Labor Breakup Song Could Be Music to General Motors

Does the AFL-CIO mess bode well for the automaker's bloated cost structure?
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The sudden rift that has opened within the organized labor movement could not have come at a more crucial time for the United Auto Workers union as it fights to defend its members' health care benefits from Detroit's ailing manufacturers.

On Monday, leaders of two of the largest unions in the A.F.L.-C.I.O. -- the Service Employees International Union and the Teamsters -- said they were quitting the federation. Breathless obituaries for the U.S. organized labor movement began to roll off the press.

The defections come as

General Motors

(GM) - Get Report

steadily raises the rhetoric in its battle to convince its own unions -- which are part of the A.F.L.-C.I.O. -- to bear a bigger burden as the automaker struggles against a river of red ink. Does the latest dissension in the ranks give GM the leverage it needs to win what it wants?

"I don't think it's any secret that union membership has been in decline, and I think there are a lot of people in business and politics that just think it's an antiquated way to do business that makes it very hard for a company to compete," said Argus Research analyst Kevin Tynan. "That said, I don't think this is something you will see GM flaunting in the UAW's face during its discussions. But I think there's got to be a little covert satisfaction in seeing that unions are losing ground, and it's just a matter of time before the union model just doesn't exist anymore."

While the idea of labor unions folding up shop remains far-fetched, many observers see the seeds of organized labor's demise being sowed. Aside from the split at the AFL-CIO, some of the most dominant U.S. companies have shown an ability to succeed without unions.

For instance, retailers like

Wal-Mart

(WMT) - Get Report

,

Target

(TGT) - Get Report

and

Costco

(COST) - Get Report

have flourished without organized labor. Workers at Wal-Mart, the largest employer in the U.S. and the biggest retailer in the world, have repeatedly voted down petitions to unionize, although the company is widely criticized for its low salaries and health benefits.

In the auto industry, foreign manufacturers like

Toyota

(TM) - Get Report

and

Honda

(HMC) - Get Report

have opened nonunion plants in the U.S. that have thrived. Detroit's Big Three automakers -- GM,

Ford

(F) - Get Report

and

Daimler-Chrysler

(DCX)

-- have all lost market share to their Asian counterparts in recent years.

"These examples offer proof that newer business models can work without organized labor," Tynan said. "There's so much transparency in business and the economy these days that workers just don't need that kind of protection anymore. Because of the rapid dissemination of information, any injustices suffered by workers are dealt with by the government on the basis of public outcry."

For their part, the unions that bolted the AFL-CIO reject the idea that their flight heralds labor's demise. Instead, they billed their stance as a way to rejuvenate a movement that has lost its way after a torrent of political defeats and waning membership. The departing unions have formed a rival coalition to the AFL-CIO called Change to Win.

In the context of the GM-UAW discussions, Joseph McCartin, an associate professor of labor history at Georgetown University, said the new coalition actually could stiffen the union's resolve.

"The emergence of the Change to Win option creates a dynamic where there's a subtle sense of competition between the federations," McCartin said. "The UAW will not want to be seen having concluded a negotiation where it could be charged with allegations that it didn't do as well for its members as it should have done.

"It could go either way," he added. "It may stiffen GM's spine on one hand, but it may stiffen the union's spine on the other. That's already such a complicated negotiation with so much at stake. To now add another dimension, it's going to introduce a degree of uncertainty on both sides."

GM provides health benefits for about 700,000 workers under plans negotiated under the GM-UAW master agreement that expires in 2007. UAW members on average pay 7% of their health care costs under those plans, compared with about 27% paid by GM salaried workers. With its market share dwindling, sales and earnings in decline and its credit ratings reduced to junk, the company is asking these workers to shoulder more of the burden.

Health care costs have soared everywhere in the U.S. in recent years -- far more than anyone anticipated at the time GM negotiated its labor contract. The company has repeatedly stressed that it cannot sustain the added costs under the current plan, and it has warned the union that it could unilaterally reduce health benefits for UAW retirees if they don't reach a cost-cutting agreement.

"The biggest impact we can have on our profitability is if we can get some help on our health care costs," said GM's Chief Financial Officer John Devine on a recent conference call. He expressed no hope that politicians in Washington would pitch in with the cause.

Ron Gettelfinger, president of the UAW, has said there is little justification for benefit cuts while GM continues to pay a dividend to shareholders and show a hefty cash pile on its balance sheet. He said GM has been making the wrong kinds of vehicles and its management's decisions have created the company's problems.

Meanwhile, GM's recent "employee discount for all" promotion has resulted in a sales windfall in the last two months, forcing competitors to step up their own discounts. In June, its vehicle sales jumped 44% over the same month last year, and Wall Street is expecting auto sales in July to hit a four-year high due to the price war that GM inspired with the promotion.

GM spokesman Jerry Dubrowski declined to comment for this story, while the AFL-CIO and the UAW did not return phone calls.

"The union can argue that if GM had pursued different management strategies, the company would not be in the serious crisis that it's been in of late," Georgetown's McCartin said. ""If the union gives in, then the question becomes, 'Where does it stop?' They're trying to prevent a ball from beginning to roll down hill. Once it begins to roll, it could take the union pretty low."

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