General Motors Dodges a Bullet

Last week, United Auto Workers leaders issued a 20-page report summarizing the union's tentative contract agreement with General Motors (NYSE: GM  ) . The report, produced for union members who will be voting on the contract in coming weeks, contains lots of impressive-sounding numbers: 6,400 jobs created, $2.5 billion in new investments, $5,000 cash bonuses for all employees on ratification, among many others. All things considered, it's a good deal for the union.

But from a GM shareholder's perspective, the most important number to keep in mind isn't mentioned in the union's summary, and may not even be mentioned in the contract itself.

That number is 10.5 million, and it's a big deal.

The number that matters most
Why is "10.5 million" so important? It's shorthand for GM's breakeven point: As long as the total number of cars and light trucks sold (by everyone) in the U.S. remains above 10.5 million, and as long as GM's market share stays in its current neighborhood around 20%, GM will be profitable under the new contract, according to a report by Daniel Howes of the Detroit News.

GM's management hasn't yet made any public statements about the substance of the new agreement, and won't until after workers ratify it, but it's no secret that maintaining GM's low breakeven point -- holding the line on the company's fixed costs, in other words -- was the priority for management during negotiations. Early signs indicate that goal was met: While the contract includes a generous profit-sharing provision, it's tied to -- and contingent on the existence of -- GM's North American profits.

While it's not a surprise, for shareholders, it should be a relief. GM's fixed-cost base, lowered dramatically via painful restructuring and labor concessions before, during, and after the company's 2009 trip through bankruptcy court, is the key change underpinning the company's increasingly impressive turnaround, just as at rival Ford (NYSE: F  ) .

While 10.5 million auto sales might sound like a lot, it's roughly the sales rate one would expect to see at the low point of a bad recession. For context, Edmunds is currently forecasting 12.6 million sales for 2011, down from the 13-ish million forecast earlier this year as the economy has slowed.

Making good money in not-so-good times
For GM (and Ford) shareholders, it's important to keep even that number in context. Viewed in the light of recent history, current auto sales rates are already kind of lousy. Americans bought 17 million vehicles in 2005, 16.5 million in 2006, and 16.1 million in 2007 -- and much concern surrounded that last number, as it was the lowest seen in a decade. 2008's economic crisis made things much worse, of course; the 13.2 million vehicles sold that year was the lowest number since 1992.

And even that number looks decent compared to what we've seen since. But -- and this is important -- GM and Ford, like rivals Toyota (NYSE: TM  ) and Honda (NYSE: HMC  ) , have generated solid profits in North America despite these subdued sales levels. That wouldn't have been possible for either company as recently as six or seven years ago, because their costs were too high.

That's what's making this whole Detroit renaissance possible, and that's what the new UAW contract needed to preserve.

Next up: The blue oval
GM's unionized workers are widely expected to approve the new contract, which will reward them with an expanded profit-sharing arrangement and bonuses tied to production quality, as well as other incentives and benefits. This, too, is a good thing: While the UAW agreed not to strike GM (and Chrysler) as a condition of the companies' bankruptcy restructurings, any labor unrest would have been, at best, an expensive distraction for the General.

The UAW's leadership has now turned its attention to Ford. In the past, the union has followed a predictable path, fighting hard to get the deal it wanted from one target automaker and then seeking to impose the "pattern" of that deal on the others. The "fighting" is more subdued nowadays, but I expect a similar result. Ford's contract will likely look a lot like GM's, maybe with somewhat more generous bonuses reflecting the more advanced state of Ford's turnaround. That should suit both Ford and the UAW just fine.

For shareholders, four more years of labor peace at a price that won't hinder the companies' turnarounds seems like a good deal indeed.

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Fool contributor John Rosevear owns shares of Ford and General Motors. You can follow his auto-related musings on Twitter, where he goes by @jrosevear. The Motley Fool owns shares of Ford Motor. Motley Fool newsletter services have recommended buying shares of Ford Motor and General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 26, 2011, at 12:38 PM, AmericanFirst wrote:

    It's amazing that UAW thugs can threaten, hold hostage an american company for higher wages, more generous benefits or bonuses.

    The UAW doesn't create jobs....they destroy jobs!

    Employers create the jobs not the UAW!

    If they don't like their job they should go get another.

  • Report this Comment On September 27, 2011, at 11:16 PM, TaoOfPatrick wrote:

    A-Hole^

  • Report this Comment On September 27, 2011, at 11:24 PM, TaoOfPatrick wrote:

    American come on down to local uaw 598 the boys would like to have a little talk about your viewsThat way you can talk to the source.and let the union brother know how you feel face to face.I'll be there ask for UAW thug # 23,052.

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