How deep a cut will Chrysler unions accept?
Cerberus, in a $7.4 billion deal to buy control of the automaker, will try to turn it around.
A deal to put Chrysler under new ownership also promises to open a new and difficult chapter for America's unionized auto workers.
The private buyout firm Cerberus plans to purchase a majority stake in the struggling US car company for $7.4 billion – a move announced with fanfare Monday.
But the big financial question is not what Cerberus will pay, but what the UAW will throw into Chrysler's pot.
The labor union has not, by itself, dug Detroit's automakers into their current hole of sagging market share. But analysts say America's iconic car companies will have trouble regaining their footing unless they can win significant cuts in their labor costs.
The parent company, Germany's DaimlerChrysler, lost faith in its own ability to turn its Detroit operations around. Now this task will fall to Cerberus, which specializes in restructuring and cost-cutting at the companies it buys.
"It may be the best hope for Chrysler as a company, and so in the long run it may be the best hope for the jobs of the Chrysler workers," says Joseph D'Cruz, an expert on the auto industry at the University of Toronto's Rotman School of Management. "But they're going to pay a price."
Cerberus, at least, hopes to extract a price.
The so-called private-equity firm, funded by big investors, is in the business of buying companies and taking them into private ownership – so their shares aren't traded on a stock exchange. Cerberus traditionally aims to squeeze out excess costs, with the goal of later reselling the firm at a big profit, in a public stock offering.
In the deal announced Monday, DaimlerChrysler AG said it will sell 80.1 percent of the Chrysler to Cerberus, with the sale closing by this fall. The $7.4 billion price is a steep discount to the $36 billion that Daimler-Benz AG paid in 1998 for North America's No. 3 automaker.
Now, the Chrysler Group, which includes the Dodge and Jeep nameplates, is No. 4 behind Toyota in US sales.
Toyota is fast gaining on No. 2 Ford in the US market. While General Motors remains No. 1 in American sales, it is poised to cede top billing in global sales to Toyota for 2007.
All this puts pressure on Detroit's threesome to push for major concessions from the UAW in talks this summer. In the talks, which occur every three years, the union bargains first with one of the Big Three, and then typically cuts a similar deal with the other two.
This year, the union has chosen to bargain first with DaimlerChrysler. Now, in effect, that means it is across the table from Cerberus. And the bargaining will start soon.
The buyout firm "will want to wring concessions right from the start," says Mr. D'Cruz. "Their ability to act is strongest right at the beginning."
If the concessions aren't big enough, the Cerberus deal for Chrysler could fall through. But all sides appear to have a strong stake in trying to make it work.
Daimler's management wants to unload a division that is losing money. Cerberus, with former auto executives in its managerial talent pool, sees the chance to manage one of America's best-known companies – and perhaps engineer a moneymaking turnaround.
And the UAW, knowing that Daimler is eager to sell Chrysler, has concluded that Cerberus represents its best hope going forward.
"The transaction with Cerberus is in the best interest of our membership, the Chrysler Group, and Daimler," UAW president Ron Gettelfinger said in a statement Monday.
Still, his comment doesn't mean smooth sailing ahead. Whatever the union negotiates with Chrysler could ripple out to affect its pacts with Ford and GM.
And the union won't willingly cast aside hard-won pay and benefits that have long been among the best at any North American factories. But without some significant concessions, analysts say the Big Three may be doomed to a future of shrinking sales and dwindling jobs.
One estimate, done in 2004 by the Center for Automotive Research in Ann Arbor, Mich., found that higher pay and benefits add about $1,300 to the cost of each car made by the Big Three, compared with the North American operations of rivals such as Toyota and Honda.
Retiree healthcare costs are also large and rising – and much higher for the Big Three than for its younger rivals. Asian competitors also have more flexibility in worker job categories, which helps translate into greater plant efficiency.
In all, the per-car cost gap between the Big Three and nonunion assembly plants – mostly in the South – is about $2,400 to $3,500, says Tony Faria, a professor at the Odette School of Business at the University of Windsor, Ontario.
That gap makes it harder for the Big Three to invest in solving another urgent problem: refreshing and repositioning their product lineups at a time of growing demand for fuel efficiency.
"They have to cut costs everywhere in the operation," Mr. Faria says. But in no area is that effort more difficult than in labor costs, he says.
The US union, and its Canadian counterpart, have been resisting such cost-cutting. But in the end, that reluctance could translate into lost jobs as the Big Three remain at a competitive disadvantage, analysts say.
"The union doesn't get it," says Peter Morici, a University of Maryland economist who follows the auto industry. Meanwhile Chrysler, he says, is lagging behind its peers in vehicle quality and reliability.