Photographer: Daniel Acker/Bloomberg

A Wage Hike for Workers, a Win for Fiat

The carmaker still has a labor-cost advantage over its rivals.

Since 2007, workers at Fiat Chrysler’s U.S. plants have fallen into one of two wage categories: veteran employees who earn about $28 an hour, or Tier 1; and newer hires who make about half that, or Tier 2. The system, agreed to by the United Auto Workers (UAW) to help the Big Three automakers stem losses during the recession, turned a job that helped create the American middle class into one that for some barely paid the bills.

Detroit’s autoworkers want that tiered pay scale abolished, and, starting with Fiat Chrysler, they’re closer to that goal. The automaker and the union reached a tentative agreement on Oct. 7 setting higher wages for all workers, averting a strike that would have crippled production. It would create a path for entry-level workers to eventually reach the highest pay grade, more than $29 an hour, with increases beyond that based on seniority.

Under the proposal, scheduled for a vote by union members on Oct. 20-21, Fiat Chrysler’s entry-level workers will start at $17 an hour, up from $15.78. The union didn’t win a cap, similar to one at Ford Motor, on the number of Tier 2 hires. The wage increases are a gain for a union that has spent most of the past decade making concessions. But the big winner is Fiat Chrysler, which under the proposal will continue to keep labor costs below those of its U.S. competitors.

“I thought the UAW would say, ‘Get to $30 and cap Tier 2 at 25 percent,’ ” says Ron Harbour, a partner at New York consulting company Oliver Wyman Group. “I’m shocked that they didn’t push harder for that.”

After Fiat purchased Chrysler out of its 2009 bankruptcy, it reduced its average labor costs by hiring entry-level workers who were paid lower wages and weren’t entitled to costly pensions or retiree health benefits. To keep up with growing demand for its popular Jeep SUVs and pickup trucks, the automaker has hired more than 15,000 workers over the past six years, most of them starting at $15.78 an hour, or $32,822 a year. Adjusted for inflation, that’s less than Henry Ford paid his workers in 1914. It’s also just $2,000 more than the starting price of a Jeep Grand Cherokee.

Nearly half of Fiat Chrysler’s 36,000 U.S. workers make less than $20 an hour, according to the Center for Automotive Research in Ann Arbor, Mich. Ford, the lone U.S. automaker to avoid bankruptcy during the financial crisis, also pays its entry-level workers $15.78 an hour to start, but under its existing contract it can’t have more than 28 percent of its UAW workforce at that level. If it hits that threshold, Ford bumps some workers up to $28 an hour, the top of its pay scale.

In 2008, UAW labor accounted for 15 percent of the cost of a new vehicle among the Big Three, according to the auto research center. Last year, that dropped to 6.7 percent. Fiat Chrysler’s labor cost, the lowest in the industry in recent years, fell 45 percent from 2007 to last year, the group reports. The company’s hourly workforce is the cheapest in Detroit. Per vehicle, Fiat Chrysler pays $1,771 for UAW labor, compared with about $2,400 for Ford and General Motors.

If UAW members vote for the Fiat Chrysler deal, the union will then begin negotiating with GM or Ford. Consultant Harbour expects the UAW to push for a limit on the number of lower-wage workers at GM and retain Ford’s cap. That would leave Fiat Chrysler as the only major U.S. automaker able to hire as many entry-level workers as it wants. “If they do that, Fiat Chrysler will have a huge advantage from a total labor-cost standpoint,” he says. Jodi Tinson, a spokeswoman for Fiat Chrysler, declined to comment. UAW spokesman Brian Rothenberg says the agreement “addresses key member concerns on issues like wages, health care ... while still ensuring members’ long-term job security.”

Even with higher labor costs, GM and Ford are more profitable than Fiat Chrysler. All three saw declines last year: Ford’s net income fell 56 percent, to $3.19 billion; GM’s earnings slid 26 percent, to $3.95 billion; and Fiat Chrysler’s declined 37 percent, to $568 million.

Fiat Chrysler Chief Executive Officer Sergio Marchionne has been open about the industry’s weaknesses and Fiat Chrysler’s search for a merger partner. Consolidation will help cover development costs, he says, and boost returns. The downside for the UAW in such an outcome would be potential job losses if production lines are combined.

Ford has said it isn’t interested in a merger, and GM, Marchionne’s preferred partner, has said it’s busy overcoming last year’s recall crisis and its own emergence from bankruptcy six years ago. Few in the industry, however, dispute Marchionne’s logic or his math.

The bottom line: Even with a wage increase for all workers, Fiat Chrysler will continue to have the lowest labor costs in Detroit.

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