(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.”