Detroit Three Wisely Standing Strong Against CAW

Includes: F, FCAU, GM
by: Adam Levine-Weinberg

As recently as one week ago, the Canadian Auto Workers Union was threatening a simultaneous strike at each of Detroit's "Big Three" automakers. Ford (NYSE:F), General Motors (NYSE:GM), and Fiat's (FIATY.PK) Chrysler division all had their Canadian labor contracts expiring on Monday night. Not surprisingly, the automakers and workers came into negotiations with very different expectations. With Ford, GM, and Chrysler all posting strong profits in North America, CAW negotiators were looking to take back some of the concessions they made during the depths of the recession. By contrast, the automakers were focused on narrowing the growing cost gap between Canadian and U.S. labor.

Finally, Ford arrived at a tentative agreement with CAW on Monday, averting the possibility of a strike for the time being. The two sides bridged their differences by substituting a lump sum payment for cost of living increases, while the union offered lower starting wages that would still rise to the same level as current employees after ten years. However, Ford was in the best position of the Detroit Three to find agreement with CAW. All-in labor costs (including the cost of benefits and pensions) for Ford were roughly $62/hour in Canada vs. $59-$60/hour in the U.S (though estimates vary widely). The Canadian workers will receive lower lump sum payments than Ford workers in the U.S., and will not participate in profit-sharing. Furthermore, Ford has the smallest Canadian footprint of the Big Three, with less than 10% of its North American production located in Canada. Together, these factors will make Canadian production relatively affordable for Ford.

By contrast, General Motors and Chrysler have a lower average all-in cost for U.S. production. According to Reuters, GM's all-in cost is around $56, while Chrysler's is only $52. As more U.S. workers move to the lower wage scale for new hires, U.S. costs will shrink, thus creating a wider gap. Furthermore, GM and Chrysler each employ about 8000 workers in Canada, versus only 4500 for Ford. Canadian costs thus have a larger impact on the bottom line for these two companies than for Ford.

Thus, GM and Chrysler have been much tougher negotiating partners for the CAW. By Thursday afternoon, negotiators for the union were clearly frustrated by a lack of progress in their bargaining with GM. At that point, the union leadership stated that it was planning to give GM a 24-hour strike notice by the end of the evening unless GM became more accommodating before then. By the early evening, the two sides had reached a bargain similar to Monday's Ford-CAW deal. GM will add or save over a thousand jobs by adding a third shift to its Oshawa "flex" line, and extending the life of the Oshawa "consolidated" line by at least a year. In return, GM will be able to keep using lower-paid supplementary workers to assist during product launches.

GM was wise to hold out until the last minute for the best terms. GM had previously committed to maintaining at least 16% of its North American production in Canada through 2016 in return for its 2009 bailout. This meant that the company could not just walk away from Canadian production. However, GM was able to stave off some of CAW's most costly demands (e.g. getting rid of supplementary workers entirely), while showing the union that it was willing to make reasonable concessions.

Talks between Chrysler and CAW are still ongoing. Just as the UAW eventually settled for a less lucrative deal with Chrysler last year, CAW will likely have to consent to some deviation from the "pattern" at Ford and GM to get a deal done. Chrysler has the highest percentage of its production capacity in Canada of the Big Three, and it also has the lowest U.S. labor costs of the three. Giving CAW a much better deal than the UAW could create bad blood between the company and its U.S. workforce. It will be interesting to see how this situation plays out over the next few days.

Overall, I think that Ford, GM, and Chrysler have fared well in this round of labor negotiations. Canadian workers have been less accepting of the "profit-sharing" model that the automakers and the UAW have moved to. However, while CAW was hoping for a resumption of annual raises, the automakers were able to win a four-year wage freeze that will keep Canadian costs competitive with American costs. With the threat of a strike now off the table, I expect particularly good performance from GM in the short term. A strike would have left a shortage of key products like the Chevy Equinox, Impala, and Camaro models, as well as the brand-new Cadillac XTS. Without that overhang, I expect GM stock to continue the strong performance it has achieved over the past month.

Disclosure: I am long F, GM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.