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GM confirmed today that the United Auto Workers (UAW) union has approved modifications to its national contract that “…will enable GM to be fully competitive and has eliminated the gap with our competitors.”  GM claims the changes eliminate the wage and benefit (cost) gap with its competitors.  It also includes changes to the agreements regarding the Voluntary Employee Beneficiary Association (VEBA) trust for retiree healthcare.

Separately, GM announced a plan to utilize a UAW-represented idled assembly and stamping facility for future production of an unnamed compact/small car in the United States to meet future fuel efficiency regulations.  GM did not specify the facility to be used, but the re-tooled plant will be capable of building 160,000 cars annually, which can be a combination of both small and compact vehicles. 

GM already has a strong manufacturing presence in the United States. Currently, about 67 percent of GM cars and trucks sold in the U.S. are built in the U.S. With this announcement, GM anticipates that U.S. production levels will increase beyond 70 percent by 2013, augmenting its already automotive industry-leading U.S. manufacturing footprint.

This is clearly a bone thrown to the UAW and the federal government.  The UAW has complained very publicly about GM’s plan to close US plants and increase imports.  This has put pressure on the feds because the public believes the $19.4 billion in loans that GM has received should not be used to subsidize the elimination of US jobs in favor of foreign-based jobs.  GM (and the other Detroit automakers) has long stated that high costs prevent them from manufacturing small cars in the US profitably.  Could the new contract really save them enough to make this turn around, or are they just saying this for PR or are the y just willing to continue to lose money to please their new overseers in DC?

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The Obama administration today announced the biggest and most expensive increase in fuel economy ever. Flanked by 10 auto executives, UAW President Ron Gettlefinger and others, Obama announced the plan in the Rose Garden.

The new standards will commonize the various regulations governing the sale of vehicles in the US into 1.  In return for the stricter standards, the state of California agreed to drop its attempt to institute its own fuel economy standards and the automakers agreed to drop lawsuits aimed at forcing them to drop the attempt.  This is the only good part of today’s announcement.  The threatened patchwork of regulations would have made doing business extremely difficult and MUCH more expensive.

The plan:
• Requires yearly 5 percent increases in fuel efficiency from 2012 through 2016, resulting in an average fuel economy standard of 35.5 miles per gallon in 2016. The previous plan had the standard at 35 in 2020.
• Cuts oil consumption by an estimated 1.8 billion barrels over the life of the program.
• Cuts greenhouse gas emissions by a projected 900 million metric tons.
• Supported by 10 car companies and the UAW.
• Sets one clear, national policy for all automakers, instead of standards from the EPA, Transportation Department, and a California standard that would apply to 13 other states.
• Gives automakers clarity, predictability and certainty about the rules, as well as flexibility to meet the expected outcomes.

The oil savings and emissions cuts are spurious at best. CAFE has been on the books for about 30 years, and has not resulted in any fuel savings. Why? Because by forcing fuel economy gains without any increase in fuel price, CAFE encourages more driving. The increase in driving miles has more than offset the decrease in fuel consumption per mile. Also offsetting the increases in economy has been a shift towards pickups and SUVs, which has also been driven (pun intended) by CAFE & other government policies.

So why did 10 automakers, including the 2 divisions of Government Motors, say they are in favor of this? 2 reasons: the political winds are blowing in such a way that they risk significant negative PR if they are seen to be unsupportive and 2. the commonization of the standards is a real benefit of the plan, as discussed above. You can bet, though, that GM and Chrysler were told that they will be there and they will look happy.

Obama at least did one thing that has been noticeably absent in previous discussions on fuel economy: he admitted that this will increase the price of cars and trucks in the US.  He also stated that the price increase will be made up in 3 years of fuel savings.  The government numbers assume that gas prices will be $3.50/gallon for the life of the program (2012 – 2016). One thing about cost increases in a competitive market is that there is no certainty that the OEMs will be able to increase their prices to make it up. And with the current state of the economy, raising prices is anything but certain. The cost increase, however, is very certain.

With every major automaker losing money, now is about the worst time possible to be adding at least several hundred dollars to the cost of the average vehicle. This is where I would normally say, “I hope the government knows what it’s doing.” But clearly, they do not.

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Chrysler today filed papers with the U.S. Bankruptcy Court to eliminate the franchise agreements of 789 (about 25%) of its dealers.  In a conference call today, Jim Press, Chrysler President and Steven Landry, Executive VP, NA Sales and Marketing/Global Service and Parts outlined the transition.  They said that the “rejected” dealers will be dealt with exactly the same through the end of their franchises, which will be June 9.  Chrysler will assist with the redistribution of the 44,000 new vehicles on the lots to other dealers in the areas affected.  They will also assist with the parts, if the dealers wish.  The dealers will no longer be able to sell new Chrysler vehicles, but they will still be able to service vehicles.  They will not be eligible for warranty work, though, as that work is reserved for franchised dealers.

There is no appeal process for dealers; however, the bankruptcy court has to approve the action.

Landry stated that the problem “is not too many dealers, it is too little industry.”  Press reiterated this point, calling the dealers Chrysler’s partners and said this has been a very difficult decision.

The number of jobs lost as a result of this action is not known, because many of the affected dealers are dualed with competitive brands or will be combined with other Chrysler LLC dealers.  Many also sell fewer than 100 units per year.

Every state except Alaska is affected by this action.  Pennsylvania (53) and Texas (50) have the most and several others have over 30 each.  23 states have 10 or fewer dealers losing their franchises.

Chrysler says that while they are rejecting 25% of their franchises, those 789 only represent 14% of sales.

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