A promise that Magna International Inc. made to General Motors Corp. has landed the auto parts giant in messy negotiations as it attempts to reach a contract with the United Auto Workers union that will finalize its $435-million (U.S.) acquisition of New Venture Gear Inc.
The difficulty centres on a contract Magna won with GM to manufacture transfer cases for the next generation of the auto maker's full-sized pickup trucks and sport utility vehicles.
To win the contract — for vehicles that go into production beginning in 2006 — Magna promised GM that it would build a plant in Muncie, Ind., Magna officials said Wednesday.
“We don't, at this point in time, think we're going to back out of that commitment,” said Pat Cerullo, a senior Magna executive who will work on co-ordinating New Venture into Magna's existing operations.
But the transfer cases now are assembled at the New Venture plant in Syracuse, N.Y. They represent the biggest single chunk of business at that operation, leaving Magna with the difficult task of trying to reach a deal with the UAW when the work that provides jobs for about 900 of 3,100 people is scheduled to be shifted elsewhere.
New Venture, which makes components and parts for all-wheel-drive and four-wheel-drive systems, was originally created as a joint venture between GM and the Chrysler division of DaimlerChrysler AG.
That partnership broke up last year, leaving Daimler as the sole owner. A new partnership between Magna and Daimler will buy Daimler's stake in New Venture. Magna will hold 80 per cent of the joint venture and buy out the remaining 20 per cent in 2007.
But the first step of the purchase is contingent on Magna reaching a deal with the UAW.
“One issue above all others is critical — labour has not bought into this thing yet,” one industry observer said Wednesday. Talks between Magna and the UAW began earlier this week, company officials said.
Magna has some requirements in the new contract, chief financial officer Vince Galifi said Wednesday.
“It's imperative that our agreement with the UAW include certain key Magna principles, including the recognition of our employee charter and corporate constitution [and] additional flexibility in the work rules,” Mr. Galifi told analysts.
The purchase of New Venture makes sense for Magna, company officials and analysts said Wednesday, because it positions the company well in what is expected to be a growing market for all-wheel-drive and four-wheel-drive components in coming years.
“We believe that there's a tremendous amount of opportunity to grow this business,” Mr. Galifi said.
New Venture will form a key pillar of the company's new Magna power train division, which will tackle the growing market.
The purchase also significantly broadens Magna's customer base in the all-wheel and four-wheel-drive market.
Some analysts raised questions, however, about the impact on New Venture of shifting a major chunk of the business out of the plant.
Mr. Cerullo said New Venture might assemble some of the parts and ship them to the new plant in Indiana for the GM program.
“Can we find other business to replace that GM business that we're going to put in Muncie? Those are discussions that we still have to have with our customers,” he said.
Daimler was angered last year when Magna won the contract for the next generation of GM business because at the time, it had the New Venture operations up for sale.
Industry sources said there were high-level discussions last year between Magna and Daimler — which is the Canadian company's largest customer — about how to resolve the difficulty.
“I think they were forced into [the purchase] and they've done the best they could,” one analyst said Wednesday.
One fact that supports that comment is that Magna is not buying the land on which the plant in Syracuse sits. It will continue to be held by DaimlerChrysler
In addition, union workers in Syracuse will have the right to rejoin DaimlerChrysler in 2007, when Magna buys out the auto maker's 20-per-cent stake in the joint venture.
Union officials in Syracuse could not be reached for comment.
Magna shares closed at $105.21 (Canadian) on the Toronto Stock Exchange Wednesday, up 21 cents.
