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Ford Wants to Close $8-an-Hour Labor Cost Gap

Could prove contentious issue during upcoming auto talks.

by on May.09, 2011

Ford CEO Mulally's huge pay package could make it difficult to win UAW concessions.

In an industry where even a nickel’s added cost can make a competitive difference, Ford is dealing with an issue of dollars and sense that could turn into a big issue as it heads back to the bargaining table with the United Autoworkers Union.

The maker says it currently is paying its U.S. union workers $8 an hour more than what non-union factory employees make at the “transplants” operated by makers like Toyota, Honda and Hyundai.  On average, Ford employees are earning $58 an hour, including wages and benefits, compared to the average $50 cost of labor at foreign-owned factories.

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“We cannot continue to have a cost gap with the competition and still be able to make significant U.S. investment and create new jobs,” the automaker emphasized in a blog posting on the fordahead.com website that it set up to discuss bargaining issues. “For Ford to be fully competitive in the years ahead, we’ll need to focus on closing the gap even more.”

The second-largest American automaker has generally declined to discuss bargaining issues, part of a joint union-management strategy to avoid the sort of confrontational tone that has traditionally colored the start of negotiations.  But the cost gap is certain to be one of the key issues Ford plans to put on the table, and it appears the maker could be presenting its case directly to workers hoping they will pressure UAW negotiators to place jobs ahead of wages and benefits as a new contract is hammered out.

The $58 figure is still significantly less than what Ford had been paying.  The maker won significant concessions from the Autoworkers Union in 2007, and again in 2009 as its two cross-town rivals struggled through bankruptcy.  Eventually, labor costs could decline simply from those givebacks, as Ford (and General Motors and Chrysler) will have the ability to hire many of its future employees at a lower second-tier wage rate.

Chief Financial Officer Lewis Booth last year estimated the end figure could average out to just $50, making Ford “close to being fully competitive.”

Meanwhile, the current $58 figure includes about $2 an hour derived from the big profit sharing checks Ford issued, reflecting its huge $6.6 billion profit last year.  The maker actually issued larger profit sharing bonuses, averaging $5,000 per UAW worker, than its contract called for.  Without those bonuses, labor costs would be around $56 an hour.

Though labor rates are a significant factor on an automaker’s overall balance sheet, those costs have steadily declined as a part of a vehicle’s total price tag, in large part due to productivity gains.  Two decades ago, the typical Detroit automaker needed as much as 40 hours or more to assemble the typical vehicle, while today that has declined to less than 20 hours, on average.  That alone yields savings of more than $1,000 a vehicle.

Complicating any Ford push for further concessions, the UAW has sharply criticized the more than $100 million in pay, benefits, bonuses and stock options provided the maker’s CEO Alan Mulally in recent months.

Union President Bob King described the hefty package as “unfortunate,” suggesting Mulally has a “blind spot” that could impact contract talks.  Nonetheless, the union’s goal is to engage in “creative problem solving,” King said last month, adding that it is well aware of the trade-off between jobs and labor costs.

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