UAW-Ford deal hints at fine line Detroit Three must walk on labor costs
- Ford’s tentative deal with UAW signals how domestic automakers will balance higher labor costs with competitive concerns
- Some worry higher labor costs will hurt Detroit Three as more companies fight for U.S. market share
- At the same time, automakers may have exhausted their ability to continue to raise vehicle prices as consumers hit their spending limits
Striking hourly workers at Ford Motor Co. are poised to return to work as the Dearborn-based automaker and its suppliers prepare to reopen production lines affected by the United Auto Workers’ walkout.
The movement follows a tentative deal the union reached Wednesday with Ford, a day before the automaker released third quarter earnings that said its profits as of the end of September were $1.6 billion behind forecasts for the year.
Unclear is whether Ford can hit its original profit target of $11 billion to $12 billion, CEO Jim Farley said Thursday, citing “the strike and uncertainty over whether UAW members will ratify the contract.”
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While the agreement remains in the early roll-out to union members — and General Motors and Stellantis are still negotiating their own deals — the tentative deal with Ford offers an early glimpse into the direction of labor costs for domestic automakers over the next four to five years.
And it raises questions about whether those costs will hinder the Detroit Three as they compete against an unprecedented number of rivals vying for U.S. sales of traditional vehicles and EVs
“There is more competition in the world’s most profitable market, North America, than ever before,” said Glenn Stevens, executive director of MichAUTO, the automotive arm of the Detroit Regional Chamber.
“It’s a whole different playing landscape than the UAW and the D-Three have ever been through.”
The deal with Ford, as described by the UAW, calls for a 25-percent general wage increase through April 2028. That’s four times the wage increase won in the 2019 agreement, UAW Vice President Chuck Browning said Wednesday, when the union unveiled the deal via Facebook.
Top wages will be just over $40 per hour, he said, and workers will reach that level more quickly. Today, the top wage is $32.32 per hour, and workers take up to eight years to reach that.
The annual pay difference could cost the automaker an additional $400 million per year or more, depending on how many of its 57,000 union workers at Ford are at the top of the pay chart.
Automakers, Stevens said, are rebalancing many of their costs and processes to target profitability. Labor costs will just be a portion of that.
“They are not going to agree to something that they couldn't make work for their business,” Stevens said. “At the end of the day, these are publicly traded global companies who have a responsibility to their shareholders. They have a responsibility to their customers, and they have a responsibility to their own employees to continue to reinvest in their businesses.”
Whatever deals they reach in union contract agreements, “they can’t step over the line” that would prevent them from doing that, Stevens said.
Automakers look to offset labor costs
Speaking to analysts Thursday, Ford officials said the strike cost the automaker $100 million in the third quarter, when it made about 80,000 fewer vehicles. Combined, the strike appears to be cutting $1.3 billion from Ford profits this year, CFO John Lawler said.
The automaker said costs are pressuring the company, and are not just coming from labor. Technology, supplier costs and manufacturing inefficiencies also impacted a disappointing third quarter, Lawler said.
GM, in a call with analysts earlier this week, said it will update investors on the strike costs to its business once it has a ratified contract. Though GM officials said the company anticipates adjustments to offset pay increases to hourly workers.
“Higher labor costs will make it even more imperative that we continue to focus on the most significant and margin-accretive parts of the business,” CFO Paul Jacobson said.
GM CEO Mary Barra added that the company is already looking to reduce $2 billion in fixed costs, and that is prompting a search for efficiencies in staffing, such as recent salaried buyout offers, as well as in production of its vehicles. One example is in EV batteries built on the Ultium platform, which streamlines battery manufacturing across models.
But labor costs at domestic automakers will be higher than at non-union factories run by Toyota, Honda, Mercedes Benz and other foreign makers, along with EV companies like Tesla and Rivian.
“Toyota, Honda, Tesla and others are loving this strike because they know the longer it goes on, the better it is for them,” Bill Ford, the executive chair of Ford Motor, said in Michigan last week.
Top pay at non-unionized auto factories pay an average of $28 per hour, compared to the pre-strike rate of $32.32 for UAW members.
