The United Auto Workers union would appear to be the big winner in the Chrysler bankruptcy saga, having exercised its considerable political muscle to win a 55% stake in the country's third-largest automaker.
But when you consider the 55% is in a company that lost $16.8 billion last year and has seen its sales drop by half, the victory seems less impressive. Especially since the union's stock must necessarily be converted at some point to cash to pay billions of dollars in retiree health care bills over the next 25 years.
Plus, the union's control in the boardroom will be limited. Despite the large stake, it gets only one seat on a nine-member board that will govern a new Chrysler-Fiat joint venture.
Yes, the union could still come out the winner at Chrysler and at General Motors Corp., which has offered the UAW a 39% stake as part of its own reorganization plan. But that depends on the iffy prospect of the companies making money again and their stock values sharply rising.
"I think it's a whole lot weaker than it appears," said Gerald Meyers, a University of Michigan business professor and former CEO of American Motors Corp. "I would say the UAW wouldn't want to get into the speculative game of the stock market. That's not reassuring to retirees."
Unions have in the past traded an ownership stake in a struggling company for wage cuts or other money-saving steps. For the most part the deals, such as an employee stock ownership plan at UAL Corp., parent of United Airlines, have worked well at first, only to fall apart when economic times grew tough, with labor and management fighting as profits declined.
The UAW started making concessions during 2007 contract negotiations and that helped in negotiating the stakes they stand to gain now. At the time, both GM and Chrysler had huge labor cost disadvantages compared with Japanese automakers, mainly because they have far more retirees and had agreed to pay their health care bills.
For GM, the health care tab is projected to total $46.7 billion over the lives of about 350,000 retirees and spouses. At Chrysler, it's $10.9 billion for around 82,000 retirees.
So to unload the costs, the companies persuaded a reluctant UAW to take billions in cash to set up trust funds called voluntary employees beneficiary associations, or VEBAs, to pay the bills starting next year.
But the U.S. auto market went bad and both automakers ran out of cash. Enter government financing and the Obama administration, which engineered the Chrysler-UAW deal. Chrysler has now formed an alliance with Fiat, and the government will finance what it hopes will be a quick Chrysler bankruptcy. Chrysler plans to close five more factories and shed thousands more workers as it slims down and resets to build Fiat-designed fuel-efficient cars in North America.
The UAW spent nearly $5 million in independent expenditures to promote Obama's campaign, according to the nonpartisan Center for Responsive Politics, and some Chrysler debtholders contend that the union was unfairly rewarded for that support. Secured creditors were offered roughly 30 cents on the dollar for $6.9 billion in debt. A few balked and the deal fell apart late Wednesday, triggering Thursday's bankruptcy filing.
The UAW's reward, though, could turn out to be punishment if the stock price doesn't rise.
"What's happening at Chrysler and GM is not employee ownership in any recognizable way," said Corey Rosen, founder and executive director of the nonprofit National Center for Employee Ownership. "The employees don't own any part of Chrysler or GM, it's the health trust, and they're going to sell that stock as soon as they can. It's more like somebody saying 'I can't pay the money I owe you, so take some stock and you can sell it."'
That's exactly what the union intends to do, its president Ron Gettelfinger said Friday in an interview with National Public Radio.
"The VEBA's going to be stressed in order to pay the benefits. So what we will need to do ... is as soon as we possibly can, to start selling these shares," he said.
Fiat is a likely buyer for at least part of the UAW shares, should they gain value. Under its deal with Chrysler, the Italian automaker takes an initial 20% stake in exchange for small-car technology. That can rise to 35% as goals are met, and Fiat has options to bring its stake up to 51%.
Even with the stock, the union won't have much say in the Chrysler boardroom. The trust gets just the one board seat, and it has to vote its shares "in accordance with the direction of the independent directors on the Chrysler board," according to a summary of the UAW's contract concessions.
Owning 55% of a company doesn't mean you're managing or even significantly influencing it. Three big employee groups at Chicago-based UAL Corp. agreed to wage cuts and work rule changes in 1994 in exchange for 55% of UAL's stock and board seats.
It worked for a year or so. Management introduced task force teams and invited employees into strategy sessions aimed at lowering costs. But the sense of partnership soon unraveled as the employees learned that stock ownership didn't translate to real power or even an ability to sway the board. The employee stock ownership program was eventually eliminated during UAL's Chapter 11 restructuring, in 2003.
Employees of Tribune Co. also got majority ownership as part of the 2007 deal that made multibillionaire investor Sam Zell chairman and CEO. But they also shouldered a good deal of the risk — without control, or even board representation. The future of Tribune's ESOP is highly tenuous with the Chicago company now in bankruptcy court.
The UAW for years had a seat on the boards of Chrysler and DaimlerChrysler AG — Chrysler's previous owner — but had little to show for it, said Harry Katz, dean of the Cornell University School of Industrial and Labor Relations. "That never connected down to the shop floor," he said.
Unlike European unions, the UAW has shied away from boardroom power plays, instead exercising its will at the bargaining table, he said.
Katz said the UAW, through the stock it will get, has gained power relative to management, but it doesn't mean as much when there are no profits to divvy up.
The union was able to preserve base wages and rich health benefits, which is remarkable even though it had to make other concessions, Katz said. He noted that workers represented by the UAW fared far better than nonunion employees at other companies that have entered bankruptcy protection, such as defunct Houston-based energy company Enron Corp.