With Strike Over, Detroit Faces Old Worries

Sliding sales and shrinking market share remain concerns for automakers.
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General Motors

(GM) - Get Report

appears to have forged a fair and sensible agreement with the United Auto Workers that makes real progress on fixing its bloated cost structure.

But while the company's executives and the union's leaders are patting themselves on the back for a job well done, investors should be selling GM shares and locking in their profits.

Throughout 2007, traders have been looking forward to this summer's labor negotiations in Detroit as a positive catalyst for auto stocks. Now that the talks are nearing resolution, Wall Street's outlook on Motown will be clouded by further sales declines, market share erosion and a shaky economy.

"Great, you've got some of the cost issues addressed, but now what?" wonders Argus Research analyst Kevin Tynan. "How do you reverse the momentum on the sales side and stop losing market share? That's the real problem."

Shares of GM are now up 20% so far this year. They added roughly that amount in the month of September alone. Meanwhile, U.S. auto sales hit their slowest pace in nine years in July, and while August showed a slight rebound, September sales are expected to show a continued slump in demand.

GM's U.S. sales are down 7.5% for the year, as the U.S. housing downturn has weighed on the world's financial markets. Signs are emerging that fallout from that problem is spilling into retail and other sectors of the economy, where consumer spending is a major driver of growth.

"It's possibly getting worse," says Tynan. "You're going into what some people are calling a recession in a business that is far from recession-proof."

Detroit's negotiations with the UAW are hardly concluded. The union still has to sell its agreement with GM to its 74,000 members, who will have a chance to vote on it. Also, it's expected to begin talks with

Ford

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or

Chrysler

next.

"The decision about how things will move forward is completely up to the UAW, and we respect whatever decision they make," says Ford spokeswoman Marcy Evans. "We're pleased that they were able to reach an agreement with GM. Our discussions with the union have been ongoing, and we just look forward to reaching an agreement that is competitive for Ford."

Evans declined to comment on the GM deal, saying she didn't have enough information about it. A spokesman for Chrysler could not be reached for comment.

While the negotiating season has yet to resolve itself, GM's tentative deal with the UAW is expected to establish a pattern that will be followed in the negotiations with the rest of the Big Three.

The deal includes an agreement on creating a union-controlled health care trust fund for GM retirees, or a so-called VEBA, which promises to free the company from most of its $51 billion in long-term health care liabilities in return for a large cash payment.

It also reportedly includes an agreement for a lower wage structure for newly hired workers, as well as financial offerings to give existing workers an incentive to retire. GM said the deal will strengthen its U.S. manufacturing presence with "significant future investments."

"This agreement helps us close the fundamental competitive gaps that exist in our business," the automaker said in a press release. "The projected competitive improvements in this agreement will allow us to maintain a strong manufacturing presence in the United States along with significant future investments."

The deal provides a victory for the UAW, in that its two-day strike was short and it appears to have brought the extended contract negotiations to a swift conclusion. It's unclear, however, whether the union got any real guarantees on job security for its U.S. workers, which was the stated purpose of the work stoppage.

"We're very comfortable with this agreement, and we're happy to be able to recommend it to our membership," said UAW President Ron Gettelfinger at an early morning news conference. "I'm pleased to say that we have a VEBA in place that will secure the benefits of our retirees."

Tom Mobley, a professor of employment and labor relations at the Farmer School of Business at Miami University, says the UAW strike was more about getting its members onboard with the agreement than it was about pressuring GM at the bargaining table.

"They need to send a signal to workers that they're taking a tough stand and they're getting the best deal they can," says Mobley. "They must have been close to a deal when they called the strike."

Mobley also said the UAW may be willing to back down more than it has in the past, because the Democratic Party looks poised to take the White House in 2008 and push for a universal health care program.

GM will have to pay a lump sum in cash to finance the VEBA, estimated to be around $35 billion. It had $22.3 billion in cash on its balance sheet at the end of the second quarter, so the fund will cost GM dearly.

In time, its wage structure will come down as more workers become eligible for retirement, but GM's labor costs will still be high compared to foreign-based competitors like

Toyota

(TM) - Get Report

for the foreseeable future. Add that to Detroit's economic woes, and the automaker is still facing stiff headwinds.

"At the end of the day, I have to want to go to a GM brand showroom and be impressed by the products, and we're a long way away from that," says Tynan.