Why the UAW made peace with Detroit

October 21, 2011: 10:43 AM ET

The Detroit-based auto industry could face significant threats over the next four years. Inflated costs from union labor won't be one of them. Here's why.

By Doron Levin, contributor

Auto PlantFORTUNE -- The Detroit-based auto industry could face significant threats over the next four years: tighter regulation, soft demand and tougher competition. High costs from union labor won't be one of them.

A successful ratification vote by Ford Motor Co. (F) hourly workers, following ratification at General Motors Co. (GM), seals the four-year wage and benefit deal between the two biggest of the Detroit Three automakers and the United Auto Workers union. (Chrysler Corp. has a tentative agreement with the UAW.) "Detroit automakers haven't solved everything. Competition with the [foreign] transplants is still very difficult," said Sean McAlinden, a labor economist with the Center for Automotive Research in Ann Arbor, Michigan. "But the UAW contract is no longer the strategic threat it's been."

By employing more new hires, who work at a wage rate far below that paid to more senior workers, the automakers now are able to bring their total labor costs closer to those paid by Toyota (TM), Honda (HMC), Nissan (NSANY), Hyundai, BMW, Volkswagen and Mercedes.

Foreign automakers operate assembly factories mostly in southern states. The UAW has failed to organize any of the so-called transplants. The union has said that winning a representation election at a U.S. plant owned by a foreign company is a top priority. But, winning recognition votes in southern auto plants will be an uphill battle. Now, the union's chances have been improved by having avoided a bitter strike or an outsize wage settlement in the latest contract negotiations in Detroit.

Ford said the contract, approved by a nearly 2-to-1 margin, will increase hourly labor costs less than 1% annually. Ford has agreed to add 12,000 new jobs in the U.S. and pay workers up to $10,000 in bonuses, an amount that will be balanced by savings to Ford from work-rule improvements.

Now that the uncertainty around labor costs have been settled, the biggest risk to Detroit automakers could be persistent weak demand for new vehicles due to the global financial crisis, which has hurt employment, torpedoed housing values and depressed stock prices. Ford and GM have been solidly profitable in 2011 at an industry sales volume that should total less than 13 million vehicles. Prior to the downturn in 2008, the industry had been averaging about 16 million in sales. Ford has said it can break even at 10.5 million vehicles.

All in all, the automakers are now in much better shape to withstand a double-dip recession, said McAlinden, and a drop in sales to as little as 10 million vehicles, because they've reduced the number of union workers. With fewer workers, the risk of having to pay layoff benefits is reduced. In the last five years, GM has reduced its union workforce in the U.S. to 48,000 from 129,000; Ford is down to 41,000 from 74,000 and Chrysler has shrunk its union workforce to 22,000 from 56,000.

One group that benefits greatly from the latest contract are the so-called Tier 2 workers, those who hired in at $14 an hour. Their pay will rise to as much as $19 an hour over the four years. "A lot of compensation will be tied to profit sharing," said McAlinden. Thus, if the automakers are profitable, the workers will get large bonuses, which the companies prefer to pay rather than high base wages.

Workers who voted against the contract mostly said they did so because they favored a return of wages and benefits that they gave up when the industry fell on hard times. John Fleming, head of global manufacturing for Ford told Reuters, "I see it like a family. Some people are not happy at the moment. We've got to work through that."

Four years of prosperity could foreshadow even stronger calls by the UAW rank-and-file for a restoration of the past. Or, perhaps, recognition that the U.S. industry can't survive without a more flexible UAW.

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