Big Three-UAW Contracts Even the Playing Field -- EventuallyBy Michelle Krebs November 18, 2007
After nearly four months of earnest talk, surprise strikes at General Motors and Chrysler LLC and some creative wheeling and dealing, American carmakers finally have new labor agreements -- ones that almost wipe out the cost advantage enjoyed by Asian rivals operating in the U.S. without union contracts.
Sean McAlinden, vice president of research at the Center for Automotive Research (CAR) in Ann Arbor, Mich., said it will take U.S. carmakers two to four years to reap the benefits of all the changes embedded in their new contracts with the United Auto Workers.
But the cost savings are genuine and substantial, he said.
Contract Changes Save Billions
The contract changes could save GM nearly $1,000 per vehicle, or about $4 billion annually in labor costs, McAlinden estimated.
"It will take a while for (the contract) to kick in," GM Vice Chairman Robert Lutz said. "But when it does it will have eliminated about 70 percent of the (cost) gap. Our labor guys are going to have to keep working with the UAW to address the other 30 percent. We're definitely in a much better position."
Ford expects to reduce its spending on health-care for active and retired employees by $2 billion annually. "The contract terms significantly improve Ford's competitiveness," Ford CEO Alan Mulally said.
Average Worker Wage Cut
Overall, contracts will cut the average wages of workers at all three companies, which are basically frozen at $28 per hour under the new agreement. As workers retire, the contracts require the companies to hire new workers, but the new employees will get an average of $16 per hour.
At GM and Chrysler, the new workers can transfer to assembly line jobs where they will get $28 per hour. However, those new hires won't get post-retirement health care and the defined benefit pension plans, perks older workers enjoy. At Ford, even new workers on the assembly line will get the lower wages and reduced benefits, McAlinden said.
As GM replaces older, more expensive workers with new employees, its overall labor costs will fall close to those of Toyota, said Greg Gardner, an analyst with Harbour Consulting in Troy, Mich.
Meanwhile, as the world's most profitable automaker, Toyota is certain to face intense pressure to raise wages, noted Bernd Swiecki, a CAR researcher who helped prepare the center's post-bargaining analysis of the new contracts.
Costly Transition from Old to New Contract
However, the transition from the old to the new benefit system isn't cheap and will stretch the financial reserves of the domestic companies.
Over the next two years, GM, which has the largest retiree population, will transfer $32 billion to the new Voluntary Employee Benefit Association (VEBA) created by the contract. Ford owes $13.6 billion to its VEBA. Chrysler will pay $8.8 billion to its new retiree-health-care trust.
Once the retiree health-care liabilities are removed from company balance sheets, the gap in labor costs could drop to $250 per vehicle or even less, Gardner estimated.
In 2003, Toyota labor-cost advantage on cars built in the U.S. was roughly $2,500 per vehicle. Earlier concessions on health-care had helped reduce the gap to about $1,400 per vehicle at the beginning of the year, McAlinden says.
Automakers Get More Flexibility
The new four-year contracts also give domestic car makers critical operating flexibility. They have actually opened substantial labor cost-advantage of $9 per hour over European companies such as Volkswagen, making the U.S. a more attractive place from which to export vehicles, Swiecki said.
Joe Barker, director of North American forecasting for CSM Worldwide in Northville, Mich., said the new contracts also give the domestic carmakers improved flexibility to better align supply with demand. In the past, GM, Ford and Chrysler piled on incentives to keep plants running. "We think they're going to be in a better position to back off their fleet sales and to protect their residual values and the value of their brands," Barker said. "They're not going to have to keep a plant running because of the contract."
Barker's point was driven home in a dramatic way just days after workers ratified a new agreement at Chrysler when the company's management announced plans to reduce operations at five different assembly plants. The cuts made in response to slowing sales eliminate between 8,500 and 10,000 jobs -- or more than 20 percent of its hourly workforce. GM also has cut shifts and ordered layoffs since signing its new contract with the UAW. Ford is preparing to offer a new round of buyouts that will trim its blue-collar workforce of 54,000. GM also is expected to offer new buyouts in early 2008 to its 80,000 remaining workers.
Jobs Bank Scaled Back
Workers have less protection under the agreement. Since the mid-1980s, UAW members had the right to stay in the bank indefinitely while collecting full pay for doing no work or for helping with community service projects. The Jobs Bank remains in the new contracts, but union members are only protected for 24 months.
While in the Jobs Bank, workers can turn down two job offers that would require them to move to another plant. If they refuse to move more than two times, they can be dropped from the payroll under the new rules, according to the union dissidents.
"The new contract will allow the Big Three to finally realize the full value of the productivity improvements that they have put into the plants in the last decade," said Swiecki.
The contract also eliminates dozens of job classifications, Swiecki said. At Ford alone, the number of separate skilled trades classifications is expected to drop from 358 to 22.
Union Militancy Gone
UAW President Ron Gettelfinger did achieve one key union objective; he pushed GM and Ford to keep small car production in the United States for at least one more product cycle. Without the commitments included in the new contracts, both companies were prepared to shift production of small vehicles, such as the Ford Focus and Chevy Cobalt's replacement, to Mexico, union officials said privately.
While picket signs came out briefly at GM and Chrysler, the contracts also signal a decided shift away from the union militancy that had long defined the UAW. Younger workers today have fewer expectations, than those hired 25 years ago, noted one now-retired union activist. "The younger guys have a different perspective. They're just trying to get by," he said. "Unfortunately, it's going to be harder for them."
Photo by Ford
UAW President Ron Gettelfinger, left, shakes hands with Ford Executive Chairman Bill Ford after the two sides reached a tenative contract.