GM suit against Fiat Chrysler could upend crucial talks

General Motors brought an unprecedented racketeering lawsuit against Fiat Chrysler this week. It could not have come at a worse time.

Fiat Chrysler is in the process of two crucial negotiations at the same time: labor talks with the United Auto Workers union on a new contract, and merger talks with French automaker PSA Group. Fiat Chrysler needs each set of talks to go well, but the GM suit could complicate both discussions.

Fiat Chrysler’s long-term survival could very well depend on closing the deal with PSA to give it the scale and efficiencies it needs to develop the next generation of electric and self-driving cars. But the company’s previous efforts at mergers with other automakers have failed and terms of this proposed deal are still being negotiated.

While the lawsuit may not directly disrupt those merger negotiations, it stands a very good chance of disrupting ongoing labor talks. And Fiat Chrysler’s success in getting an affordable contract without a costly strike could determine if the merger gets done.

An attractive merger partner

Citing criminal charges in an ongoing probe into the UAW, the suit alleges that bribery of union officials by Fiat Chrysler executives got the union leadership to give the automaker an unfair cost advantage in the 2011 and 2015 labor negotiations, costing GM billions of dollars. The racketeering suit by an automaker against a rival is unprecedented, analysts say.

Fiat Chrysler called the suit “meritless” and an attempt to sabotage its negotiations with the union and PSA.

“We are astonished by this filing, both its content and its timing. We can only assume this was intended to disrupt our proposed merger with PSA as well as our ongoing negotiations with the UAW,” said Fiat Chrysler in a statement.

Fiat Chrysler’s recent record third quarter operating earnings make it an attractive merger partner for PSA.

Those profits were achieved due to labor costs that are far cheaper than those at GM or Ford.

Fiat Chrysler saves between $5 and $7 an hour because of the fact that so many more of its workers are paid at a lower pay and benefit scale established for new hires in 2007. The differences in negotiated pay is at the center of GM’s lawsuit.

The union just got GM and Ford to agree to move those lower-paid workers to the top pay scale over the four-year life of their new contracts. If Fiat Chrysler agrees to a similar deal, that would hit its profits much more than its rivals.

“I don’t know if the labor talks can get more difficult than they already were, especially with a rich pattern set at GM and Ford,” said Kristin Dziczek, vice president of industry, labor and economics at the Center for Automotive Research. “The Fiat Chrysler workers are going to have a difficult time accepting a contract that is anything less.”

The bribery scandal has ensnared a number of union and FCA officials. Three former Fiat Chrysler executives have pleaded guilty to federal charges and were sentenced to prison. Seven other people associated with the union have also pleaded guilty in the scandal.

Industry experts say the suit brings new attention to those misdeeds. As one expert who did not want to be identified due to the delicacy of the issue noted, the facts had been known, but the suit made connections between the events in a way that put them in a new light.

So just as GM’s plans to close four US factories angered membership and likely made a strike there inevitable, the bribery scandal at Fiat Chrysler has angered membership there, and will likely make Fiat Chrysler pay more for a deal to avoid a strike.

“The scandal makes it’s harder, but I don’t know how much harder it can get,” said Dziczek.

Why Fiat Chrysler needs these deals

The company needs the deal with PSA if it is going to be competitive long term.

It has been clear in the decade since Fiat bought Chrysler’s assets out of bankruptcy that it needed another deal to give it the size to be competitive with other major global automakers. It needs to spread research and development costs over a greater number of vehicles sold globally. That need only grew as automakers have been forced to spend billions on research and development of a new generation of electric and self-driving vehicles.

A deal with PSA, the maker of Peugeot, would create a new global automaker larger than GM.

The merger deal was always going to be difficult to close with the French government, the owner of a major stake in PSA. The government is concerned about protecting jobs at French auto plants.

PSA said Thursday it had no comment on the GM suit or the impact it would have on negotiations with Fiat Chrysler. That deal would only become more difficult if Fiat Chrysler’s labor situation worsens.

“I think for now PSA will carry on. But this is certainly potentially a big bump in the road,” said David Leggett, auto analyst with GlobalData, a data and analytics firm. “The industry is littered with mergers that never happen. This proposed merger still has quite a long way to go.”