Howes: Rich UAW-FCA deal masks long-term risks

Daniel Howes
The Detroit News

Nothing comes free in the global auto industry, including a rich labor contract for the United Auto Workers.

Legacy workers would get their first base-wage increase in nearly a decade. Second-tier workers, accounting for 44 percent of Fiat Chrysler Automobiles NV’s union workforce, would pocket a substantial raise and win a path to $29 an hour over eight years.

The richer end of the profit-sharing formula would be converted into roughly $3 an hour more for the second tier, exchanging fixed pay for a portion of variable compensation tied to company performance. Health care survives unmolested, and the health care co-op pool advanced by UAW President Dennis Williams appears dead.

The deal is a big win for the UAW members who rejected the first tentative agreement by a two-to-one margin, a reminder that solidarity turbocharged by social media in an era of fat profits and fatter CEO pay can reap big rewards — and cost the company big.

Altogether, says one source familiar with the numbers, the proposed UAW-FCA deal would add between $500 million and $600 million to FCA’s annual costs, or roughly $2 billion over the life of a new four-year contract. That, for Detroit’s most financially fragile automaker.

The money to underwrite the deal has to come from somewhere. The most likely spots are FCA’s already-pressured profit margins, the capital it invests in products and plants, and whether it will continue to do so in the United States as labor costs begin to rise again under a tentative agreement set for ratification next week.

Meaning the unambiguous short-term win could cost the union jobs and investment over the longer term as CEO Sergio Marchionne (or his successor) looks for bigger returns on capital invested outside the United States — chiefly in Mexico, where FCA plans to move its small and midsize car production over the next few years.

Old Detroit lives. Record North American profits at General Motors Co. and Ford Motor Co., coupled with blistering sales of FCA’s Jeep and Ram brands, are driving higher rank-and-file expectations for new contracts that reverse give-backs granted during the Great Recession, federal intervention and bankruptcy.

That’s perfectly understandable. The past five years have generated nearly $80 billion in North American profits between Detroit’s so-called Big Three, evidence that the restructuring of U.S. plants, portfolios and workforces can generate mountains of cash this town has not seen in a long time.

The first result is a proposed contract that looks to be the richest since 1999, when bargainers for DaimlerChrysler AG set broad terms that subsequent bargaining teams sought to unwind, most noticeably in 2007 and then the crisis-induced talks of 2009.

None of this is happening in a vacuum. The proposed UAW-FCA deal would boost the company’s all-in labor costs to as much as $56 an hour at the end of the fourth year, according the Center for Automotive Research, putting it closer to GM, Ford, Toyota Motor Corp. and Honda Motor Co. than the low-cost producers operating in the United States.

“When they went bankrupt last time, it was because of legacy costs and because they had too many workers and too many factories,” says Sean McAlinden, chief economist of the Ann Arbor-based CAR. “Not because of wages, and certainly not because of profit-sharing.”

For all the attention Wall Street and the news media pay to union labor and its contracts with the Detroit automakers, the UAW is an increasingly small component of overall costs. CAR estimates that UAW labor accounts for 8 percent of Ford’s total costs, 6 to 7 percent at GM, and just 4 percent at FCA.

Still, the proposed UAW-FCA contract would diminish the biggest competitive advantage the No. 3 automaker achieved in bankruptcy and holds over its larger rivals. The deal also ratchets up the pressure on GM and Ford to accede to fatter base-wage increases and more fixed compensation, a trade-off that will exact a price.

It always does. FCA’s richer contract, forged after the rank-and-file rejected a “transformational” deal last month, poses new questions for voting members, starting with an eight-year wage phase-in for qualified second-tier workers. This working for a company whose CEO remains committed to engineering a merger, preferably with GM, that would ensure GM — not FCA — is the surviving entity.

Could the revised deal Marchionne reached with the UAW’s Williams be yet another move in his grand quest for GM, a de facto alliance with the guy whose retiree health care trust controls nearly 9 percent of GM’s shares?

It could be. Or it could just be another Detroit-style contract in good times, proving yet again that nothing comes free in this business.

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Daniel Howes’ column runs Tuesdays, Thursdays and Fridays and can be found at

Catch him 3 and 10 p.m. Thursdays on Michigan Radio’s “Stateside,” 91.7 FM.