2019 Detroit 3 Automakers – UAW Bargaining
The Parties Simply Cannot Afford to Let History Repeat Itself
It feels like déjà vu. Ten years ago, in 2009, GM and FCA were tasked by the U.S. federal government to reduce their overall labor costs to competitive levels in order to receive government assistance. At that time, the yardstick utilized was estimated U.S. Transplant (international producers in the U.S.) labor costs which were pegged at $49 per hour. There were two main solutions. First, in 2007, the parties negotiated the transfer of their respective multi-billion dollar retiree health care obligations to an independent UAW health care trust. I was directly involved in this process, and believe me, this was no trivial task. The real benefits of this agreement were expected to kick in during 2009. Secondly, rather than directly impacting existing UAW members through significant wage and benefit cuts, the parties decided to address some of the cost reduction targets prospectively by focusing on a lower wage and benefit package for new hires (effectively a two-tier system). At that time, the understanding was that there would be a 25% cap on the number of second-tier employees at the expiration of the 2011 Agreement. For illustration purposes, assuming that there was a $20 per hour differential in all-in labor costs between traditional and new hire employees, this would create downward pressure of $5 per hour on all-in composite labor costs (i.e, $20 per hour x 25% cap). For purposes of this article, we will refer to this two-tier system element of the solution as the “fix”.
Let’s fast forward to 2019. According to Kristin Dziczek from the Center for Automotive Research (CAR), estimated all-in hourly labor costs are currently $63 per hour at GM, $61 per hour at Ford and $55 per hour at FCA. This creates a Detroit 3 automaker average of approximately $60 per hour. CAR has estimated U.S. Transplant labor costs at approximately $50 per hour so going into 2019 bargaining, the Detroit 3 automakers once again appear to have a significant competitive labor cost gap (i.e., $10 per hour).
So what happened? What were the key drivers that influenced Detroit 3 automaker all-in labor costs over the past decade? I will attempt to explain some of the key drivers here.
First, the automakers have absorbed nearly all of the employee healthcare inflation costs over the past decade as evidenced by the fact that a recent Detroit News article indicated that “Under the 2015 agreements, UAW employees pay as little as 4% out of pocket for coverage”. As highlighted earlier, retiree healthcare costs were addressed back in 2007. However, with respect to healthcare costs for active employees, the automakers and the UAW have kicked the can down the road for way too long. These active healthcare inflation costs can be significant. For illustration purposes, if active healthcare costs are $20,000 per employee or $10 per hour worked, assuming a six percent annual healthcare inflation rate, this would represent an incremental cost to the company of approximately $0.60 per hour worked each year. To put it into perspective, this cost is similar to a 2% annual wage increase on a job that pays $30 per hour (excluding the roll-up effect for impact on overtime costs, etc.).
Secondly, the Detroit 3 automakers have enjoyed increased profitability over the past few years – accordingly, many UAW members have enjoyed some 5-digit profit sharing checks. These larger profit sharing payouts have also contributed to higher all-in labor costs for the automakers.
Thirdly, over the past decade, UAW members have received a couple of base wage rate increases along with some significant lump sum payments in the form of ratification bonuses and annual lump sums ranging from inflation-protection payments to quality awards. For example, in the 2015 agreement with the UAW, Ford provided an $8,500 signing bonus that effectively translated into approximately $1 per hour worked if amortized over the four-year agreement.
Fourthly, the 2009 “fix” is gone and this is a big deal because it was likely the best opportunity for the Detroit 3 to remain somewhat competitive with the U.S. Transplants. It should be noted here that, similar to the Detroit 3 “fix”, many of the U.S. Transplants regularly utilize lower cost full-time temporary employees to keep their all-in labor costs in check. As illustrated earlier with the “fix”, in theory, the Detroit 3’s lower cost two-tier wage and benefit structure, as defined in 2009, should have mitigated their all-in labor costs by approximately $5 per hour worked. However, this “fix” no longer exists, as the 2015 agreement negotiated with the UAW effectively eliminated the two-tier wage structure as all permanent non-skilled employees now migrate to the same maximum base wage rate as traditional employees. The one saving grace is that the existing UAW contract allows for some downward pressure on labor costs via the utilization of temporary workers, perhaps 5 to 10 percent of the workforce, in order to assist the companies in dealing with high absenteeism. However, from a company perspective, the bad news here is that high absenteeism typically drives labor costs higher in the first place.
