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GM Witnesses Historic 2007 With UAW Deal, Higher CAFE Rules

Special Report

2007 Year in Review

In a year stamped by lackluster vehicle sales in its home market and a topsy-turvy financial performance, perhaps the most indelible marks left on General Motors Corp. in 2007 were a transformational contract with the United Auto Workers union and a 40% hike in federal fuel economy standards.

However, GM did not arrive easily at its new, 4-year collective bargaining agreement with the UAW. After nearly three months, negotiations stalled in late September and more than 74,000 UAW members employed by GM walked off the job. It marked the first nationwide strike at the auto maker since 1970. The UAW cited job security as the primary issue dividing the two sides.

“(GM) made it clear as we moved closer to (the) deadline that they had no intention of sitting down and working out something that is equitable for our membership,” UAW President Ron Gettelfinger said during a press conference at the union’s Detroit headquarters. “We feel like we’ve been pushed off a cliff.”

The walkout would last two days before GM and the UAW reached what most industry experts consider an historic contract likely to transform the auto maker and place it on sounder competitive footing against key rival Toyota Motor Corp.

“There is no question there are things in this agreement that will make (GM) more competitive,” said Gettelfinger, who credited the strike with moving talks to a conclusion.

Contract highlights include a 2-tier wage structure that calls for new hires performing non-core functions, such as material movement, to earn a starting wage of $14 per hour – 50% less than the estimated 16,000 existing employees now performing those functions. Factoring in active and retiree health-care costs and pensions, newly hired non-core employees will earn $25.65 an hour, compared with the $78.21 hourly rate paid to existing workers.

GM thinks the wage structure will trim its average UAW-member pay about $30 an hour and align compensation for hourly workers more closely with that at Toyota. And because many of GM’s current employees represented by the UAW will be eligible for early buyouts, some analysts believe the auto maker could turn over its entire union work force before the expiration of the contract.

GM, in fact, is closing 2007 with buyout offers for another 5,200 workers, and is promising to extend the plan to remaining hourly employees in 2008 once it has worked out a detailed strategy with the UAW. In 2006, a similar program drew 34,410 takers.

The new UAW contract also features a Voluntary Employees’ Benefit Assn. (VEBA), which calls for GM to contribute a total of $31.9 billion to a retiree health-care trust that will be managed by the UAW. It wipes $2.6 billion in short-term cash off the auto maker’s books in 2007 and another $4 billion in liquidity by 2009, but the auto maker says favorable cash flow will begin in 2010 at $2.8 billion and reach $3.3 billion in 2011.

Savings could go higher down the road, GM says. That, plus an estimated $9 billion in structural costs the auto maker has removed from its business over the last two years, has GM Chairman and CEO Rick Wagoner declaring the turnaround from a combined $12.6 billion loss in 2005 and 2006 fully under way.

“It is hard for anyone to objectively conclude anything other than we are moving this business, the auto business, very well,” he told Ward’s in a November interview.

In return for the historic concessions from the UAW, GM made sweeping commitments to invest in its U.S. assembly plants, including a pledge to build small cars domestically. Analysts took that as a sign GM is confident the bargaining agreement gives it the leeway it needs to operate profitably on its home soil.

The auto maker wasted no time in taking advantage of the new latitude provided in the agreement, trimming production at several plants producing slow-selling models late in the year. That marked a departure from past practices, when GM would have continued to push the vehicles into the market while enticing buyers with costly sales incentives.

“Detroit’s newfound willingness to aggressively curtail production and avoid excess inventories is, in our view, a clear by-product of the labor flexibility won in the 2007 UAW labor contract (i.e., breakeven points have been lowered, reducing their need to protect volumes with brand-eroding incentives),” Himanshu A. Patel, an analyst at J.P. Morgan, writes in a research note.

But headwinds persisted in 2007. GM witnessed flagging vehicle sales in the U.S., driven down mostly by consumer uneasiness over an economy hamstrung by the sub-prime mortgage debacle. Before year’s end, GM forecast annual industry sales of 16.4 million units for 2007, well below peak levels. Given its current share of the market, GM expected its own light-vehicle sales to decline by 300,000-400,000 units.

