Detroit's $100 billion headache

NEW YORK (CNNMoney.com) -- The survival of brands like Chevrolet, Ford and Chrysler could very well depend on whether the United Auto Workers union is willing to assume a $100 billion headache.

That's the estimated price tag of the combined liability to provide health care for retirees of General Motors (Charts, Fortune 500), Ford Motor (Charts, Fortune 500) and Chrysler Group, the unit of DaimlerChrysler (Charts) being sold to private equity group Cerberus Capital Management.

As crucial labor talks get underway between the union and the three major U.S. automakers, there is a widespread assumption among industry experts that the automakers will need to cut their labor costs by nearly a third, or roughly $20 an hour, if they're going to be able to stem huge losses in their core North American auto operations and compete with nonunion rivals like Toyota Motor (Charts) and Honda Motor (Charts).

Pay cuts aren't likely to be the answer, especially since pay of about $28 an hour for UAW members is not much out of line with what the Asian automakers are paying hourly workers at their U.S. plants. Rather, it's the promises of health care to retirees and their dependents that's seen as the crux of the problem.

As the UAW-Chrysler negotiations opened Friday, with GM and Ford kicking off Monday, the talk in the industry is about the automakers setting up a union-controlled fund that would be responsible for those retiree health care costs going forward.

Retiree health care coverage is crucial because with their shrunken hourly work forces, the number of retirees at the Big Three dwarfs active employees.

For example, GM has 432,000 retirees but only about 80,000 active UAW members at the end of last year - less than a third of the hourly U.S. work force it had in 1994. Union ranks at GM have fallen further this year due to buyouts. Between them the three U.S. automakers have less than 160,000 UAW members on staff heading into these talks.

A deal for an old-line industrial company to shed its health care promises to retirees was the crux of a labor pact reached in December between Goodyear Tire (Charts, Fortune 500) and the United Steelworkers union that had the company putting $1 billion into a union-controlled fund to take over its retiree healthcare obligations. The deal ended a three-month strike there.

It was also part of an agreement between the UAW and bankrupt auto parts maker Dana reached early this month. The fund for Dana retirees will have $700 million in cash and $80 million of its common stock, with the cash coming from private equity firms that are buying control of the company.

UAW President Ron Gettelfinger said Friday the Dana deal "is not a precursor for any other set of negotiations." Officials at the automakers won't comment on the record whether they're seeking a deal like the ones at Goodyear and Dana, although in January GM Chief Financial Officer Fritz Henderson told analysts and investors "it would be fair to say that we have more than a passing interest in the Goodyear agreement."

The funds set up at Goodyear and Dana are far smaller than the one that would be required for the automakers. David Cole, chairman of the Center for Automotive Research, estimates that the automakers together would have to put at least $35 billion to $40 billion into the funds at the start to cover retiree health care costs over the long run.

On the plus side for the UAW, such a fund would give it control of health care coverage for its retired members, benefits that would continue if one or more of the automakers were to go bankrupt. It also theoretically would give the Big Three a better outlook longer term, allowing them to be more competitive with the Japanese automakers who are not burdened by the retiree health care costs.

"You can't get to where you need to go without doing something on health care," said Cole. "From a membership standpoint, they're betting their future on this contract. If these companies are not sustainably profitable for the long term, they're going to go away."

But other experts say they doubt the automakers will be able to win that kind of radical cost-shifting agreement from the union, and that any savings in these labor negotiations will be modest and not enough to prevent the further steady slide in the U.S. automakers' fortunes.

"The market seems to be looking forward to a Goodyear type of arrangement, but I just don't see it," said Kevin Tynan, auto analyst at Argus Research. "That's why the move in the stock (prices) may be a bit too optimistic." GM and Ford stock have rallied about 10 percent apiece the last three months, ahead of the labor talks and despite weak auto sales.

Agreeing to take on the health care costs would put the union in the uncomfortable situation of being the one to cut benefits or coverage or raise out-of-pocket costs for its retired members if the funds assets don't perform as planned, or if health care costs rise faster than expected.

Even if the union agrees in principal to the idea of assuming the retiree health care costs, negotiating how much each automaker would have to put into a fund could prove difficult, if not impossible, experts said.

Finding those funds would be difficult as well, especially with GM and Ford debt rated as junk, which raises their cost of borrowing, and with Ford already mortgaging much of its plant and equipment to fund a turnaround effort. Cole said while the companies might prefer to use their own stock to make much of the contribution, he believes the union would be reluctant to accept that.

Both management and labor said that while they expect the negotiations will result in an agreement rather than a strike our lockout, nothing can be taken for granted. The labor contracts between the UAW and the three automakers expire Sept. 14.

"Rational negotiators look at the options," Joe Laymon, Ford's group vice president for human resources and labor relations, said at a news conference Monday. "We looked at Ron and the UAW, they're sitting on a $900 million strike fund. It does not frighten us because we think we can work with UAW and come to an agreement short of an impasse. But it doesn't negate the fact that a strike is a possibility because we could make a mistake with them or they could make a mistake with us. We don't think that will be the outcome."

While Gettelfinger would not comment on what kind of health care deal might emerge, he did say Monday that the union would continue to push for the kind of universal government-funded health care that benefits automakers from Asian or European companies.

"It's obscene what we spend on health care and what we get for it," he said. "It's disheartening to see what's happening to this industry and this country. Other countries don't have this problem. They value their auto industry. So on many things we can't do anything about in the bargaining agreement, we have to take it on in the legislative arena."