UAW, Detroit Three Seen Crafting Transitional Contract

As the unofficial start to negotiations between the UAW and the Detroit Three begin today with a ceremonial handshake between union President Dennis Williams and General Motors CEO Mary Barra, experts stop short of predicting a radically new 4-year contract and instead see bargainers using the talks as a foundation for bigger changes down the road.

“This will be a transitional contract,” says Gary Chaison, an industrial relations scholar and labor historian at Clark University in Worcester, MA. “The UAW knows it cannot get everything at once, but it can move in the right direction by building layer on layer through multiple contracts.”

However, bargainers for the union, GM, Ford and FCA US will tackle one of the thorniest conditions on the shop floor: a 2-tier wage structure the sides implemented in 2007 to make the Detroit automakers’ U.S. labor costs more competitive with those of Toyota, Honda and Nissan.

Williams has been unabashedly clear about his intentions to use this year’s wrangle to narrow the pay gap between entry-level workers earning about $19 an hour and traditional employees making $28.

“We’ve made sacrifices, and we feel it is our time,” Williams told journalists at Solidarity House in Detroit last month. “We will bridge that gap. We are going to find a way.”

At the same time, automaker sources tell WardsAuto, the Detroit Three’s generosity will only go so far and they will push for a wage cap below $28 an hour. And while acknowledging the fact upper-tier wage earners have not had a raise in more than eight years, the automakers plan to resist labor’s push for annual pay hikes and instead will pursue variable pay increases through the profit-sharing formula employed today.

Cathy Clegg, GM’s lead bargainer, says wages are just one element in what the automaker expects to be complex negotiations with lots of options on the table for both sides.

“It will be a problem-solving approach for things that are good for the business and good for our employees,” she told WardsAuto last month. “That’s our objective.”

Other bargaining points will be familiar to each side but involve new twists.

For example, Williams would like the UAW to take over management of health-care benefits from the automakers for 140,000 active hourly workers, just as the union did in 2007 for retirees. He wants to open it up to salaried employees of the automakers, too, which could create a pool of as many as 1 million beneficiaries.

“I would love to create a pool to insure members across companies,” he says.

Job-security measures, another longtime item of debate between the sides, will draw renewed interest given the rapid rise of automaker investment in Mexico. GM, Ford and FCA also will offer the potential for new manufacturing jobs in its plants performing work typically done offsite by suppliers if the union agrees to an entry-level wage for those workers.

Notably, the summer’s negotiations will play out under external conditions not witnessed in decades. The companies are healthier than ever, generating some $70 billion in operating profit since the current contract was ratified in 2011; Detroit Three market share has stabilized; sales forecasts remain robust into 2020; and, perhaps most interestingly, the UAW has the legal right to strike for the first time since 2007.

Deconstructing the Tiers

Arguably the single greatest item of contention in the UAW camp is the 2-tier wage system. An outcome of the 2007 contract, the wage structure provided slow-but-eventual labor-cost relief to the Detroit Three and fueled a recent hiring binge, fattening the UAW’s waning membership role.

GM alone saw its labor costs decline to $7.07 billion in 2014 from $18.14 billion in 1999, according to the Center for Automotive Research in Ann Arbor, MI. Ford paid a labor bill of $6.88 billion in 2014, FCA’s cost was $3.04 billion and the transplant automakers paid $5.51 billion. Meanwhile, the UAW’s membership shot up to 135,500 in 2014 after bottoming out at 119,753 in 2009, according to CAR, as automakers added 36,250 hourly manufacturing jobs over the current contract.

However, the union argues 2-tier wages create tension on the shop floor between lower- and upper-wage earners performing similar tasks.

“The UAW despises it,” Chaison says of the system, which roughly 25% of U.S. industrial companies use. “Once you get into a 2-tier, it is difficult to get out.”

At Ford’s Louisville, KY, assembly plant it took four years and a January announcement by the automaker to add 1,550 new jobs in Kansas and Michigan to trigger a $9 raise for 300 to 500 entry-level workers at the truck-building facility. Companywide, Ford has moved 800 entry-level earners up this year, the automaker says.

