Hard-hit U.S. carmakers to seek union cost cuts

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DETROIT -- This summer's contract talks between the Detroit automakers and the United Auto Workers promised to be more contentious than ever, with the Big Three losing billions of dollars and their market share in a slump.

But the recent announcement that Daimler would sell most of Chrysler to private equity firm Cerberus Capital Management LP likely means the union will face even deeper demands for givebacks as the automakers try to pare costs to compete with Honda and Toyota.

Cerberus is seen wielding a big bat when it comes to the bargaining. Because it bought Chrysler for relatively little, it can threaten to sell the company off in pieces or take it into bankruptcy. It also will be looking for a quick return on its $7.4 billion investment for an 80.1 percent stake in Chrysler, many analysts say.

"What Cerberus does is bring to the forefront the real possibility, if the union doesn't agree to real major changes in the legacy costs, they would face bankruptcy rather than just an incremental adjustment" in wages or benefits, said Harry Katz, dean of the Cornell University School of Industrial and Labor Relations, who has studied the auto industry for 25 years.

"It brings home kind of the atom-bomb scare."

Chief among demands from the Detroit Three will be reduction or elimination of their long-term liabilities for retiree health care, which together total about $100 billion, said David Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich.

With a declining U.S. market stifling top-line growth, the only option to return Chrysler to profitability is to cut costs, especially the estimated $19 billion retiree health care obligation, according to analysts.

Cerberus has leverage in the talks, analysts say, because it can threaten to break up Chrysler or take it into bankruptcy protection, leaving workers with no health insurance and uncertain pensions.

Yet Cerberus Chairman John W. Snow, former U.S. Treasury secretary, says the workers' fears are unfounded. He said Cerberus is different from other private equity firms because it holds companies much longer to turn them around.

He said the characterization of Cerberus as a corporate raider that will split up a company to make money is contrary to Cerberus' history.