Howes: Strike? GM's financial gearing delivers solid third quarter
To mere mortals, $3 billion is a lot of money.
To General Motors Co., a hit equivalent to $2 a share is a price worth paying to “maintain our competitiveness” and preserve “our operating flexibility” following a 40-day national strike by the 48,000 members of the United Auto Workers, the automaker says.
At least two weeks of production are gone and cannot be recouped. GM’s hourly labor costs are likely to remain the highest in the U.S. industry. And there’s no assurance the full weight of its rich financial package with the union — punctuated by $11,000 ratification bonuses for permanent workers — will be swallowed whole by crosstown rivals, starting with Ford Motor Co.
But to hear CEO Mary Barra tell it Tuesday, this is a contract the automaker thinks it can afford. It better, because it’s the one they got as both GM and the union prepare to navigate the brave new world of electrification and autonomy that promises to have profound effects on sales, customer expectations and union employment.
The Detroit automaker used its third-quarter earnings call Tuesday to tout its new agreement with the UAW. GM says the deal "maintained" its "North American manufacturing footprint," code for saying it is reducing costly assembly plant capacity in Canada even as it preserves its status as the top vehicle assembler in Mexico.
It "reached agreement" with UAW bargainers to close "unallocated" plants in Maryland, northeast Ohio and southeast Michigan, exposing the limits of UAW plant-closing restrictions and improving its worst-in-the-U.S.-industry plant capacity utilization. GM can offer a limited buyout program "to improve labor force composition," even if it made precisely zero progress toward shifting more health-care costs to union members.
More, GM leaders managed to avoid making the kind of mistakes that helped land their predecessors in bankruptcy court a decade ago and then out of their jobs: there is no bargained increase in pension obligations, nor increased obligations to the automaker's legion of retirees.
There is no revival of the "jobs bank," which infamously paid UAW hands not to work; no revival of the cost-of-living adjustments deep-sixed in Chapter 11 bankruptcy a decade ago; and none of the other head-slappers that in retrospect doomed GM to ignominy when the global financial meltdown hit.
Instead, bargainers produced a deal that's more "pay-as-you-go" and a whole lot less pay-up-later. Both sides win: UAW-GM members reap higher base wages over the life of the contract, fatter bonuses, uncapped profit-sharing payouts powered by rising profitability of big pickups and SUVs.
And GM contains upward pressure on fixed costs that can prove deadly in a prolonged slowdown. It also got the ability to shape the new four-year agreement to its needs and to saddle rivals with the end results, the single most attractive aspect of "going first" and setting the new UAW pattern.
The fuller effect of the longest national strike since 1970 will be known in January, when the automaker reports fourth-quarter and full-year numbers. But the guidance offered Tuesday, and GM's financial performance despite two weeks of no production, suggests a Detroit automaker shifting into another gear.
Credit rising demand for its profit-rich pickups and SUVs, a new refreshed lineup coming in the first few years of the new deal. Credit the market's rotation out of cars and into heavier metal. Credit comparatively low fuel prices, rising transaction prices and consumer demand that keeps defying gravity — precisely what was supposed to have disappeared by now.
Despite the strike, GM managed to keep adjusted pre-tax margins in North America above 10%, in line with the same period last year and sharply better than its 6.9% performance in the first quarter of the year. And adjusted automotive free-cash flow totaled $3.8 billion.
No wonder the UAW targeted GM: it's where the cash is nowadays. Just two working days into the union's turn to Ford, a new report from Morgan Stanley said the Blue Oval's lowered guidance for the rest of this year "implies" a fourth-quarter adjusted pre-tax margin in North America "in the area of 4%."
"That's the lowest margin achieved by Ford NA since the global financial crisis of 2009," Morgan Stanley wrote. "For perspective," in the fourth quarter of 2010 — just a year out of the financial meltdown — "Ford produced a 4.1% NA pretax margin on revenues that were one-third lower than what they'll likely do this quarter. A really low level of performance."
The same can't be said of GM — not now, anyway. Just days removed from a costly strike, investors are optimistic: GM shares traded nearly 4.3% higher Tuesday, already erasing the losses accrued during the strike. That's progress.
Daniel Howes’ column runs Tuesdays, Thursdays and Fridays. Follow him on Twitter @DanielHowes_TDN, listen to his Saturday podcasts, or catch him 3 and 10 p.m. Thursdays on Michigan Radio’s “Stateside,” 91.7 FM.