980s and 1990s, the industry is in some ways healthier, with higher-quality products and flexible manu-facturing facilities.

But foreign competition hasn't let up, shrinking market share - and profits - for General Motors (GM), DaimlerChrysler, and Ford, known as Detroit's Big Three.

The result is a vicious cycle: To reduce costs, the firms cut jobs, which swells the ranks of pensioned retirees. That, along with costly healthcare benefits, adds to so-called legacy costs that are significantly higher than those of foreign competitors. It's a disadvantage that's taking a toll.

"The logical future of these companies is to be smaller," says Kevin Wilson, executive editor of Autoweek in Detroit. "That's what brings these 'legacy costs' into focus." GM just announced a restructuring designed to shed 30,000 workers last week. Ford will announce its major overhaul plans, including job cuts, in January. And Delphi, now in bankruptcy, is asking workers to accept a 55 percent cut in pay.

The emerging battles at these and other firms, analysts say, could result in an industry that makes a million fewer cars each year with a workforce that is leaner both in numbers and in earnings power.

To many here in Flint, which has already lost thousands of auto-related jobs in recent decades, it feels as if the industry's very survival is at stake.

But Mr. Wilson notes that General Motors is "still the biggest automaker on the planet, at least for a little while now."

Toyota could take that title from GM as early as next year, but Asian competition is just part of the challenge facing the domestic industry. Experts say concerns include:

• Vision and leadership. Product quality has improved, but critics say the American automakers still haven't solved the fundamental problem of building the right cars at the right time.

• Energy and the environment. While gasoline prices have edged down considerably since their record highs after hurricane Katrina, they remain in a range that puts sales of Detroit's larger cars and SUVs in jeopardy. The carmakers are scrambling to boost their output of hybrid designs.

• China rising. The foreign competitor most feared by US manufacturers isn't yet a player in the US market. But with one China-based venture already eyeing the US market, that won't be true much longer.

• Productivity rates. While US factory productivity has improved, it still lags behind rivals in hours of work per vehicle.

Then there are the legacy costs. The more jobs US automakers cut, the more they become victims of their own storied past. A quarter century ago, GM employed a stunning 80,000 workers in Flint alone. Its factories remain local landmarks. Some appear big enough to allow every team in the NFL to play simultaneously behind their corrugated walls.

But now GM and Delphi, the partsmaker it spun off in 1999, employ fewer than 20,000 people here.

Where once GM had more than four workers for every pensioned retiree, that ratio is fast reversing. The company has more than 2.5 retirees for each of its 106,000 North American workers.

Last week, the company announced its goal to trim its ranks in North America by another 30,000 by 2008, including more cuts here in Flint.

Now healthcare and pension costs, for current workers as well as retirees, add more than $1,500 to the cost of each GM vehicle.

The generous promises of the past no longer look as affordable, with GM losing as much as $1,000 this year on every car it sells.

While GM has faced the steepest losses this year, its challenges are ones that Ford and DaimlerChrysler share, too. All will be pressing for union concessions on issues such as healthcare costs.

"The Japanese companies operating in the US are operating without any of these pension burdens and healthcare problems," says Peter Cappelli, a labor expert at the University of Pennsylvania's Wharton School.

Benefits now cost auto companies more than hourly wages for their UAW employees. Total compensation averages $65 an hour at Delphi and even higher at GM.

This fall, Delphi filed for bankruptcy protection, and bond ratings for GM and Ford have fallen into the "junk" (below investment grade) category.

With Wall Street investors pushing for profits and union workers trying to retain cherished benefits, finding answers won't be easy.

One answer, favored by many on the investor/management side, is to find ways to shed benefit obligations.

Already, in the steel and airline industries, worker pensions have been decimated in bankruptcy proceedings.

At Delphi, CEO Miller has threatened that the promise of pensions for UAW workers after 30 years of work may be frozen if other costs savings don't make the company profitable.

If union workers end up striking at Delphi if a deal isn't reached by January, the impact could shut down GM factories. So GM is trying to coax a deal between the factions, promising this week to raise the price it pays for Delphi parts.

Here in Flint, as workers stage a rally against big executive bonuses at Delphi, many say there's another key part of the answer: revising trade laws.

For too long, they say, "free trade" deals have proved devastating to American workers.

Looking out over a sea of signs and above the din of passing cars honking their support, local UAW official Steve Grandstaff puts it this way: "You could probably characterize it as a last-ditch effort to ask the government to step in and reconsider the trade laws."