General Motors (NYSE:GM) and the United Auto Workers (UAW) came to an agreement on a new four-year labor contract for GM's factory workers late on Sunday.
It won't be official until a majority of workers vote to accept it, but the new contract took a big step forward on Wednesday, when a committee made up of representatives from the UAW locals that work in GM facilities agreed to send it to the workers for a vote.
The voting will take several days, with the first votes set to be cast on Friday. But what will they be voting on -- and how will it affect GM and its Detroit rivals?
What's in the deal?
The UAW has released copies of the new tentative contract (which runs to hundreds of pages), as well as a summary that covers the key changes. Here are the high points:
- $8.3 billion in factory upgrades. GM had already committed to spending $6.4 billion over the next four years on tooling and upgrades to its factories. Some of these investments are in tooling and equipment to make upcoming new models, others are to upgrade or expand the capacity of existing production lines. During the negotiations, GM committed to an additional $1.9 billion in investments in tooling and renovations at 12 more facilities. The UAW says that these new investments will "create or retain more than 3,300 jobs." GM's commitments are subject to change if the economy turns south, of course. But it's important to spell them out in the contract, as it gives the workers at those plants some reassurance that their jobs are likely to be secure.
- Big raises for lower-paid workers. Following the pattern set by the UAW's agreement with Fiat Chrysler (NYSE:FCAU), GM's new deal will largely phase out the "two-tier" pay system with a series of raises for the junior-tier workers over the next eight years. About 20% of GM's U.S. hourly workers, or about 10,500, are paid junior-tier wages. Upper-tier workers will also get raises.
- Big buyout offers to the highest-paid workers. GM will offer buyouts worth up to $60,000 to as many as 4,000 UAW members who agree to retire before May 1 of next year. The eligible workers are among the highest-paid veterans. GM is clearly hoping to somewhat offset the cost of the big raises for the junior-tier workers.
- Bonuses and profit-sharing. All of the workers will get an $8,000 bonus if and when the contract is approved. They'll also be eligible for a new profit-sharing arrangement, a $1,000 annual bonus for every $1 billion of pre-tax profit that GM earns in North America. Through the first three quarters of 2015, GM North America generated $8.3 billion in pre-tax profit. There are additional, smaller annual bonuses that will be paid if GM hits certain internal product-quality metrics.
It's a bit sweeter than the deal that FCA's workers just approved. From the UAW's perspective, that's appropriate, as GM, like rival Ford (NYSE:F), is much more profitable than FCA right now. (Ford is still negotiating with the UAW, but it's a good bet that the Blue Oval's new deal will look a lot like GM's.)
But is it a good deal for GM?
Is this a good deal for General Motors?
It's not clear yet how much this deal will end up costing GM over the next four years. FCA's deal is expected to add almost $2 billion in costs to its North American production over that time. The percentage of GM workers getting the biggest raises, those in the junior tier, is smaller than that at FCA. On the other hand, GM has more workers, and the bonuses and profit-sharing agreements are richer than those in FCA's contract.
All that said, labor peace is a valuable commodity. The UAW made big concessions last decade, when GM was on the ropes. Now that the General's profits are soaring, the workers feel like they're overdue for some improvements. If GM hadn't agreed to some solid wage and bonus increases, strikes were very likely. (That will also be true of Ford.)
From the perspective of CEO Mary Barra and GM's senior executives, there really wasn't a good alternative to giving workers a contract that they would accept. Sales are very strong right now, many of GM's factories are maxed out, and any prolonged strike would be very expensive. And it's just not realistic for GM to start moving significant amounts of production out of the United States, even if that could be done quickly and affordably (which it can't).
GM, in other words, has to live with the UAW. It has to spend whatever it takes to get workers to agree to a new four-year deal -- but it doesn't want to spend any more than that. Right now, this looks like a deal that GM can afford. If workers approve it, then it will be a good deal for GM.
John Rosevear owns shares of Ford and General Motors. The Motley Fool recommends Ford 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.