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UAW's Delphi deal
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September 29, 1999: 7:03 p.m. ET
Ex-GM parts division Delphi pays top dollar but analysts think it can compete
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NEW YORK (CNNfn) - Members of the United Auto Workers union local 659 brought General Motors Corp. to its knees last year with a 54-day strike at their plant in Flint, Mich.
But when GM negotiated a lucrative new pact with the UAW late Tuesday, the members of Local 659 were not included. They work for Delphi Automotive Systems Corp. (DPH), which GM (GM) spun-off as a separate company in February. And while the contract the UAW negotiated with Delphi is a mirror image of the GM agreement, the fact there are separate agreements for the first time could be important to the future of both companies.
The four-year pacts that covers 148,000 UAW members at GM and another 42,000 at Delphi are generous. Union officials say they give the same 3 percent annual wage increase plus inflation protections and a $1,350 signing bonus like the one that the union won from DaimlerChrysler AG (DCX) earlier this month. It also gives enhanced job protections for employees with 10 years seniority.
But analysts believe that high levels of retirement during the life of the contracts should allow GM, which has the highest labor costs in the industry, to achieve the savings it needs.
"I think that (labor peace at GM) is largely the news here," said Rod Lache, analyst with Deutsche Banc Alex. Brown. "They've lost a lot of momentum last year and previous years due to strikes."
Ground zero of those labor wars has been Delphi plants in cities such as Dayton Ohio, and Flint. The union did not forget those workers, negotiating an identical pact with Delphi on Tuesday that covered 42,000 members there. But that pact wasn't enough to ease members' fears.
"That (the identical contract) made people feel a little better, but there's still a lot of apprehension about not having a choice," said Jim Delair, vice president of Local 659. "Probably in the next agreement, they'll be trying for a two-tier wage system."
Double the wages of other suppliers
The reason for Delair and analysts' expectations is that Delphi and Visteon, the Ford Motor Co. (F) parts division that is also expected to be spun-off soon, both pay wages identical to the top scale at the Big Three's assembly plants, while other U.S. suppliers pay about half that level. Labor costs at the Big Three equaled about $45 an hour in wage and benefits costs last year.
With a strong job market, the gap between wages at nonunion suppliers and independent unionized suppliers, such as Lear Corp. (LEA), have narrowed. But Lear, with its plant-by-plant labor agreements, is much closer to the nonunion wages than to the Big Three with their national agreements with the UAW.
Still, auto parts industry analysts contacted Wednesday say this contract can still be good for Delphi, because it removes the risk of new labor pains, and it puts the company on the road to labor independence from the Big Three.
"There were several challenges for Delphi stock. Labor was one. The need to diversify their customer base away from GM is the big one now," said Ronald Tadross, analyst with Prudential Securities, who has a strong buy recommendation on Delphi.
Local agreements key to productivity
Tadross and other analysts say that Delphi can be competitive with its higher wage scale through improved productivity and downsizing of its U.S. work force.
"They'll keep the head count down. They've got a business plan to make them competitive," said Darren Kimball, analyst with Lehman Bros. "As a separate company, you can bet on greater success."
Only about a quarter of Delphi's worldwide hourly labor is covered by the UAW pact. Even Delair, the local official from Flint, concedes his members and the union need to work with management to keep jobs here.
"We can't have job security if we don't have a good product, and don't build it efficiently," he said. "Obviously, being an old time union man, I want it (wage structure) to stay the same. But I know the worldwide market has a lot to do with what we have here."
Delphi's stock closed Wednesday at 16-1/6, down 5/8, below the February IPO price of $17.50, while GM's stock was up 7/8 to 62-9/16.
Ford faces tough talks next
Ford which faces the most contentious negotiations of any of the Big Three because of UAW concerns over the proposed spin-off of Visteon, was off 5/16 at 49 5/8. Intensive talks are expected to start there early next week.
"The (Visteon) locals have created a powerful lobby against it (a spin-off)," said Lache. "It's almost politically impossible for (UAW President Stephen) Yokich to agree to it. A strike is pretty big leverage to block that, so I think there's a very strong possibility of a strike."
The expectation in the industry is that Ford is more likely to sell Visteon, reportedly to Lear Corp., than to float an IPO. The fall in Lear's stock price since rumors first started floating about a possible deal might have done as much to hurt the sale as the union's objections.
"I still like Lear stock," said Prudential's Tadross. "I think the decline is because the market is anticipating it'll buy Visteon and it's not going to be that good a deal. But Lear's management has maintained that any transaction will be accretive to earnings in the first year." 
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