DETROIT -- Since John F. Smith Jr. took command of General Motors Corp. in November, investors and analysts have praised his restructuring skills. GM stock, following earnings improvements in the past two quarters, has appreciated steadily.
From a low on Mr. Smith's watch of $29.75 on Nov. 12, the stock closed yesterday at $40.375 a share, down 87.5 cents, on the New York Stock Exchange.
The majority of analysts following GM, under the assumption that cost-cutting will continue, are recommending the lagging stock.
But that optimism could evaporate swiftly if the automaker fails to win concessions in health care, job security and other labor costs during this summer's collective bargaining with the United Auto Workers union.
Cost-cutting has worked because General Motors finally has been able to wrench concessions from suppliers, reduce dividends to shareholders and even trim white-collar employment and compensation. Now the UAW is being invited to the party,pending expiration of its three-year agreement this September.
Negotiations begin next month and investors will be watching closely to see whether GM management and union leaders can solve the automaker's disadvantage in labor costs, which are high especially compared to foreign competitors.
Jack Kirnan, automotive analyst for Salomon Bros. Inc., echoes Wall Street's view that union wages, health-care benefits and work rules must be reduced to reflect the reality of worldwide competition, some of it on American soil.
No one -- certainly not Mr. Smith -- believes GM can afford to perpetuate multi-billion dollar job security packages for redundant workers or premium medical coverage with no deductibles for hourly workers, a benefit the company's salaried workers have already relinquished. GM needs the savings to finance $7 billion in annual outlays for new models and to shrink a pension liability that exceeds $14 billion.
"If GM can't get major cost savings from the union, it would be adisappointment," Mr. Kirnan said. "It would signify the company isn't willing to fight for the flexibility and cost structure to compete."
The first two months of talks will be devoted mostly to less significant contract issues. The real action won't take place until Labor Day draws near. But GM stock could take a heavy hit in early September when the union chooses the negotiating target from among the Big Three.
The contract negotiated with the target company traditionally establishes the pattern for the contracts of the other two automakers.
In the last contracts, negotiated three years ago, GM was the target.
Should the UAW select Ford or Chrysler rather than GM, the company could lose the opportunity to address costs specific to it that are not shared by its rivals.
This time around, Ford or Chrysler negotiators might agree once more to generous benefits for long-term jobless, figuring that only GM, with too many workers, would have to pay. Holders of Ford and Chrysler stock might gain some incremental advantage over shareholders of GM.
But in the long run, holders of all three stocks stand to lose unless the industry can find cost-cutting solutions the union will bless.