There are plenty of puts and takes in the tentative deal the United Auto Workers struck with General Motors Co. (IW500/5) this week, but this much looks clear: Detroit carmakers dealing with already-higher labor costs than their international foes risk becoming even less competitive.
GM’s labor costs will rise $100 million a year just due to the increases in worker pay, which “could be an even bigger headwind” for Ford Motor Co. (IW500/3) and Fiat Chrysler Automobiles, according to RBC Capital Markets analyst Joe Spak. And that doesn’t even account for the cost of continuing the union’s generous health care coverage -- a tab Ford expects to rise above $1 billion next year.
“The economics of the deal look really attractive for the GM workers,” said Colin Lightbody, a former labor negotiator for Fiat Chrysler who’s now a consultant in Windsor, Canada. “This agreement will increase the competitive labor cost gap.”
GM’s average hourly labor costs -- including wages, benefits and other expenses -- were already about $13 above what international automakers such as Toyota Motor Corp. and Honda Motor Co. pay workers at their U.S. plants, according to the Center for Automotive Research. Ford’s costs are $11 an hour higher, while Fiat Chrysler pays a $5 premium.
The UAW will begin the process of ratifying its proposed contract with GM on Saturday, with workers casting ballots at locals across the country through Oct. 25. Assuming the deal goes through, the union will turn its attention to either Ford or Fiat Chrysler next. While the two companies will look for ways to tailor an agreement to their unique needs, the union will seek to broadly follow the economic pattern established by the pact with GM.
GM is seeking to offset wage concessions with buyouts of higher-cost production workers. It’s offering $60,000 early retirement payouts to as many as 2,060 employees.
Even if overall labor costs still go higher, it may be worthwhile as long as the automakers’ deals with the union give them room to maneuver on where models are manufactured and when output needs to be curtailed.
“They got the ability to continue to run the company without the union telling them what they can produce and where,” said Art Schwartz, a former GM labor negotiator who is now a consultant in Ann Arbor, Michigan.
Ford’s bargaining team is likely going to understand that concessions are “part of doing business” with the UAW, said Arthur Wheaton, director of the Worker Institute at Cornell University.
“The wild card is Fiat Chrysler, because it’s all new people at the bargaining table,” he said.
Fiat Chrysler Chief Executive Officer Sergio Marchionne, who died last year, played an important role in past contract talks with the UAW. Other key negotiators for the company and the union have retired or been implicated in an ongoing corruption scandal.
Sparser Signing Bonuses
There’s no desire at Ford or Fiat Chrysler to stomach a strike of the sort UAW has staged at GM. That walkout will last almost 40 days if GM’s 48,000 workers ratify the proposed pact next week.
The UAW issued statements earlier this month citing progress they were making with Ford and Fiat Chrysler while the GM deal was being hammered out. Should the two companies succeed in avoiding a strike, they might save some money by paying smaller signing bonuses -- they wouldn’t have to essentially compensate workers for wages lost during a walkout, as GM is doing with its record $11,000 ratification reward.
Four years ago, Fiat Chrysler went first in negotiations and paid roughly half the signing bonus of its rivals. Now that the company is more financially fit, it’s unlikely to get away with as big of a discount.
“I can’t see the UAW allowing FCA to go down 50% anymore, because their margins are pretty good now,” Lightbody said. “They’re gotten close to GM and Ford.”
Health care remains the most intractable cost as it reaches record levels of more than $20,000 a year for family coverage, according to a study by the Kaiser Family Foundation.
While the average American worker contributes 30% of the premium for family coverage, UAW members pay for just 3% or 4% of their insurance plans, according to the automakers.
During bargaining, GM quickly rescinded a request to have workers cover 15% of their medical coverage and have left it to others to cut that cost. The UAW zealously defends its health care benefits, viewing them as compensation for giving up raises and jobs for years as the Detroit carmakers struggled to survive.
Another concession the UAW won from GM is on the use and treatment of temporary workers, who’ve populated plants in greater numbers since GM and Chrysler reorganized in government-sponsored bankruptcies in 2009. They now represent almost 10% of the roughly 150,000 unionized workers at the Detroit Three.
GM agreed to give temps a path to permanent employment and more vacation days, and the highlights of the automaker’s agreement states the UAW will have stronger oversight over their use. While it’s possible the company negotiated wiggle room in this regard to keep a steady stream of at-will cheap labor on hand, the fine print of the proposed agreement hasn’t been made public.
The cost of this compromise could fall hardest on Fiat Chrysler, which has the most temporary workers, Wheaton said. In the end, though, both Fiat Chrysler and Ford are likely to settle for paying a little more than planned rather than risk disrupting the flow of fresh models into a shrinking U.S. auto market. Labor only accounts for 5% of the cost of a car, Wheaton said.
“When you’re fighting over only 5% of the cost, you have to ask yourself: ‘Why are we doing this?’” Wheaton said. “Why risk a billion to save $100,000?”