The wage structure creates headaches for the automakers, too. Unlike GM and Chrysler, Ford operates under a 20% cap for entry-level hiring. Ford hit that cap in January, so every new hire going forward under the current contract must result in a wage hike for an entry-level earner.

Ford bargainers will aggressively pursue reinstating the hiring cap, experts predict. A source at the automaker tells WardsAuto Ford seeks “a level playing field” with its local rivals.

About 19% of GM’s hourly workforce is entry-level earners, while 43% of FCA’s hourly employees are entry-level. Caps at GM and FCA were lifted with their bankruptcies, and FCA took particular advantage by offering massive buyouts to top wage-earners to clear the way for cheaper hires.

“We think the only reasonable out is to promote (entry-level earners) to a ‘1.5 level,’” says Sean McAlinden, executive vice president-Research, chief economist, at CAR. “We call them the new traditional worker, with retirement benefits, health care and supplemental employment.”

It is unclear how big of a window the transition might need, with CAR experts speculating between four and eight years for entry-level to reach new-traditional. CAR also forecasts a reinstatement of the caps for entry-level hires of between 20% and 25% at each of the Detroit Three, resulting in a $5 hike in average hourly labor costs at FCA. Hourly labor cost at Ford and GM likely would remain at current levels, the group says.

Pay Raises, Job Security

Another bone of contention between the two sides this summer will be across-the-board annual pay raises, which the UAW demands and the Detroit Three desperately wish to avoid.

“The UAW wants annual wage increases with profit sharing,” Chaison says. “The auto companies will have to prove they are not fully recovered.”

Guaranteed annual pay raises could put automaker finances at risk if there’s a sales downturn, and experts mostly agree the industry is deep into the bullish, 17-million-unit per year market it is enjoying since bottoming at 10.5 million deliveries in 2010.

A downturn almost certainly lies ahead, if not during the life of the next contract then likely soon after the sides sit down again in 2019. That leaves automakers preferring to stick to the variable pay increases employed today, where hourly workers receive bonuses based on company earnings.

But the UAW will argue the 2009-2010 restructuring of the Detroit Three has led to billions of dollars in annual profits and are proof the companies now can afford the raises, although the $7.2 billion in combined earnings at GM, Ford and FCA in 2014 does not approach the $18 billion earned by Toyota alone in its last fiscal year.

Automaker restructuring also sharply reduced the companies’ break-even points, the UAW will argue, as low as 10.5 million in annual industry sales at GM.

Detroit Three profits are indeed bigger, because the OEMs are making more money per vehicle, according to CAR. Revenue per vehicle sits just under $30,000, compared with a combined average of less than $24,000 in 2007, a year before the recession and sales implosion.  Profit per vehicle stabilized under the existing labor agreement, based on earnings before interest and taxes, and now exceeds that of Toyota and Honda.

“There is room for a wage increase,” McAlinden says. “(Automakers) spend more money today on logistics, advertising and materials.

“The wage component isn’t very important,” he adds. “They can afford it. Besides, the workers are the gatekeepers of quality. Give ’em a raise.”

What the Detroit Three cannot afford is the sort of generous job-security measures of a decade ago that led to infamous “job banks,” where workers were moved from the assembly line during production cutbacks and paid to perform rudimentary and oftentimes meaningless tasks. The job banks were a key component leading to the bankruptcies at GM and the former Chrysler.

But the UAW sees automakers, both Detroit-based and those overseas, investing in Mexico to the tune of a CAR-estimated $24.2 billion over the life of the current contract.

“As North American production ramps up, it will not be in the U.S.,” Chaison says. “The UAW is very fearful of Mexico (and) they are unable to organize transplants in the South (U.S.).”

The outlay is for good reason, too. Average wages in Mexico are just over $8 an hour, and wage growth is a negative 5.4%. Land is cheap, too, so automakers can build greenfield plants relatively inexpensively; government regulations are much looser, reducing the cost of doing business; and the value of the peso against the dollar has plunged 24% since 2011, which increases the per-vehicle profit of products built there.

