Tue, 31 Mar 2009 20:49:22 +0000 – By Liz PeekFinancial Columnist
Here's a positive spin on President Obama's dismissal of Rick Wagoner: maybe it lays the groundwork for demanding serious concessions from the UAW. The union was a major contributor to Obama's presidential campaign -- to the tune of about $5 million. In short, he owes them. Moreover, union labor in general is looking to this president to reverse the declines in membership that have occurred over the past decade. It would be the height of political ingratitude (and recklessness) to disavow that commitment this early in his tenure.
However, it is clear to even the most casual observer that any hope of resuscitating Detroit's Big Three has to start with demolishing the entitlements programs that have made the companies uncompetitive. This must be done either through bankruptcy proceedings -- not an especially attractive alternative for the administration in that they will lose control of the process -- or though hard-nosed negotiations with the unions.
Clearly, this is treacherous turf for the Obama team. How can they stomp on the unions? The answer: only by stomping on management first.
By ejecting Rick Wagoner, they are hoping to persuade the American people, and more importantly union members, that they are asking for Obama's much-vaunted "sacrifices" at every level. Firing GM's head was the easy part. The beleaguered CEO has been in the driver's seat since 2000, and has not been able to maneuver around the wreckage piling up in the highway. In fact, the company has operated in the red since 2004, losing more than $80 billion in the past few years. Hence Wagoner doesn't win much sympathy, though without a doubt he struggled against huge odds. The damaging labor costs were ladled on the backs of the car companies long before Wagoner appeared on the scene --and they are the legacy of both management and union bosses of old who knew full well that the deals they struck would someday wound the company.
Looking ahead, even an optimistic forecast by the existing management team projected continued negative cash flow over the next six years. More specifically, the company estimates that its so-called "legacy liabilities" -- i.e., healthcare and pension costs -- would cost it $6 billion per year in 2013 and 2014 -- requiring the sale of an additional 900,000 cars annually. This is not a survival plan.
Obama's auto task force realizes that throwing GM into bankruptcy will not sit well with union voters, dealers or bond holders. On the other hand, a total restructuring may be the only way that the company survives. In any case, threatening to put the courts in charge of GM may be the reality dose necessary to meaningfully cut entitlements. This is the union's last chance; not playing ball may doom the auto industry, no matter how green the future product line becomes. On the other hand, union leadership has not historically been much persuaded by the obvious.