Thursday, May 17, 2007

Tuning up Chrysler

Daimler's fire sale might point to a way out for large manufacturers with massive pension liabilities.
May 17, 2007

FOR DETROIT'S BIG THREE, 2007 is shaping up to be a banner year in reverse. Just last month, Toyota overtook General Motors to become the largest automaker in the world. The Ford family, meanwhile, reportedly wants to unload part of its controlling stake in Ford Motor Co.

But executives at DaimlerChrysler in Stuttgart, Germany, may have outdone them all. On Monday, they unveiled a $7.4-billion deal that will require them to pay Cerberus Capital Management, a private equity group, $650 million to take Chrysler and its $19-billion benefits liability off their hands. Daimler paid $36 billion for Chrysler in 1998. That a fire sale like this can be lauded as a good deal — and it has been — says a lot about the sad state of the American automakers.

It may also mark the final nail in the coffin for iconic, postwar corporate America, where workers stayed in jobs for decades and companies paid health and retirement benefits until the day they died.

Sadly, such benefits, once considered a right, are dragging Detroit down. The Big Three carry a whopping $95 billion in pension and healthcare liabilities. For Chrysler, the burden adds $1,000 to the manufacturing cost of each vehicle. The company pays $30 an hour more for labor, on average, than competitors such as Toyota, Nissan and Honda, and that will go up to $45 by 2009 if changes aren't made. That's no recipe for staying competitive.

If the deal goes through, Cerberus may try to offload the liability through a deal much like the one the United Steelworkers of America worked out with Goodyear last year. The tire company paid the union $1 billion to take responsibility for its retiree health plan.

There is plenty of potential downside for workers. But labor seems willing to admit that the circumstances may call for dramatic measures. In an about-face from his earlier assertion that private equity firms do little more than "strip and flip" the companies they buy, United Auto Workers President Ron Gettelfinger endorsed the Cerberus deal, saying it "was in the best interest of our membership."

Giving up on the old vision of benefits-for-life would be painful for U.S. autoworkers, but not nearly as painful as watching GM, Ford and Chrysler collapse under their own weight.

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