Hard bargaining ahead in Detroit

As talks begin over autoworkers' contracts, the industry's generous benefits are under scrutiny.

This week, automotive executives will sit down across from union workers to bargain over pay in an industry that seems to live on its own planet.

At a time of record corporate profits, Detroit's Big Three domestic automakers are losing billions of dollars.

As the broader US economy boasts an unusually low jobless rate of just 4.5 percent, auto–plant shutdowns have pushed unemployment in Michigan above 7 percent.

Growing numbers of US workers lack health insurance or traditional pensions. By contrast, the United Auto Workers (UAW) enjoy both these benefits. They can retire fully covered as young as 49 years old.

Yes, this industry is a world apart. Its ritualized labor talks are artifacts of a time when Big Labor and US automakers were more powerful economic forces.

But this year's negotiations are focused on financial survival, and they do have relevance for the rest of America. The tribulations of Detroit are also those of the overall economy: How to pay for healthcare. How to keep jobs from moving overseas.

These concerns have captured attention nationwide, as well as in Midwestern union halls. How Detroit navigates these issues in this summer's choreographed bargaining could bring lessons for the nation at large.

"This is a defining moment" for Detroit, says James Womack, an automotive expert at the Lean Enterprise Institute in Cambridge, Mass. "It could be the end of an era for a lot of things," he says, including "the idea that most healthcare costs are going to be borne by the employer."

For decades, the UAW has been one of the most successful unions in the nation, building and preserving an array of strong pay and benefits. The arrangement worked fine for both sides, as long as General Motors, Ford, and Chrysler faced relatively little outside competition.

But since the 1970s, foreign competition has risen relentlessly, the Big Three have made mistakes, and the generous worker contracts have weighed on the companies' financial health.

This year's talks, the industry's first since 2003, began with handshakes between the union and Chrysler on Friday. Similar launch ceremonies are scheduled for Monday at GM and Ford Motor Co.

The bargaining comes at what some analysts call the most difficult juncture in the industry since the rise of the UAW in the 1930s. And that's without any recession.

Ford is probably in the toughest shape, with sales down 11.5 percent in the year's first half, compared with the first half of 2006. It has borrowed heavily to fund a make–or–break restructuring.

Chrysler will soon have its own shake-up accelerated, as the private buyout firm Cerberus completes its purchase of the company from Germany's DaimlerChrysler.

GM has made headway in its turnaround efforts, but still has plenty of hurdles ahead.

"We're faced with a very difficult reality," says GM spokesman Dan Flores. "For every active employee we have more than three retirees."

In fact, each of the companies has more retirees than workers. The number of workers is shrinking partly because of productivity (factories are doing more with fewer people) and partly because of heightened global competition.

Meanwhile, retiree health costs are soaring. American medical costs keep rising, life spans are lengthening, and – for the auto industry – current workers are eligible to retire young. A "30 and out" policy allows retirement for anyone who has served 30 years. Asian rivals – with nationalized healthcare at home and few retirees in America – don't have to assume these costs.

In this summer's negotiations, the companies and the union are considering a way to lessen this load without abandoning legions of retirees. The idea is for the Big Three to provide a one–time infusion of cash into a trust fund, which thereafter would pay for retiree healthcare. The companies win a cap on these costs, while the union gains assurance that these benefits won't disappear if one of the Big Three goes bankrupt.

"It would be a major accomplishment," says Greg Gardner of Harbour Consulting near Detroit, which tracks auto productivity at auto plants.

Some analysts say such a deal merely patches over the fact that healthcare has become unaffordable for many businesses and individuals alike. UAW president Ron Gettelfinger, for one, has called for the government to become the nation's health insurer.

However the problem is solved, the talks in Detroit amplify one point, Mr. Womack says. "No company can pay what it can't pay," even if it made a promise in years past.

Behind all the focus on healthcare costs is a threat that is only partially veiled. If Detroit's carmakers can't close a labor–cost gap with Asian rivals such as Toyota and Nissan, production will increasingly shift overseas. An hour of union labor costs GM about $73, says Mr. Flores. It will cost Asian competitors about $30 less at their US plants, industry experts say. For the union, and for US workers in general, pay cuts aren't an appealing answer to the threat of job offshoring.

The ideal answer, economists say, is continuous productivity gains that justify the retention of high–wage jobs in the US.

Both sides are focused on this goal as they press for new contracts by Sept. 14. The companies are expected to seek changes to union work rules. The union, for its part, says it has a strong record of boosting productivity. And members knows that their jobs are only as secure as the companies that employ them.

"Members of our union have no interest in entering a competition based on who can work for the lowest possible pay," Mr. Gettelfinger said in a recent statement. "Instead, we intend to pursue a high–road strategy centered on creating high–quality, high–performance workplaces."

The UAW says that all the labor costs together make up only 10 percent of the cost of a new vehicle. So the domestic–based carmakers' competitiveness challenge won't be fixed just by closing the cost gap. Still, workers may have to give up something. Analysts say that in this case, narrowing the gulf of labor costs is vital.

"That's sort of a minimum," says David Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich. "You'll hear a lot of tough talk" by the union, he says, that's really aimed at preparing its own members for a cost–cutting deal.