Finally, the automakers have hired a significant number of new UAW-represented employees over the past decade to staff expansion. This has been great for the UAW as it has significantly bolstered their membership. From an automaker perspective, the good news is that these new hires have been a pretty significant contributing factor in keeping their all-in labor costs down, as many of these new employees are still “in progression”, meaning that they are growing into maximum wage rates and full benefit entitlements over time. The bad news is that once these new employees migrate to maximum wage rates and benefits, the automaker’s all-in labor costs will naturally rise.
Going into 2019 bargaining with the UAW, from a Detroit 3 automaker’s perspective, labor costs are already non-competitive by $10 per hour on average and this gap will likely continue to widen as remaining “In Progression” employees mature. Autoworker base wage rates (at ~$30 per hour for production employees) are perhaps as much as 40% higher than the average manufacturing wage rate in the United States. On top of that, UAW members are receiving significant annual lump sum payments and lucrative profit sharing checks. Also, as highlighted earlier, let’s not forget that active UAW members are not paying anywhere close to their fair share of healthcare costs. Another important point to note here is that, while the Detroit 3 have experienced high profitability, the companies will require all of the cash that they can get their hands on in the future to fund autonomous driving and electrification initiatives, not to mention ongoing capital requirements for future product. Therefore, from a pure economics perspective, it will be very difficult for the UAW leadership to convince the companies, or the public for that matter, that their members should receive more of the Detroit 3’s profits in this round of bargaining.
From a UAW perspective, given the fact that their members have only received two base wage rate increases in over a decade and the automakers are seen to be flush with profits and cash, there is likely an overwhelming expectation from the rank and file that they will receive pay increases. However, the problem with base wage rate increases, unlike lump sums and profit sharing, is that they add to the fixed cost structure of a company. This may not be good for anyone long-term, particularly during a downturn.
However, let’s be realistic here. In the current economic environment, where the Detroit 3 automakers have been enjoying record profits over the past few years, management would be far too optimistic to believe that the UAW will accept a concessionary agreement as the solution to addressing the $10 per hour competitive labor cost gap. On the other hand, the UAW leadership should be very concerned about this competitive labor cost gap coupled with a potential economic downturn on the horizon. Therefore, one could argue that the UAW should likely focus less on new economics and more on job security for its members as any new economics will only serve to increase the competitive gap. On another note, in reality, competitive labor costs are often considered to be one of the best forms of job security. As highlighted in the title of this blog, the parties simply cannot afford to let history repeat itself. If the parties don’t seriously address labor cost and operational competitiveness in this agreement, I am not convinced that the U.S. federal government will even remotely consider coming to the rescue again in the future.
There will be a ton of moving parts in crafting this agreement and it will be a huge balancing act for the negotiators. The parties must be careful not to add too much to the fixed cost structure of the automakers and any new variable compensation will likely need to be designed to address non-competitive operational concerns such as productivity (e.g., labor hours per vehicle), quality and absenteeism. If the UAW is adamant about receiving permanent base wage rate increases for its members, these raises may need to be funded through a redistribution of existing economics, perhaps through modification of annual lump sums and/or profit sharing, coupled with more modest signing bonuses. Otherwise, the competitive labor cost gap will continue to grow. In addition, the parties will need to seriously consider concepts such as a higher proportion of lower cost full-time temporary employees (similar to the U.S. Transplants) in order to provide some downward pressure on all-in labor costs and improve competitiveness. In theory, these full-time temporary employees would be dues paying UAW members and would ultimately be the feeder pool for full-time permanent jobs as attritional openings occur. Also, as outlined earlier, the parties absolutely cannot afford to kick the active employee healthcare can down the road again. There are many innovative strategies available to address rising healthcare costs. For example, implementation of employee consumerism initiatives can reduce healthcare costs while minimizing intrusiveness on union members. Finally, the parties will have to address the automaker’s concerns about high unplanned absenteeism and the union’s concerns about job security, especially given that an economic downturn is likely not too far off. These are my initial thoughts about 2019 bargaining. I have other ideas but I have decided to save them for future blogs!
In closing, I have worked closely with many of the top executives on both sides of the table here and I am confident that the teams have what it takes to make this happen. One thing is for sure – it will be interesting to watch. We just have to hope that history does not repeat itself.
If you are interested in learning more about bargaining preparations, development of negotiations costing models, bargaining strategy formulation or labor cost reduction strategies, visit our website at www.hrandlaborguru.com.