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Wall Street Sees Cold Reality for UAW

Striking autoworkers face major concessions in order to keep jobs in the U.S., analysts say.
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Is the United Auto Workers' nationwide strike against

General Motors


aimed at pressuring the automaker, or is it really intended to condition its members for the cold reality that major labor concessions are required for the company's survival?

With shares of GM trading near the high end of their 52-week range, down just four pennies in the second day of the union's first nationwide strike since 1970, Wall Street is betting on the latter.

The truth will only be revealed when the two parties either come to an agreement soon, or gridlock prevails and investors get caught flat-footed. If the strike continues for weeks or months, GM's liquidity position could be drained, its hard-fought turnaround could be derailed and its stock price could collapse.

Brett Hoselton, analyst with KeyBanc Capital Markets, said in a note to clients that the union's leadership is really using a strike as political cover from criticism that will come from its members when its forced to accept big concessions in wages and benefits in order to preserve jobs in the U.S. He noted that the UAW will be forced to pay wages and benefits to all of GM's roughly 70,000 union members during the strike.

"As such, we believe a short-lived work stoppage is likely due to the fact that the UAW strike fund is finite, UAW members are only receiving a portion of wages and benefits and that GM is bearing none of the cost," said Hoselton in the report.

After UAW workers are forced to live on just $200 a week during the strike, the union may be betting that they'll be more willing to accept the end result while believing that the UAW still did all it could for them. A spokesman for the UAW could not be reached to comment.

Investors view union President Ron Gettelfinger's comments Monday in support of the formation of a union-controlled health care trust fund, known as a VEBA, as a sign that the strike will end well for GM.

"The UAW's acknowledgement that they do not object to the VEBA trust should support GM's shares," said Deutsche Bank analyst Rod Lache in a note to clients. "We do not believe GM or the UAW can back away from this framework."

Such a framework could free GM, along with



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, from roughly $95 billion in health care obligations for retirees. That burden has been a major factor for the U.S. auto industry's disparity with foreign-based competitors in terms of costs. It has also led to spiraling borrowing costs for the automakers.

The UAW could shoulder the burden in return for a lump sum payment from GM and its counterparts in order to finance the fund.

David Cole, chairman of the Center For Automotive Research, says the automakers are also pushing for concessions in wages and benefits for workers in return for not moving production overseas to cheaper labor markets.

"GM views this as a critical negotiating period that will determine whether it will invest in the U.S. or go elsewhere," says Cole. "If GM can get reasonably close to a competitive wage and benefit structure, including health care costs, it will invest in the U.S. If it doesn't get there, it will invest away from the U.S."

In his speech on Monday, Gettelfinger said the UAW was striking for the job security of its workers.

"We were disappointed to find out that this was going to be a one-way negotiation," he said at a news conference after the strike began. "It was going to be GM's way at the expense of the workers. The company walked right up to the deadline like they really didn't care."

The notion that GM was taking a hard line with the UAW was also heartening for many on Wall Street, who feel that Detroit needed to win major concessions to fix itself.

"A strike is never good, but the fact that GM appears willing to go to the mat in order to solve these issues beyond just the health care costs is a very good sign," says Shelly Lombard, analyst with Gimme Credit.

Lombard says GM has enough inventory to weather a strike for a month before its cash position begins to dwindle. Lache estimates that GM could burn $880 million a week during the work stoppage.

The Canadian Auto Workers union said it expected to stop work on Tuesday at GM plants in Canada, and the Teamsters union said its members wouldn't cross UAW picket lines to ship to GM dealers.

"We have a pretty robust inventory right now," says GM spokeswoman Katie McBride. "We have 950,000 vehicles in inventory, so our feeling is that we can weather this for a while."

McBride declined to comment on the negotiations except to say that the parties were back at the bargaining table and working through the outstanding issues.

"My expectation is for a short strike," says Cole. "If this goes longer than two weeks, we're into a whole new world and that could be a particularly dangerous world for the UAW. If they lose GM's investment in the U.S., they're toast. GM has the ability to survive over the longer term, while the union does not and job security means nothing without a profitable company."