Ford’s U.A.W. Agreement Will Increase Expenses While Alleviating Labor Conflict

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During the strike in September, top executives of major U.S. automakers cautioned that union demands could significantly undermine their competitiveness in a rapidly evolving industry. The CEO of Ford Motor stated that the company might need to abandon its investment in electric vehicles.

However, the outlook is not as pessimistic now that Ford and the United Automobile Workers union have reached a tentative deal. This agreement is expected to serve as a model for future agreements that the union will eventually make with General Motors and Stellantis, the manufacturer of Ram, Jeep, and Chrysler.

Under the new contract, Ford’s costs will increase due to a 25 percent raise spread over four and a half years, enhanced retirement benefits, and other provisions. The additional expenses will impact profits and could hinder Ford’s ability to invest in new technology, according to John Lawler, the company’s CFO, who made this statement on Thursday.

However, some analysts argue that the cost increases should be manageable. They believe that what truly matters for the company’s prospects is its innovation and efficiency in designing and producing cars and technology that can effectively compete with Tesla, which dominates the electric vehicle market, the fastest-growing segment in the automotive industry.

“They haven’t agreed to anything that would undermine their competitiveness,” stated Joshua Murray, an associate professor at Vanderbilt University and co-author of a book analyzing how U.S. automakers lost ground to Japanese and European rivals. He even suggested that the deal could potentially benefit Ford, partly because the four-year contract ensures there will be no labor conflicts during the intense transition to electric vehicles.

“They won’t be engaged in labor conflict while they’re dealing with” the technological shift, commented Mr. Murray.

On Thursday, Ford reported earning $1.2 billion in revenue of $44 billion for the period from July through September; however, the company suffered a loss of $827 million in Q3 of 2022. The division responsible for electric vehicles experienced a loss of $1.3 billion due to investments in new technology and increased competition leading to price reductions.

Soon, the approximately 17,000 Ford employees who were on strike, out of a total of 57,000 U.A.W. employees at the company, are expected to return to work. At U.A.W. Local 900 in Wayne, Mich., near a Ford factory that was among the first three factories affected by the strike, workers have begun to dispose of signs, firewood, and bottled water that were stockpiled for picket lines.

Robert Carter, 49, who works with engineers to layout workstations on the assembly line, expressed his satisfaction with the new contract, saying, “This is the best contract I have seen in my 30 years with Ford.” He highlighted the substantial impact of the new agreement on younger workers who were earning significantly below the top hourly wage of $32; their pay is set to increase to over $40 per hour within the next four and a half years.

“For some people, their pay will almost double,” he explained. “How can you say that’s not significant?”

The market’s reaction on Wall Street does not suggest that investors view the agreement as a disaster. The carmaker’s shares only fell 1.7 percent during regular trading on Thursday.

However, in after-hours trading, Ford stock plummeted by nearly 5 percent after the company indicated that, due to the strike’s cost, it could no longer uphold its earlier forecast of $11 billion to $12 billion in profits before accounting for interest expenses and taxes in 2023. Mr. Lawler also noted that the strike would cost the company $1.3 billion this year.

Analysts at Barclays estimated that the new union contract’s yearly expenses, including pay raises, improved retirement benefits, and other measures, could amount to $1 billion to $2 billion by the end of the four-year contract period, equivalent to approximately 1 percent of sales.

Mr. Lawler stated during a conference call that the contract would result in an average labor cost increase of $850 to $900 per vehicle. In light of these higher labor costs, Ford will attempt to “identify efficiencies and improve productivity to help us achieve our targets,” he added.

Some analysts criticized the agreement with the U.A.W., expressing concerns that the cost to Ford could place the company at a significant disadvantage and potentially prompt it to shift more production to Mexico.

“It adds a constraint in a very competitive market,” said Jonathan Smoke, chief economist at Cox Automotive. “It’s definitely a compromise that I think will either limit Ford’s performance or force them to consider alternatives.”

During the intense negotiations, Ford raised concerns that a substantial wage increase for workers would further widen the gap between the company and Tesla in the electric vehicle market. Sales of Ford’s two main electric models, the F-150 Lightning truck and the Mustang Mach-E SUV, have been underwhelming this year, leading the company to recently scale back its plans to increase Lightning production.

“There is significant downward pressure on EV pricing,” explained Mr. Lawler.

However, now Tesla and other automakers such as Toyota, Hyundai, Nissan, and Honda, whose U.S. factories are not unionized, may face pressure to raise wages, eroding any cost advantage they may have had.

The U.A.W. has expressed its intention to attempt organizing those factories. The pay agreement with Ford, which represents the biggest compensation boost that the union has secured in decades, is likely to serve as a powerful advertisement for collective bargaining.

“Elon Musk better take a look at this,” urged Madeline Janis, executive director of Jobs to Move America, an advocacy group closely tied to organized labor. “Hyundai and Toyota better be looking at this. This is a new era where workers are asserting themselves.”

Tesla, the company led by Mr. Musk, and other carmakers without unionized workers in the United States, such as BMW, Mercedes-Benz, and Volkswagen, may choose to proactively grant raises to deter labor organizing efforts.

“Raising wages is one strategy for deterring union organizing,” explained Rebecca Kolins Givan, an associate professor of labor studies and employment relations at Rutgers University.

According to Ms. Givan and other experts, the crucial factor that will determine success in the electric vehicle market is the ability of Ford, G.M., and Stellantis to develop innovative products. This responsibility falls on management, not assembly line workers.

“It’s evident that these companies have work to do in the electric vehicle market,” Ms. Givan remarked. “This contract doesn’t create any constraints.”

In addition to the 25 percent wage increase, the contract provides Ford’s hourly workers with cost-of-living wage adjustments, significant gains in pensions and job security, and the right to strike in the event of plant closures. Initially, the union had requested a 40 percent wage increase.

Ford has not yet announced dates for the resumption of production at the plants affected by the strike. The company had previously estimated that it could take up to four weeks to fully restore production. Additionally, Ford requires approximately 600 suppliers to resume production and deliver parts.

“Restarting a plant is much more challenging than shutting it down,” stated Bryce Currie, vice president of Americas manufacturing at Ford, earlier this month.

As of Thursday, workers at the Wayne plant, which manufactures the Ranger pickup and the Bronco SUV, had not received instructions to return to work, but they expect to be back on the assembly line next week.

Walter Robinson, 57, has been employed at the Wayne plant for 34 years and anticipates retiring by the end of the new contract. Nonetheless, he mentioned that three of his children work for Ford and will greatly benefit from the new conditions.

“My daughter has only been here two years, and it was going to take years for her to reach the top wage,” he explained. “This is going to significantly help her. It’s going to improve all of their lives.”

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