“They are using cheap labor and conditions our government would be speaking out against if it was any other country. And they are shipping products here to sell,” Williams tells WardsAuto. “We are going to address it.”

Ford last week revealed it will move production of the Focus and C-Max small cars out of its Wayne, MI, assembly plant in 2018. It is assumed, but not confirmed, output the cars will shift to Mexico for lower-cost production.

A solution satisfying both sides might be bringing more jobs into Detroit Three assembly plants, with newly hired, UAW-represented workers performing tasks usually done by suppliers at lower wages.

At GM’s Orion Twp., MI, assembly plant, an agreement with the UAW in 2011 to bring kitting and sequencing into the facility at a cost cheaper than the automaker paid a supplier paved the way for two new products there and two others in the pipeline.

“It saves money, improves quality and we can manage the work flow better,” a GM source tells WardsAuto.

More of that supplier work likely will become available as the parts-making sector continues to consolidate in the coming years. Most recently, Johnson Controls announced it may sell its seat business, work an automaker might consider bringing in-house for half the cost.

Pool Active, Retiree Health Care

After taking over management of the hourly retirees health-care trust in 2007, the UAW wants to add active workers to that plan in this round of talks. The offer is not entirely unexpected, given the union likes managing the $61.1 billion account and thinks it has done a better job of taking care of retirees than the automakers did.

“We’ve learned a lot about health care,” Williams says. “In many of our departments now, I consider them the best experts in the United States. We are discussing health care with corporations on a different level.”

But Williams throws a bit of curveball by suggesting active salaried employees of the automakers join, too.

“The more people we pool together, the more leverage you have with the institutions, such as hospitals and clinics and insurance companies,” says Williams, who through the massive pool of beneficiaries would have a big bargaining chip on the 2-tier wage structure and across-the-board raises with the millions of dollars it could save automakers annually.

“I would love to create a pool to insure members across companies,” he says.

The Detroit Three pay an estimated $2 billion combined to cover health care in the plans they administer. Active employees pay 6% of their medical costs, compared with 11% for retirees, and automakers likely would want them to take on more of the expense in a health-care plan considered by many the richest in industry.

Automaker sources tell WardsAuto they also would push for behavioral changes among beneficiaries, such as costlier emergency-room fees to encourage fewer visits and mandating cheaper generic drugs over branded ones.

Williams’ health-care pool faces another obstacle: the Affordable Care Act’s so-called “Cadillac tax.” A 40% excise tax placed on the health plans of companies offering especially robust benefits, which would suck in Detroit Three hourly workers and retirees, it rolls out in 2018 and the potential exists for companies to demand benefits cuts to cover expected costs.

Williams considers the Cadillac tax an unfair penalty on people for having good health care and plans to fight it at the federal level. But with companies already projecting how to cover costs associated with it, he says it will be a topic of this year’s talks.

“We will work (on it) through collective bargaining,” he says.

To Strike, Or Not to Strike

All of the drama will play out over the dog days of summer in Michigan and, for the first time since 2007, under the specter of a UAW strike if talks stall ahead of the current contract’s expiration on Sept. 14.

The UAW acquiesced to a no-strike clause five years ago as part of the government-backed bankruptcies at GM and Chrysler. The restriction lifted this year and if negotiations break down, the UAW could walk off the job to pressure automakers into a deal.

The last UAW strike against an automaker came briefly at GM in 2007 and the last prolonged walkout occurred in 1997, also targeting GM. The Flint, MI-based strike in 1997 crippled GM production and in a matter of weeks the automaker began bleeding market share. It is seen by experts as an early seed in GM’s 2009 bankruptcy.

A strike also likely would rally the UAW membership, which saw its organization lose clout without the ability to picket.

A rank-and-file member tells WardsAuto he has been told to prepare for strike.

Williams confirms as much, although he prefers an agreement brokered at the table.

“I never go into a negotiation without being prepared,” he says, adding, “We believe we can get through collective bargaining without a confrontation.”

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