Fallout from the housing depression had a dual effect on GM’s books. Not only did the auto maker see revenue decline as a result of falling car sales, it also took a hit from its 49.0% stake in GMAC Financial Services, whose residential mortgage unit reported deep quarterly losses. In fact, a third-quarter setback at GMAC’s ResCap group of $2.3 billion – combined with a non-cash write-down related to unused tax credits at the auto maker – caused GM to report a $38.6 billion non-cash charge in the period.

Including the charges, GM reported a loss of $39 billion, which set an ignominious mark in the auto maker’s history and overshadowed continued progress within its struggling North American automotive unit. GM Vice Chairman and Chief Financial Officer Fritz Henderson characterized the outlook for the mortgage industry as “challenging” and “uncertain,” and added that GM followed standard accounting rules in recording the unused tax credits.

Yet while GM witnessed softer vehicle demand in the U.S., its global sales soared. The auto maker set a number of records in several countries and every region besides North America. Growth was particularly robust in key emerging markets such as China, Russia, India and Brazil. In China specifically, GM became the first global auto maker to sell 1 million vehicles in the country in a single calendar year.

In Europe, where GM has struggled for years against a weak German economy, the auto maker set an all-time sales record. In November, it netted its highest share of the European market since 1999, with the import-laden Chevrolet brand serving as the key driver.

And the U.S. market was not entirely without its bright spots. GM continued to pull back on incentives and sales to rental fleets. As a result, its average transaction price climbed and its steadily declining share of the U.S. market stabilized.

“We’re most proud of stabilizing our share and residual values,” Henderson told reporters in New York in December. But at the same time, he added, GM’s revenues are dominated by its U.S. business. “We are making money everywhere else,” he said. “We need to win (in the U.S.).”

GM showed particular improvement in retail share, despite a shrinking of its bread-and-butter truck sales because of the housing crisis.

“GM’s retail share could get further support from the launch of the high-volume Chevy Malibu,” Patel says.

In addition to the new Malibu, the auto maker continued its product push with the redesigned Cadillac CTS sedan and the Buick Enclave, which joined the Saturn Outlook and GMC Acadia in completing a trio of midsize cross/utility vehicles to further cement GM’s position in the popular segment. It also rolled out the Chevrolet Tahoe and GMC Yukon 2-mode Hybrid SUVs, the first of a range of alternatively powered fullsize trucks slated to be unleashed over a 12-month period.

GM kicked off 2007 by unveiling the Chevrolet Volt, an ambitious plug-in hybrid it expects to bring to market by 2010, at the Detroit auto show, and wound down the year by anointing the bowtie division as its leading brand in alternative powertrains at the Los Angeles auto show. In between those events, it launched “Project Driveway,” where the auto maker began placing 100 Chevy Equinox electric fuel-cell vehicles in the hands of average consumers, popular personalities and government officials.

GM Vice Chairman and product chief Bob Lutz called the blitz in 2007 further evidence of a “relentless drive at General Motors to recapture the success formula of the 1950s and 1960s – when GM was viewed as the dominant company, not just in size, but in capability, design and engineering.”

That comeback got decidedly tougher in December, when Washington lawmakers passed an energy bill raising corporate average fuel economy standards by 40.0% to 35 mpg (6.7 L/100 km) by 2020. The standard for ’08 model cars stands at 27.5 mpg (8.6 L/100 km) and trucks must achieve 22.5 mpg (10.5 L/100 km). The new rule keeps cars and trucks classified separately, an element fought for by auto makers and Michigan lawmakers.

Wagoner called the 35 mpg target “a significant technical and economic challenge to the industry,” and one where “GM is prepared to put forth its best effort to meet with an array of engineering, research and development resources.” But to reach a compromise bill, other key elements beneficial to auto makers, such as incentives for plug-in hybrids and federally backed loans of $25 billion to update plants to produce more fuel-efficient vehicles, were nixed.

But in move favorable to GM, the Environmental Protection Agency rules on the heels of President Bush signing the energy bill into law that states cannot regulate emissions. The EPA said the new CAFE standard will suffice in reducing the global-warming emissions of automobiles.

The decision strikes down several court rulings giving California and 17 other states such authority and left environmentalists fuming.

California politicians promised an investigation into the EPA’s decision-making and hinted at the possibility for a lawsuit. Taken together, however, regulatory actions in 2007 by federal and state governments regarding emissions levels could cost auto maker billions of dollars over the next several years and will certainly color GM’s business plans as it enters 2008.

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