Big 3-UAW contracts transform industry

October 25, 2011

Big 3-UAW contracts transform industry

2011 deals laying foundation for automakers’ success, analysts say


Whatever you may think about Detroit’s automakers and their de facto partner, the United Auto Workers, both sides are delivering three things this town hasn’t seen in a very long time: real profits, flattened fixed costs and more jobs-producing investment.

Less than three years after General Motors Corp. and Chrysler Group LLC collapsed into a federally induced bankruptcy, imperiling the UAW in the process, the Detroit-based industry is emerging from this fall’s national contract talks generating jobs, cash, an optimism founded on the hard nuts and bolts of success.

And cooperation. Ratification of the union’s agreement with Chrysler appeared almost certain Monday, as nearly 58 percent of 1,881 members at Jefferson North Assembly voted in favor of the third contract to bolster the competitive posture of Detroit’s automakers for the next four years.

Break-even points? At roughly 10 million cars and trucks sold per year, they are far lower than the 13 million-plus market is now. Credit ratings? They’re nearing the threshold to investment grade again, the precondition for restoring dividends and attracting new investors. Labor costs? Comparatively flat, with larger proportions of total compensation for hourly workers tilted toward richer profit-sharing and other performance bonuses.

This is not the Detroit auto industry of 2007, much less a decade or more ago. These are the signs of forward progress, of stronger and more profitable companies, of a New Detroit grounded in cooperation, competitive awareness and economic reality, not the denial, dysfunction and arrogance of the failed past.

“You can go back 30 years” or more “and this industry has never been this strong, purely strong,” says Eric Selle, managing director of fixed-income analysis for J.P.Morgan & Co. in New York. “They’re making money on all their products, or they’re not making them. The mentality has definitely changed. This is a new industry.”

It had to be. The shame of bankruptcy and public opprobrium, paired with the unforgiving financial reality of the global market meltdown, forced wrenching restructuring and midwifed new attitudes evident not only in the agreements, but in how the parties reached them and what that says about the future.

Most of what it says is good.

For the first time in a long time, these contract talks are ending with a sense that the automakers and their union crafted deals that are defensible; that both sides can withstand the pressure of recession, partly because they’re profiting at near-recession levels today; that $13.3 billion in capital will be reinvested in American sites to create or replace 20,500 American jobs, unlikely four years ago; that the Detroit industry has a promising future after such a bleak past.

“Nothing has been done in the contracts that would derail the progress that’s been made,” says Art Schwartz, a longtime GM bargainer who is now president of Labor and Economics Associates, an Ann Arbor-based consulting firm. “The UAW is doing things that they never would have done before. They’re in a life-saving mode of their own.”

Yes, they are because they have to be. Since 2007, estimates the Ann Arbor-based Center for Automotive Research, the Detroit automakers have cut 130,000 dues-paying UAW members from their payrolls. That leaves just 108,000 at all three companies to vote on this fall’s contracts.

And more. The UAW of President Bob King shed the confrontational rhetoric of the past and reached beyond the culture of entitlement (even if some of its members didn’t) to craft agreements that are as responsible as they are financially defensible. Labor costs for GM and Ford Motor Co. are expected to increase by 1 percent over the life of the four-year deals. Base wage rates will hold steady, enabling the automakers to hold the line on pension liabilities, a trigger point for Wall Street.

Fat signing and profit-sharing bonuses for hourly workers — as high as $16,700 per member at Ford — could outstrip the financial gains that otherwise would have accrued to the members through increased base wage rates. If so, that’s a good problem for many autoworkers to have, and it’s dollars and cents evidence they are doing their part.

Total labor costs are trending in the right direction, even as foreign and domestic producers are expected to see labor cost inflation running at roughly 1.5 percent annually. Going into this fall’s bargaining, Ford’s all-in wages and benefit costs for hourly workers totaled $58 per hour. GM tallied $56 per hour, and Chrysler booked $51 per hour — roughly equivalent to Honda Motor Co. and $4 per hour cheaper than Toyota Motor Corp.’s Georgetown, Ky., facility, the Japanese automaker’s most costly operation in North America.

“Labor is no longer a strategic risk component for the Detroit Three,” says Sean McAlinden, executive vice president of research and chief economist for the Center for Automotive Research. “That is a major, major, major issue.”

Management needs to deliver, too. The sum total of cuts in labor costs — off-loading retiree health care costs to a union-controlled trust fund, holding the line on inter-related increases to base wages and pensions, introducing second-tier, lower wages for new hires — makes whatever management pays its line workers a much smaller part of the overall cost to produce a car or truck.

Put another way: These agreements, following on bankruptcy restructuring and the concessions of 2005 and ’07, mean labor can no longer be the stock excuse for a Detroit failure in the marketplace. Their cars, trucks and management savvy can be, instead.

Detroit’s automakers no longer have jobs banks that pay people not to work, but Toyota and Honda, to name two, effectively do. Fixed labor costs are no longer a figurative millstone crushing the companies in tough times amid comparatively lower sales volumes.

Also, debt-laden balance sheets, meager cash generation, contentious labor relations and disfavor among investors are being replaced by lighter debt loads, enviable cash flows and the prospect of investment-grade credit ratings, starting with Ford.

“Frankly, we can realistically discuss (profit) margins of over 5 percent,” adds McAlinden. “For 10 years, GM couldn’t get realistically above 11/2 percent. Clearly, we are far, far more competitive.”

Where do we go from here? Forward, away from the myriad excuses, self-inflicted wounds and industrial-welfare economy that proved Detroit was following business rules no one respected nor emulated because all they did was model failure.

“Significant pressure points have been eliminated,” says Warren Browne, a retired GM executive and now a vice president with Automotive Compass LLC. “It’s sized correctly for performance. These guys can really perform now.”

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