Despite slow sales, automakers are leery of closing plants

Plant closings are expensive
Big 3 plant closings are unlikely in the short term for 3 reasons.

1. The UAW contract prohibits them through 2003. Automakers don't want to fight the union.

2. Plant closings trigger expensive worker benefits.

3. Companies must pay for the environmental cleanup of closed plants.

General Motors' decision to close its Ste. Therese, Quebec, assembly plant is unlikely to trigger a run of permanent plant closings.

But a prolonged sales slump would prod automakers to cut capacity - and make plant closings a contentious issue for U.S. automakers' 2003 negotiations with the UAW, industry observers say. The debate would center on the current contract's prohibition against plant closings.

"It's not going to be a pretty sight," said Michael Robinet, director of forecast services for CSM Worldwide in Northville, Mich. "When they signed those contracts, it was the equivalent of a love-in."

Some Wall Street analysts are pushing the Big 3 to tackle the UAW earlier. Analyst Nicholas Lobaccaro of Lehman Brothers Inc. last week criticized GM for leading the move to interest-free car loans, rather than cutting production and considering more plant closings.

Lobaccaro suggested that the Big 3 free themselves from "the most burdensome components" of the current contract.

"Certainly the events of the last few weeks should allow a reopening of the contract," Lobaccaro said, referring to the terrorist attacks.

'Address reality'

But, he added, the critical need is to reduce overhead, with or without plant closings.

"A significant reduction in the cost structure is long overdue," Lobaccaro said. "I think that this causes them to address reality."

A UAW spokesman said the union has not been approached about reopening the contract. The Big 3 are tight-lipped about cost-cutting plans. Ford spokeswoman Cheryl Eberwein said, "Nothing's off the table, but at this point nothing has been decided."

Spokesman Tom Wickham said GM is "abiding by the contract that we signed in 1999."

Ste. Therese is under the Canadian Auto Workers contract and is not subject to the UAW ban on plant closures. The plant, down to one shift, assembles the slow-selling Pontiac Firebird and Chevrolet Camaro. It will close in September 2002.

The Chrysler group said a restructuring will close several plants in Mexico and South America this year. It may close the Pillette Road assembly plant for Dodge Ram vans and wagons in Windsor, Ontario, in 2003.

A further rush to close plants is unlikely for several reasons. GM has carefully rebuilt its union relations in the United States. In Germany, its Adam Opel AG subsidiary placated unions by avoiding plant closings in its revival plan, called Olympia.

But the equally compelling reason is that plant closings result in environmental cleanup costs and expensive worker benefits. Sean McAlinden, director of the economics and business group for the Center for Automotive Research in Ann Arbor, Mich., said supplemental unemployment and jobs-bank benefits keep laid-off workers, on the payroll for years.

"I don't think you're going to see any near-term plant closing lists," McAlinden said. "Shutting down plants officially and permanently doesn't really save you any money in the short term."

Likely alternatives

Automakers are more likely to pursue temporary furloughs and gradual work-force reduction, he said. GM and Chrysler already are cutting head count through attrition under agreements with the UAW. Ford is likely to seek a similar deal, McAlinden said.

"Some Ford plants are still replacing retirees," he said. "That's something GM isn't even pretending to do."

Overcapacity also is likely to affect transplants if the U.S. market enters a sustained downturn. Analysts say Japanese and Korean companies have relied on U.S. sales as their home markets suffered.

"They're already sitting on excess capacity," said Jeff Schuster, senior manager for forecasting and product planning at J.D. Power and Associates. "Korea is. Japan certainly is, as well."

That means Asian makers could delay plans to build or expand U.S. plants. Rapid expansion of the plant Honda is building in Lincoln, Ala., could be postponed, as well as Hyundai's plan for a U.S. plant, Schuster said.

Said Schuster: "It would certainly cause them to re-evaluate the investment, at least from a timing perspective."

You can reach Dave Guilford at dguilford@crain.com

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