From today's Globe and Mail:
GM deal 'a black day' for Canada's auto sector: One of the key pillars supporting Canada's long-standing competitive advantage in the auto industry began crumbling Wednesday, less than a week after another one collapsed.
General Motors Corp. and the United Auto Workers reached a deal that shifts the burden of retiree health-care costs for U.S. workers to the union. The agreement dramatically reduces GM's burdensome cost structure and once it's followed by Chrysler LLC and Ford Motor Co. , will reduce the health-care advantage Canada has used for more than a generation to help lure automotive investment to this country...
GM will transfer its $51-billion (U.S.) retiree health care obligation to a trust, called a Voluntary Employees Beneficiary Association or VEBA, and finance it with a cash infusion of about 70 cents on the dollar or $36-billion.
That move will trim its average labour costs – including benefits – by about $18 or $19 an hour, Deutsche Bank AG auto analyst Rod Lache estimated. Average hourly U.S. labour costs will fall to about $55, close to the $48 that Japan-based auto makers are estimated to pay their U.S. workers.
The notion that the US arm of GM has suddenly become more competitive comes from not understanding the difference between marginal and average costs. That $19/hour is not disappearing; it's being capitalised and written off as a dead loss. Marginal costs - what it costs to actually produce an extra car - are what matter, and those haven't changed.
CAW economist Jim Stanford described shifting the retiree health-care burden to the union as simply a shell game.
The U.S. auto makers will still be paying for the health care of their active employees, Mr. Stanford pointed out and retiree health costs are irrelevant when it comes to deciding where investments are made.
Jim Stanford has it right. Too bad the story wasn't written from that perspective.