Monday, May 21, 2007

Job cuts won't fix Chrysler

Experts say management decisions are just as critical

UAW President Ron Gettelfinger has said the union is not afraid to strike if bargaining goes poorly.


Complete coverage of the Chrysler deal


Automakers' 2006 North America results

North America has been the leading problem area for Detroit automakers, resulting in major losses while providing a highly profitable market for Japanese competitors.

General Motors Corp.: Reported a pretax loss of $4.6 billion with an adjusted loss of $779 million as the company paid for an attrition program taken by 34,000 hourly workers.

Ford Motor Co.: Lost $16 billion pretax, which included $10 billion in one-time costs, mostly associated with the company's restructuring and job cuts.

Chrysler Group: Lost $680 million as U.S. sales dropped 7% for the year.

Toyota Motor Corp.: Reported an operating profit of $3.8 billion in North America as part of the company's record net income of $14 billion.

Honda Motor Co.: Net income company-wide dropped slightly in 2006, but North American operating profits rose 29% to $3.9 billion.

Nissan Motor Co.: Made $2.4 billion in operating profits in North America in what was considered a difficult year for Nissan.

Chrysler's new owners, Cerberus Capital Management LP, will need concessions from the UAW to trim costs and become competitive with Japanese automakers, industry experts say, but labor cuts alone will not turn Chrysler into a success.

Chrysler estimates that Japanese automakers, such as Toyota Motor Corp., have a $30-an-hour labor cost advantage, counting benefits and special provisions, and the gap could grow to $45 an hour by 2009 without changes to the UAW contract. Chrysler, Ford and GM begin contract talks this summer with the UAW, presenting an opportunity to rework labor costs for all three automakers.

But Cerberus could be sorely disappointed if it counts on only UAW concessions, said Laurie Harbour-Felax, president of the Harbour-Felax Group.

Management decisions are equally to blame for Chrysler's problems, said Harbour-Felax, whose company released a report last fall on the profit gap between domestic and Japanese automakers.

Chrysler does pay more in labor costs than Toyota, but Chrysler, like General Motors Corp. and Ford Motor Co., also has failed to make enough vehicles that U.S. consumers want, leading to a decline in market share, revenues and profits, she said.

"What happens in negotiations is critical," Harbour-Felax said. "I think the union understands 100% what they need to do to be competitive. ... But at the same time, they're going to look across the table at management and say, 'What are you doing for us?' "

The disparity between the U.S.-based and Japan-based automakers was highlighted this year as the companies released full-year financial results.

GM, Ford and Chrysler lost money in North America, the chief drag on operations. Toyota, Nissan Motor Co. and Honda Motor Co. made billions of dollars in North America, helping bring up overall results.

Labor costs are a major reason for the financial difficulties at GM, Ford and Chrysler, said Joe Phillippi, an auto analyst and principal with AutoTrends Consulting in Short Hills, N.J.

The domestic and foreign automakers pay similar wages at their North American plants, Phillippi said. The difference comes in the benefits, which cost Detroit automakers twice as much as Toyota, he said. Domestic automakers also have more retirees to support.

Chrysler will need UAW members to pay more of their health care costs to save money and be competitive with Toyota, Phillippi said.

Cerberus could have more leverage in winning concessions, he said. Private equity firms are known for taking brazen moves to cut costs.

"They don't have to answer to shareholders," Phillippi said. "They are the shareholders. If it comes down to a point where they need to play serious hardball, they can."

Cerberus has not indicated that it will take a hard-line approach with the UAW. It says it will carry out Chrysler's existing restructuring plan, which calls for cutting 13,000 jobs over three years.

Given the price paid by Cerberus for Chrysler, the firm may not need to take aggressive measures to get a payback, according to an analysis by Lehman Brothers.

Cerberus is paying $7.4 billion for an 80% stake in Chrysler. Chrysler Financial, the financing unit, is worth about $5.9 billion, leaving the purchase price for the core auto operations at $1.5 billion, Lehman Brothers estimates.

Cerberus also owns 51% of GMAC LLC, the financing arm of GM. The private equity firm could combine Chrysler Financial and GMAC, wringing enough profits out of that combination to justify the deal.

Harbour-Felax said she's not sure Cerberus would be able to win major concessions from the UAW. While private equity firms have a reputation for cost cutting, the UAW is a tough negotiator that works out near-identical contracts with GM, Ford and Chrysler.

UAW President Ron Gettelfinger has said the union would strike if collective bargaining is not treated as a two-way street.

Cerberus and the new Chrysler would be well-served to focus on areas outside of the UAW contract to turn things around, Harbour-Felax said. Her company released a study last fall that showed a $2,400 profit gap per vehicle between the domestic and Japanese automakers.

Labor costs accounted for about half of the difference -- $1,080 to $1,335 of the gap. Health care was the single biggest category at about $1,000, or $2 billion a year for Chrysler over Toyota's health care costs.

But the U.S. automakers also have hurt profits by making vehicles even when demand falls and by not having as many common platforms and parts, missing opportunities for efficiencies in design and production, the report found.

The UAW contract is an issue, Harbour-Felax said, but "there's a lot of other stuff that Chrysler and Cerberus can do and can control to save money and start closing the gap with the Japanese. ... If there was a miracle of miracles and we solved the health care problem, the Big Three would still lose money to the Japanese."

No comments: