Ford Motor Co. (F)’s new contract with the United Auto Workers will increase its labor costs less than 1 percent annually while allowing the company to offset that in efficiency gains, the company said.
Ford’s hourly labor costs, including wages and benefits will rise to $59 from $58, Marty Mulloy, chief labor negotiator of Dearborn, Michigan-based Ford, said in an interview. The company will deploy workers more productively in team-based systems, he said. Ford has estimated Toyota Motor Corp. (7203) pays $50 an hour in wages and benefits to its U.S. workers.
“The hourly wage itself isn’t the only important thing,” John Fleming, Ford’s executive vice president of manufacturing and labor affairs, said in the same interview. “Being competitive is really around the whole area of efficiency times hourly wage. We see this as an opportunity for us to close on the competition.”
Ford’s U.S. hourly workers voted 63 percent in favor of the four-year contract, the UAW said yesterday. Ford has agreed to create 12,000 jobs, invest $6.2 billion in factory upgrades and give each of its 40,600 U.S. workers as much as $10,000 in bonus and profit-sharing payments this year. The automaker won’t give raises to senior workers or restore cost-of-living pay increases workers gave up to help Ford survive.
The deal paves the way for Ford to begin paying an 8-cent quarterly dividend in 2012’s first quarter, its first since 2006, Brian Johnson, an analyst with Barclays Capital, wrote in a note today. Bloomberg analysts forecast a 5-cent dividend will be paid in January.
“We think this will be favorably received” by credit rating companies, Chief Financial Officer Lewis Booth said on a conference call today with analysts and reporters. “There is the opportunity going forward to think about a dividend not directly related to investment grade.”
Ford previously said it would not restore the divided until it achieved an investment-grade rating, Booth said. The automaker has changed its view on that, he said.
“Our shareholders have been very patient,” Booth said. “It would be nice to get to investment grade, but that’s not entirely in our control.”
Moody’s Investors Service said Oct. 5 it would likely raise Ford’s credit rating if the contract was ratified. Moody’s rates Ford debt at Ba2, two steps below investment grade. Standard & Poor’s said Sept. 29 it may raise Ford’s credit rating two levels to BB+, the highest non-investment grade, depending on the outcome of labor talks.
“The contract may have some pluses and minuses on the cost side, but we think it generally is consistent with their ongoing ability to stay profitable in North America,” Robert Schulz, S&P’s auto analyst, said yesterday in an interview in Birmingham, Michigan.
‘We Create Magic’
The final vote in favor of the contract was a reversal of early opposition to the deal, rejected by at least five factories last week. UAW President Bob King has said ratification would be hampered by Chief Executive Officer Alan Mulally’s “outrageous” 2010 compensation, which rose 48 percent to $26.5 million.
Ford also rewarded Mulally with more than $56 million in stock for returning Ford to profitability after $30.1 billion in losses from 2006 through 2008.
“I would characterize our labor relations as very good,” Mark Fields, Ford’s president of the Americas said today on “In The Loop With Betty Liu” on Bloomberg Television. “We work together to solve problems and when we do that, we create magic.”
Ford rose 1.2 percent to $11.70 at the close in New York. The shares have slid 30 percent this year.
The automaker had to offer a “richer” contract than General Motors Co. (GM) to win approval from workers, Ford’s Fleming said. The company is paying a higher signing bonus, greater “inflation protection” annual bonuses and offering more generous buyouts than GM. Ford said lump-sum payments to workers will cost $280 million this year.
“Truthfully, we did it to be able to get to an agreement,” Fleming said. “You saw that the vote was 63 percent, so it wasn’t a unanimous vote by any means. So it was probably pitched about right.”
The 12,957 workers who voted against the deal were likely looking for a raise and restoration of annual cost-of-living increases to their wages, he said.
“There were people who were overall unhappy,” Fleming said. “People had an expectation of what they believe they should get back that they believe they gave up previously. Clearly, through this, not all those aspirations were met and that’s probably the majority of the concern and why some people voted no.”
Higher Labor Costs
The new contract will add about 70 cents an hour to Ford’s $58 hourly labor costs, including wages and benefits, Johnson of Barclays estimated. That will boost the automaker’s annual labor costs by $70 million and reduce earnings by about 2 cents per share, he said.
GM’s new UAW contract will raise labor costs 1 percent a year, the smallest increase in four decades, the automaker said Sept. 28.
“Ford still has the highest per-hour cost, as Chrysler started lower and GM likely benefits from greater skilled trades attrition and legal services benefit cuts,” Johnson wrote in an Oct. 17 research note.
Ford’s labor costs will come down as the company hires as many as 3,280 workers during the next four years, said Mulloy, the company negotiator. New workers start at an entry-level wage of $15.78 an hour, rather than the roughly $28 an hour senior employees make. The entry-level wage will rise to $19.28 by 2015 under the contract.
On Oct. 24, Ford will hire about 1,300 entry-level workers who have already been in its factories as temporary employees, Fleming said. Those temporary workers already receive the lower wage, he said. That will give Ford a total of 1,450 workers paid at the lower rate, Fleming said.
“Over the next couple years, I think we will see the majority” of the new hires made, Fleming said.
Ford also may lower labor costs if higher-paid workers accept buyouts, Fleming said. Ford is offering $50,000 buyouts to production workers and $100,000 buyouts to skilled-trade employees, who are the highest paid hourly employees. Ford hopes 900 to 1,000 of its skilled-trade workers accept the buyout, Fleming said.
“This isn’t like 2006, where we were in a pretty desperate situation and we had way too many people than was required to operate our plants,” Mulloy said. “If the people want to go, God bless them, ‘Here’s the money and have a good life.’ If they want to stay, they can stay.”
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