He says labor pact helps close gap with rivals but more work remains.

Sharon Terlep / The Detroit News

MEMPHIS, Tenn. — General Motors Corp.’s new contract with the United Auto Workers will wipe out 70 percent of the labor cost gap separating the automaker from Japanese-owned U.S. plants, GM Vice Chairman Bob Lutz said on Tuesday.

The full benefits of the watershed labor pact, ratified Oct. 10, won’t be realized until the deal is fully implemented, a process expected to take until at least 2010.

Lutz said while the deep reduction in labor costs positions GM well for the future, it still must work to eliminate the remaining 30 percent of the $25-an-hour difference between labor costs at GM’s U.S. factories and foreign-owned plants mainly in Southern states.

"We are in a much, much better position competitively," said Lutz, who was in Memphis as part of a program to roll out the revamped Chevrolet Malibu sedan. "Until we are fully competitive, we can’t say we’re fully well positioned for the future."

Even if the labor cost chasm is fully erased, Lutz said, the U.S. auto industry’s long-term success remains threatened by looming legislation that would heighten fuel-economy requirements for vehicles sold in the U.S.

But GM’s chances are vastly improved by a labor deal that offloaded tens of billions of dollars of retiree health-care costs, created two-tier wages in assembly plants and traded traditional pensions for less costly 401K plans.

GM and the UAW reached the agreement, a pattern-setting contract for the domestic auto industry, last month after a two-day national strike. UAW rank and file ratified the accord by a two-thirds majority.

By setting up a UAW-run trust fund to administer health-care costs for 340,000 retirees and surviving spouses, GM will shake off spending an estimated $3.3 billion in medical bills.

The two-tier wage structure will trim wage and benefit costs to $26 an hour for new hires in some "non-core" jobs — from $78 an hour currently.

The automaker’s cash flow should improve dramatically, allowing it to allocate funds to product development and international expansion. In addition, GM’s credit ratings will likely improve and reduce its borrowing costs significantly.

"It will certainly help them be more competitive, but the Asian (rivals), they’re only going to get stronger," said analyst Brad Rubin of BNP Paribas.

"It allows GM to survive another decade but they need to do more."