(Bloomberg) — The most lucrative contract negotiations for the United Auto Workers (UAW) in more than a decade won’t add a lot to carmakers’ costs, even though each company committed $2 billion or more for raises, bonus money and benefits.
In exchange for improving pay and health care, General Motors Co., Ford Motor Co. and Fiat Chrysler Automobiles NV can boost production of a few cheaper, lower-margin passenger cars in Mexico, where employees average about $5 an hour compared with as much as $29 an hour in U.S. factories.
The companies also gain the flexibility to hire more, less-expensive, temporary employees and have them work any day of the week; traditionally they filled in during vacations and holidays, and worked on Mondays, Fridays and weekends. And automakers can replace retiring workers with cheaper entry-level hires, which will save about $12 an hour initially.
GM, Ford and Fiat Chrysler did pledge billions in investment for their American factories. But most of this will prepare for new models of vehicles the plants already assemble, according to Art Schwartz, a former GM labor negotiator and president of consulting firm Labor and Economics Associates in Ann Arbor, Mich.
“The translation is, ‘we can go to Mexico,”’ he said. “With this contract, it looks like money for workers is more important than adding jobs.”
The temporary-hiring flexibility, one-time payouts and bonuses, and other provisions — on top of shifting some production to Mexico — will help the automakers save cash, reduce total payrolls and offset the union’s gains. GM will be able keep its labor costs essentially unchanged, at $2,350 a vehicle in 2019 compared with $2,374 in 2014, according to analysis by Schwartz and Kristin Dziczek, director of labor and industry at the Center for Automotive Research in Ann Arbor, Mich. Ford’s costs will rise about $200 to $2,600, and Fiat Chrysler’s will jump to $2,500 from $1,771, Dziczek said.
Since U.S. sales are nearing a peak, additions to Mexico will be gradual, and these vehicles could be exported to other markets. By the time the contracts expire in 2019, the three automakers will have added an estimated 320,000 vehicles worth of production there and cut U.S. output by a collective 120,000, according to a forecast from IHS Automotive, a research firm in Southfield, Mich. Ford will add the most, boosting its Mexican production to 631,000 from 433,000, IHS said.
Joe Hinrichs, Ford’s president of the Americas, said management and the UAW spent a lot of time during negotiations talking about the “competitiveness of our footprint and the products we build and where we build them.” The company also needs to have “some flexibility to move some of our smaller products to other locations, which we intend to do.”
The list of vehicles built outside the U.S. already is growing. Ford will move two compacts, the Focus passenger car and C-Max hybrid, to plants in Mexico, according to a person familiar with the matter. Fiat Chrysler will assemble a compact Jeep sport utility vehicle there, a company spokeswoman said. GM said a year ago it is investing $5 billion in Mexico and will import the Buick Envision sport utility vehicle to the U.S. from China. It is expected to add more production in the U.S. than Mexico, IHS said.
Ford also is investing $2.5 billion to build new engine and transmission plants in Mexico. The announcement drew the ire of Republican presidential hopeful Donald Trump, who said in August that he “wouldn’t allow it.”
The auto companies aren’t closing plants in the United States. as they boost output south of the border, but they won’t be adding nearly as many jobs as the 30,000 hires they made in the last four years, both because sales growth is expected to peak and because labor costs now are higher.
One of the biggest challenges for the union “was to balance the competing demands of higher wages and job security,” UAW President Dennis Williams said in a statement when the GM agreement was released. “We believe this proposed agreement achieves both income security and job security.”
The Ford deal, the richest of the three, promises $9 billion in factory upgrades and expansions that create or preserve 8,500 jobs in the United States. It also provides across-the-board raises and $10,000 in ratification bonuses. Bonuses were $8,000 for GM workers and as much as $4,000 at Fiat Chrysler.
Veterans at all three companies got two 3 percent raises and two cash payouts equal to 4 percent of their pay. Entry-level, or so-called Tier 2, workers who once started at less than $16 an hour and topped out at $20 now start at $17 and grow into the union’s traditional $29. Those at Ford and GM also get the top-flight health insurance of their Tier 1 coworkers.
Even though the Tier 2 pay scale — which union members hated — now has a gate to Tier 1 pay, reaching it takes eight years. And as people retire, carmakers can replace them with these employees or temporary staff who make even less. GM’s hourly workers retire at a rate of about 3 percent a year. That could more than double during the life of the agreement, giving the company additional savings, said the Center for Automotive Research’s Dziczek.
Higher wages over time still will make U.S. factories even more expensive compared with Mexico and even pricier than plants in Canada, where costs are close to those in America, said Michael Robinet, managing director of IHS Automotive.
That’s why Ford and Fiat Chrysler are boosting output of cheaper, more fuel-efficient vehicles in Mexico. These models are less profitable than the pickup trucks and sport utility vehicles built in unionized U.S. plants, which means union members increasingly will rely on cheap gasoline for job security.
GM is retooling its Lordstown, Ohio, plant for the all-new Chevrolet Cruze compact, so the 3,000 workers there should be secure, said Glenn Johnson, president of UAW Local 1112, which represents employees at the plant. Johnson said some members voted against the agreement because they wanted to get back old perks, like cost-of-living raises pegged to inflation, but negotiators knew that job security meant keeping the contract affordable.
“It’s a fine wire that we walk to do what’s best for our workforce and for the company,” Johnson said in a phone interview. “Being in the small-car world, it takes a lot for us to be competitive.”
—With assistance from Keith Naughton.