Can the UAW survive in its new role?

The auto-workers union faces conflicts and challenges of historic proportions.

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By Katie Benner writer-reporter

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NEW YORK (Fortune) -- The role of the United Auto Workers used to be a simple one: adversary to the Detroit Three, fighting in recent decades to keep jobs in the U.S. and maintain the great wages and benefits that helped create a blue-collar middle class that stretched from Indiana to Michigan.

But with the bankruptcy and restructuring of General Motors (GMGMQ) and Chrysler, the UAW finds itself in a new role with a more complicated agenda. The old formula is now an anachronism: U.S. auto companies can't make money in a global, hyper-competitive industry and pay the salaries, raises and premium benefits the UAW was long able to extract on behalf of its members.

The question now becomes: can the UAW survive after the overhaul of Detroit? The UAW's power to negotiate with management is at its weakest since its peak in the late 1970s, when it had 1.5 million members. After years of layoffs, its numbers have fallen below 500,000 and continue to drop.

"The UAW way of life is gone, and young people are losing interest in unions because, as with the union movement at large, it is harder to see now how they are relevant," says Scott Peltz, managing director at consulting firm RSM McGladrey. "The whole dynamic between management and the UAW has changed."

Conflict of interest

Most notably, the UAW must now pay for the health-care benefits it fought so hard to get for its retirees, which creates a conflict in advocating for the best interests of its members. In the case of GM, can the UAW fight for its active members without jeopardizing the health plans of its retirees, which are now tied to GM stock?

The union has agreed to salary freezes. Moreover, the government has taken away the UAW's most powerful bargaining chip, its ability to organize a strike, until 2015. (The UAW did not return calls for comment on this story.)

What happens to the UAW will ripple beyond the auto industry, since it is still the country's wealthiest union and one of its most politically powerful ones. Its actions will affect the success or failure of GM and Chrysler, as well as the debate over whether unions are still relevant.

The UAW emerged from the GM and Chrysler bankruptcy negotiations better off than if the companies had liquidated. As long as the Detroit auto industry exists, the union does too, since GM, Ford and Chrysler's operations within Fiat must hire union workers, while foreign auto companies do not have that agreement in place.

But the talks also cost the UAW a great deal of its financial might.

As its ranks of dues-paying members shrinks, so does its power and influence. "Like a corporation, the union needs revenue, or in this case dues," says Peltz. "And that financial base is shrinking. Just to keep money coming in, it looks now like they might have to merge with another union," he says.

In any event, the UAW must manage the fund that pays for retiree medical costs. In 2007, GM spent $4.6 billion to pay for health benefits for its employees, retirees, and their dependents; and retirees now outnumber active members.

'Retirees don't count'

That trust, the Voluntary Employee Benefits Association (VEBA), is funded by stock in GM, which is virtually worthless until GM emerges from bankruptcy as a viable business. That means it's in the best interest of UAW retirees for the union to support a restructuring plan for GM that ensures that the company becomes streamlined and profitable. But in the short run, at least, decisions on layoffs and downsizing will be in conflict with the best interests of active employees. Labor experts believe that in such cases, the UAW will tip toward active workers.

"As far as retirees go, they don't count," says Gerald Meyers, a professor at the University of Michigan's Ross Business School. "It's an awful thing to say, but I'm a retiree so I feel I can say that. What counts are the dues-paying members who vote on who will lead the union. Unions are political organizations, and since retirees don't vote, if they don't get paid it won't be the end of the UAW or its leadership."

The UAW recently persuaded GM to reopen a factory to produce small cars, an area where GM has struggled, in the U.S. rather than at a plant in China. But when that plant will open and how much it will cost is uncertain. To produce the cars at a plant that is already up and running in China would have produced subcompact cars ready for sale in Europe this year and in the U.S. in 2011.

"It doesn't make business sense, but it makes political sense," says Meyers. "The UAW will absolutely continue to block plant closings and moving jobs overseas, even if it's not good for the company."

The union may still be able to wheedle, but until 2015 it can't strike. This gives management a window to make tough decisions that, in years past, would have pushed the UAW to pull workers off the line.

"If they don't participate positively in the restructuring, Chrysler and General Motors will fail and liquidate," says David Cohen, a law professor at Pace University.

And that is something that the Obama administration simply cannot afford.

The government's stake

The government has poured about $20 billion into the gasping automaker and will loan it another $30 billion for a debtor-in-possession, or DIP, loan to fund ongoing operations as the company reorganizes. Taxpayers will end up with a 60% stake in the new GM. While the administration is seen as a friend to the labor movement, it has set itself up to clash with the UAW if the union's demands threaten the viability of GM.

Not only is it harder for the UAW to fight, it's harder for the union to justify why workers need the UAW to fight on their behalf. Foreign automakers like Toyota (TM) and Honda (HMC) have large operations in the U.S. and are among the country's largest employers. In fact, Toyota has ranked among the top ten on Fortune's Most Admired Companies list since 2006. Unlike the Big Three, they do not have to hire union employees.

In the past the UAW has argued that the only reason non-union plants pay as well as they do (though often slightly less than a union salary) is because Detroit sets a compensation standard that foreign auto companies feel forced to match. But most labor lawyers doubt that companies like Toyota would initiate draconian benefit and salary cuts if the UAW were to disappear.

In retrospect, many of the benefits the UAW sought, like the practice of paying out-of-work employees as they looked for jobs, and giving lifetime benefits for spouses, ultimately forced the Big Three to sell its cars for more money than leaner Japanese competitors. More devastating still, these measures created enormous future promises that could still sink GM.

So what does the UAW have to offer other than nostalgia?

Surely, there are industries where workers are abused and they need a union to protect themselves, says the University of Michigan's Meyers, "but the world is not homogenous, and not every industry needs a union."

Adds Peter Stergios, a labor lawyer at McCarter and English: "It's a national habit now that there must be unions, since there once was a time when they were relevant. The UAW may soon have to justify to their workers why they should exist." To top of page

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