The purchase of Chrysler has been a huge story recently. The automaker aims to return to profits in ’08, but the main hurdle lies in its ability to clinch a new contract with the United Automobile Workers (UAW) union that reduces costs, particularly for health care. Will a private company be tougher for the auto union to deal with because the owners could be uncompromising, or can private equity investors fix Chrysler for good without a confrontation with the union?

The prospect of private ownership has alarmed Chrysler’s U.S. labor unions, which have come out strongly against the sale of the company, fearful that an investor might try to break up the company or slash costs, jobs, wages and benefits, as The Associated Press pointed out upon news of the sale. And Chrysler workers were even warned by union officials a few weeks ago that a private equity owner would be the worst thing that could happen to them.

By unwinding a nine-year-old merger between Chrysler and Daimler-Benz of Germany, “Cerberus is also taking on Chrysler’s $18 billion obligation for health care and pensions for employees and retirees,” The New York Times reported on the front page earlier this month. “Any efforts to sharply reduce those perks — which Chrysler can afford but says represent a cost burden of $1,500 a vehicle — will probably put it at odds with the UAW.”

The newspaper said that “the most obvious way” for the new owners to make money on their investment is by reducing the benefits that workers hold sacred.

Conventional wisdom holds that a private company would be tougher for the auto union to deal with because the owners could be uncompromising. According to Jerry Flint at Forbes, “This is nonsense,” as it “does not make much difference if the company is public, private or owned by the new president of France.”

Flint, who was once the national labor writer of the NYT and personally covered the negotiations between the UAW union and the automakers for 15 years, notes:

For starters, the current union contract runs into the fall, and Chrysler, no matter who owns it, must obey this agreement. The new private company can no more rush into bankruptcy as a means to pressure the union than the old public Chrysler could. That is because people are unlikely to buy cars and trucks from a bankrupt carmaker. If the company were to file for Chapter 11, the private owners, Cerberus Capital Management, would lose the $7.4 billion they paid. They might lose control of Chrysler as well.

Flint points out that Chrysler has been losing money due to “poor management decisions” — such as knocking thousands of dollars off vehicle prices and ordering overproduction a year ago — rather than due to union wages and benefits. The three-quarter billion-dollar operating loss in the first quarter should have been a profit but was not because Chrysler is knocking thousands of dollars off the price of its new cars and trucks.

Chrysler aims to return to profits in 2008. The main hurdle, according to analysts, is its ability to clinch a new contract with the UAW that reduces costs, particularly for health care, when the current contract expires in September.

“That unfunded health care really determines how much the business is worth,” Nomura analyst Michael Tyndall recently told Reuters.

In mid-July, automakers and the UAW will begin talks on a new contract. The struggling companies likely will demand big concessions in wages and health care, and the union, while considerably weakened by layoffs, “will wave its intimidating $900 million strike fund,” Forbes noted last month.

Whether there will be concessions in the new contract, even on health care, is not the question, according to Flint. Rather, “how large and how many concessions” are the question.

The new Cerberus owners already know a bit about UAW bargaining, as their investments in the auto industry go beyond Chrysler. Last year GM sold a 51 percent stake in its financing arm, GMAC, to a consortium led by Cerberus in a deal worth about $14 billion. Now it will own Chrysler Financial.

Because the UAW never gave Chrysler the same health care concessions it gave to GM and Ford, “the union could now offer Chrysler the same accommodation as a conciliatory gesture.”

Yet there is another factor, according to Flint:

The Canadian Auto Workers (CAW), a different union (split off from the UAW), is willing to bend over backward to save jobs in Canada. In February, Chrysler asked its workers at its Ontario plant (three shifts a day making the Chrysler 300 and other cars) to give up extra pay in exchange for a promise of more work. At first, the Canadian union voted down the proposal. Then the CAW leadership came in and told the workers that their jobs were in jeopardy. The workers voted again and gave up the extra pay. The UAW in the U.S. should know it must make concessions or some Chrysler jobs could go to Canada.

UAW President Ron Gettelfinger, who sits on DaimlerChrysler’s supervisory board and had publicly opposed a sale to a private equity buyer, called it the best choice. Gettelfinger, speaking earlier this month in Detroit, said he made a last-ditch effort to keep Chrysler with Daimler over the weekend, but when that failed, he decided to embrace the Cerberus purchase, AP reported. In a statement today, Gettelfinger said that the transaction with Cerberus was “in the best interests of our UAW members, the Chrysler Group and Daimler,” as Forbes previously notes.

It hasn’t made a single cost-cutting or marketing move yet, but Cerberus Capital Management’s massive $7.45 billion deal to buy 80 percent of Chrysler is already paying off, according to Ad Age.

In research done last week, CNW Marketing Research found that of the 1,600 people it surveyed who intended to buy a car, 41 percent were aware of the for-sale sign on the automaker. Of that group, almost three-quarters — 73 percent — said they were hesitant to put a ChryslerGroup product on their shopping list. Now 28 percent said they would consider Chrysler.

“The automaker’s sales are expected to rise 4.4 percent this year simply because it’s under new management,” Ad Age reports CNW Marketing Research President Art Spinella as having said, “providing yet more evidence that consumers factor the well-being of a corporation into their purchasing decisions.”

Really, though, in the end, will the new owners turn around Chrysler by getting labor concessions, or by figuring out how to sell more vehicles that consumers really want and getting more dollars for each sale?

Primary Resources:

Forbes

NYT

Ad Age