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UAW, federal control of U.S. automakers seen as big risk

UAW, federal control of U.S. automakers seen as big risk

Automotive News | May 1, 2009 – 7:16 am EST


DETROIT (Reuters) — The prospect that both Chrysler LLC and General Motors are about to fall under the control of the UAW and the U.S. government is seen by few as a recipe for the success of either automaker.

To strong believers in free markets it is just about the worst possible outcome, the big fear being that interference from the union and politicians will prevent the companies from making the tough decisions needed to turn the corner.

"The union’s priority will be to preserve jobs, not maximize shareholder value," said Paola Sapienza, a finance professor at the Kellogg School of Management at Northwestern University. "The government will have political objectives in mind rather than maximizing shareholder value. This is not the way to make GM or Chrysler stronger. It will make them weaker," she added.

Furthermore, their ownership is expected to produce numerous conflicts of interest and subjecting GM and Chrysler to political pressure to produce the type of cars Washington wants, instead of those American consumers would like to buy.

"The government could urge GM and Chrysler to make more fuel efficient cars," said James Gattuso, senior fellow at the Heritage Foundation. "This may or may not be a good thing, but it is not responsive to the market wants."

Under the terms of Chrysler’s expected restructuring in bankruptcy, the UAW will own 55 percent, Fiat 20 percent (eventually up to 35 percent) and the U.S. and Canadian governments 10 percent between them. In GM’s proposed restructuring, the government would own at least 50 percent and the UAW nearly 40 percent.

In a sign of the kind of brickbat likely to be thrown at the plans, the Wall Street Journal‘s lead editorial said on Thursday that, in future, GM could be called Gettelfinger Motors, after the UAW leader Ron Gettelfinger, or Obama Motor Co., after the U.S. president.

There are also concerns that government and union control could see both automakers rely on taxpayer money over the long term, or open them up to complaints they are unfairly subsidized from Ford Motor Co., which has eschewed government aid.


The U.S. auto industry has seen sales fall to three-decade lows, pushing GM and Chrysler to the brink of collapse.

Chrysler — which had been 80 percent controlled by private-equity firm Cerberus Capital Management LP — filed for Chapter 11 bankruptcy protection on Thursday.

The company had an April 30 deadline to conclude deals slashing labor and debt costs, plus complete an alliance with Italian automaker Fiat S.p.A. Eleventh-hour talks with Chrysler lenders failed, leaving bankruptcy as the only option for the automaker.

GM has a June 1 deadline to cut labor and debt costs, while proving it is a viable concern.

"This level of government ownership sets a dangerous precedent for American companies," said Michael LaFaive, director of fiscal policy at the Mackinac Center for Public Policy. "I think GM and Chrysler will keep going back for more aid until taxpayers have had enough."

Experts point to previous examples of failed state aid for companies to show that government support is often ill-fated.

Sapienza referred to the Italian government’s long support for national airline Alitalia that failed to prevent bankruptcy in 2008, while Gattuso highlighted unsuccessful U.S. government aid for railroad Conrail in the 1970s and 1980s.

And for the auto industry, the poster child for state intervention gone wrong is the British government’s nationalization of British Leyland in 1975, which ended in a costly failure. But while most experts fear the U.S. government would dictate product mix, IHS Global Insight research analyst Aaron Bragman said interference should be limited.

"The government has shown it’s not afraid to make management decisions — after all they’ve already ditched Rick Wagoner," he said in reference to the recent replacement of GM’s CEO. "But the government task force has been remarkably prescient and has made financial, not ideological decisions.

"It’s unlikely they’ll discount market data," he added.


The UAW is a bigger unknown.

Dennis Virag, president of Automotive Consulting Group said the union’s ownership would leave it torn between its interests as a shareholder and wanting to protect jobs.

"This will be an interesting issue to follow, especially when it comes to productivity and labor costs," he said. "Is the union really going to be able to control itself?

"They know better than to kill their host, but they could take it to the edge," he added.

Bragman said the UAW always adopted an antagonistic approach allowing it to blame management for job cuts or concessions. But now it would have a seat or two on the board.

"This sets up potential curiosities," Bragman said. "What is a union appointed board member to do? Vote in favor of workers, or face the wrath of union workers?"

For some, however, having both UAW and government stakes means double the trouble, as there will be too much pressure on the automakers’ managers for them to be effective.

"The management of these companies found it hard enough to make difficult tough decisions even without interference," said Mirko Mikelic, an analyst at Fifth Third bank. "These companies need a strong leader, but instead there would be a lot of pressure from the outside.

"It’s going to be management by committee," he added.

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