“Nobody argued that an increase to wages was not needed,” Stevens said of the union demands. The Ford package, he said, “makes these workers some of the best-paid labor not just in the U.S. but around the globe.”
While Bill Ford and others say the higher wages could hurt competitiveness, the UAW is expecting to make a push into non-union plants, many of which are located in the South.
“The forces that set the (pay) pattern in the industry are the non-union producers,” Marick Masters, a business professor at Wayne State University, told Bridge recently. “And they’re dragging down (average wages). What the UAW is hoping to do is to instead pull wages up.”
Metrics are changing
The three Detroit-area automakers lost four percentage points in market share from 2010, during the Great Recession, to 2022, when it went from 44.47 percent of all U.S. sales to 42.67 percent
Number one GM fell from 18.81 percent of market share to 17.09 percent, and Ford declined from 16.44 percent to 13.92 percent, dropping from second to third at the same time.
Only Stellantis increased its market share since 2010, four years before Chrysler bought Fiat and 11 years before it morphed into Stellantis. It went from 9.22 percent of U.S. sales to 11.66 percent. (The other brands in the top five are number two Toyota at 15.17 percent and Hyundai Kia, which jumped from 4.57 percent to 10.94 percent.)
Since the pandemic and its supply shortages, Detroit-area automakers have focused on profitability from high-margin vehicles that carry a high price to the consumer, such as pickups and large SUVs.
Ford, for example, posted a 2.2 percent profit gain across all of its business units in the third quarter over the same period in 2022. Almost all of that comes from higher prices of its non-EV vehicles.
However, automakers and experts warn that turning their focus to sales of higher-priced vehicles aren’t long-term solutions for automakers trying to maintain profitability. There’s a limit, and they may be close to it.
A report by J.P. Morgan Chase from early 2023 said higher prices are reaching “demand destruction,” and slowing sales.
“Affordability is an issue,” Lawler, the Ford CEO, said in the analysts call. “Right now it takes a consumer about 14 percent of their monthly disposable income for a vehicle. Pre-COVID and pre-inflation, it was about 13 percent.
“We think it's going to revert back to that,” Lawler said, estimating that will happen by the end of 2024 and into early 2025, resulting in cuts of about $1,800 to the average price of a Ford vehicle.
Price increases came as inflation drove interest rates higher, meaning that consumers face higher borrowing costs.
The average cost of a new car from American brands in 2023 is $57,062, about 33 percent higher than vehicles produced by automakers from Asia, which average $43,025.
Average EVs in the U.S. cost about $53,000.
The most expensive vehicles on average are GM’s Cadillac and Ford’s Lincoln, both luxury brands.
GMC and Ram trucks, made by Stellantis, average above $60,000. Toyota averages about $41,000; Honda averages $37,349.
The lowest new-vehicle averages are from Kia, Mazda and Mitsubishi, which build sedans and other vehicles with non-luxury finishes. As a group, they average less than $35,000.
A $40,000 loan for five years will cost a buyer $788 per month at a 6.5 percent interest rate; many borrowers are finding higher rates.
Meanwhile, the strike — which starts its seventh week on Friday — continued Thursday for GM and Stellantis.
GM has about 14,200 workers on strike, with an estimated 5,500 workers laid off as a result of the walkouts. About 3,000 of them work at GM suppliers.
At Stellantis, about 14,300 workers are picketing, with another 2,045 laid off due to production declines.
Striking workers at Stellantis’ MOPAR parts and distribution center in Romulus told Bridge on Thursday they’re hopeful the tentative deal with Ford means their deal will come next.
Scott Sooter, 33 of Belleville said seeing Ford workers go back to work will “apply more pressure to the other two to get their plants up and running. Otherwise, they have a chance of missing out on some of the market.”
“They're headed in the right direction,” he said. “We'll just have to see how much more effort it takes to get them there.”
Ford workers will learn details of the contract agreement after the UAW National Ford Council visits Detroit Sunday to vote on whether to send the contract on to membership for a vote. Members then will vote, after a series of information sessions.
Bridge reporter Janelle D. James contributed to this report.
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