Higher UAW wages will push Detroit 3 to find cost solutions

Tier 2 phase-out makes pacts 'more expensive'

The contracts widen Detroit's labor-cost gap with the so-called transplant automakers, which pay an average of $47 an hour in wages and benefits.

DETROIT -- General Motors and Ford Motor Co. will give signing bonuses totaling nearly $1 billion to hourly workers who narrowly ratified new labor contracts this month, or about $160 for every vehicle the companies are on pace to sell this year in the U.S.

But the bonuses, pay increases and benefit improvements workers at GM and Ford are getting, partially reversing years of concessions, will have a negligible effect on the companies’ bottom lines, analysts say.

Even Fiat Chrysler Automobiles, whose labor costs are expected to rise nearly $2 billion over the life of the four-year contract, won’t bear anything close to the heavy burdens of past UAW deals, particularly because retiree health care is no longer a factor.

“I think it’s more expensive than they were expecting,” said Art Schwartz, a former top negotiator for GM who now works as an industry consultant. “But they can make that up in all kinds of different ways. I don’t think this is going to interfere with profitability.”

That contrasts with executives’ assertions over the past several years that maintaining the two-tier wage scale created in 2007 was critical to keeping the automakers healthy, even as profits started piling up. Through three quarters this year, GM reported pretax profits of $8.3 billion in North America, Ford posted $6.6 billion, and FCA earned $3.4 billion.

“We have got to be careful [not] to say, ‘Well, let’s start disrupting the system,’” Joe Hinrichs, Ford’s president of the Americas, said last year. “The system is working.”

Marchionne: Deal is "livable."

But after FCA workers rejected an agreement that kept the two tiers, all three companies agreed to mostly drop the unpopular system, essentially in exchange for giving workers less job security and shifting production of less profitable cars to Mexico. Even so, ratification of GM’s deal was threatened by opposition from skilled-trades employees, and Ford’s contract was headed for defeat until UAW leaders saved it by rallying a wave of support from workers in Ford’s hometown of Dearborn, Mich., the last group to vote.

In the end, all three automakers -- and perhaps most important, their shareholders -- got acceptable deals, even if executives were hoping for more favorable terms.

“We will have to find ways to offset the increase in cost … [because] somehow we need to increase the distribution to our workers,” FCA CEO Sergio Marchionne said during a conference call Oct. 28. “And so, it’s livable. I will not, on the basis of this agreement, change any of the product plans that we have put together, nor would I change our view as to what gets allocated.”

FCA’s labor costs, including the cost of the benefits workers receive, will rise 19 percent, from $47 an hour this year to $56 in 2019, according to calculations by Kristin Dziczek, director of the industry and labor group at the Center for Automotive Research. She estimates GM’s will rise 9.1 percent, from $55 to $60, and Ford’s will increase 5.3 percent, from $57 to $60.

At press time, officials at GM and Ford, which both reported record North American profits in the third quarter, had not spoken publicly about how the deals will affect their businesses. Both contracts were ratified Nov. 20. Ford said its executives would discuss the deal on a conference call on Monday, Nov. 30.

Transplant gap widens

The contracts widen Detroit’s labor-cost gap with the so-called transplant automakers, which pay an average of $47 an hour in wages and benefits. But the Detroit companies still will be far below their 2007 average of $78 an hour.

On a per-vehicle basis, Dziczek projects that GM’s costs will drop $24 from 2014 to 2019, to $2,350. GM is offering retirement incentives to 4,000 production workers, so it can use younger, cheaper replacements, and it can hire more temporary workers to reduce the cost of pay increases for permanent employees.

Ford will spend $199 more per vehicle during the period, and FCA, which has the highest percentage of Tier 2 workers who now get a path to full wages, will spend $729 more, Dziczek said.

The contracts narrow FCA’s labor-cost advantage over its crosstown rivals, but FCA, whose profits are lower than GM’s and Ford’s, still got the least expensive of the three deals. Richard Hilgert, an analyst with the research firm Morningstar in Chicago, said FCA should be able to absorb the cost increases from the new contract without much difficulty.

“They’ve got room to do more work on the operations side and the supply side, and that should give them some wiggle room on the labor side,” Hilgert said. “The contract isn’t going to prevent the company from improving on its overall consolidated margins.”

The deals include 3 percent raises for veteran workers this year and in 2017, along with 4 percent lump sums in 2016 and 2018. Most Tier 2 workers can now work their way up to full wages within eight years, though people hired by FCA from now on and workers at some parts plants would never reach the top pay level.

FCA has paid out signing bonuses of $3,000 for Tier 1 workers and $4,000 for “in progression” workers, formerly known as Tier 2. GM will give its workers an $8,000 signing bonus this month, while Ford agreed to $10,000 payouts, including a $1,500 advance on next year’s profit-sharing check.

Settles: Big win for Ford workers

Less costly, more flexible

UAW Vice President Jimmy Settles, who headed negotiations with Ford, called the deal he reached “one of the richest agreements in the history of UAW-Ford.” And indeed, all three deals give workers the biggest gains they have seen in a long time, though many complained that some sacrifices — including cost-of-living adjustments to wages — were not reversed.

But Schwartz, who worked in labor relations at GM for 24 years, said the improvements in this round of contracts are less than what the UAW used to get when Detroit controlled a larger percentage of the U.S. market.

In addition, the contracts give the automakers flexibility to cut costs more easily now than before the recession, when workers who were laid off could keep collecting almost full pay through the Jobs Bank, which came to epitomize Detroit’s dysfunction. That will help the companies avoid getting back into trouble during the next downturn in sales.

“I can think of a bunch of contracts that were more expensive than this,” Schwartz said. “If you rank it among the historical contracts, it’s going to be low.”

You can reach Nick Bunkley at nbunkley@autonews.com -- Follow Nick on Twitter: @nickbunkley

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