The Friggin Cost of Globalization

Daniel Howes

Ford: Cut labor tab 30%. Pay, benefit cuts are key to survival, competition

Ford Motor Co. is entering this summer’s national labor talks with a clear, if audacious, goal: Cut hourly labor costs by about 30 percent to reach parity with Asian rivals operating in the United States.

Ford pays its workers $71 an hour in wages, pension and health care benefits – “all in,” according to industry parlance – and wants to cut that to about $50 an hour as part of CEO Alan Mulally’s drive to again make Ford “competitive,” according to people familiar with the situation.

Reaching a deal of such magnitude would be no easy feat and is by no means guaranteed, however dire Ford’s circumstances are. But it would amount to the “transformational” labor agreement Mulally is telling insiders Ford needs if it hopes to dig out of its deepening hole.

Selling such an obviously concessionary deal to United Auto Workers leaders, who, in turn, would need to lobby their members, likely would require invoking apocalyptic scenarios – including bankruptcy – and a willingness to risk a damaging strike.

“Anybody who says it will be simple is fooling themselves,” Michael Robinet, vice president of CSM Worldwide, an industry consultant, said Tuesday. “It’s going to be a tough sell.”

Yes, it will. But the truth is that the UAW, whose institutional lifeblood was, is and will be Detroit’s three automakers, is running out of workable options almost as fast as Ford is.

Betting on the Blue Oval

To raise cash to fund a North American turnaround, Mulally essentially has mortgaged all of the automaker’s U.S. assets, including the Blue Oval. He sold Aston Martin. He is exploring “strategic options” for Jaguar and Land Rover, meaning the chronic money pits (especially Jaguar) are being shopped around by investment bankers. And don’t be surprised if word resurfaces that Ford is shopping around Volvo, too.

The clear messages: Ford needs all the cash it can get to weather what is likely to be a very dangerous storm over the next few years, and that survival of the 103-year-old company is not assured.

A Ford spokeswoman, Marcey Evans, declined to comment Tuesday, saying the automaker does not publicly discuss “issues we expect to be in play around our discussions. And we expect to keep those discussions private.”

A UAW spokesman did not return a call seeking comment.

Despite Ford and the UAW reaching a deal on retiree health care, ratifying dozens of competitive operating agreements at local plants, agreeing to plant idlings and green-lighting a national buyout offer for hourly workers, the automaker’s intertwined manufacturing-and-labor empire remains uncompetitive.

Since 2000, people familiar with situation say, the Dearborn automaker’s manufacturing cost per unit has steadily increased. Its fixed costs as a percentage of revenue have jumped to 38.1 percent (compared to Toyota’s roughly 24 percent) today from 24 percent in 2000, even as Ford’s U.S. market share has slipped to 16 percent from 22.6 percent.

Left unaddressed, and in dramatic fashion, this is a recipe for going out of business.

Competitive pressure mounts

Excluding plants scheduled to be closed this year, Ford’s plant utilization is the worst in Detroit – 77 percent – compared to 88 percent at Chrysler and 93 percent at General Motors Corp. Toyota, by comparison, utilizes 103 percent of its plant capacity (through extra shifts) and augments its sales with imports.

Even break times at Ford trail the competition. On average, Ford’s hourly workers get 46 minutes of break time per shift, compared to 30 minutes in most foreign-owed plants operating in the United States. The 16-minute difference amounts to a cost disadvantage of roughly $70 per vehicle.

And the pressure is only likely to get worse. Since 2000, the number of nameplates being offered to American consumers has jumped to 289 from 253. By 2011, the number is expected to be 345, a 36 percent increase over a decade – and evidence that the U.S. market will continue to fragment, placing an even higher premium on manufacturing flexibility and quality.

How the UAW leadership, already fully briefed on Ford’s issues, and its members process Ford’s just-the-facts approach to this summer’s contract talks will be crucial in determining whether there’s a deal or an explosion in Motown.

It promises to be a delicate balancing act between a) drawing a realistic picture of where Ford is, how the union can help and what the real risks are and b) appearing to heap too much blame, publicly, on the union when it is management that designs, engineers and markets cars and trucks.

“They all understand the problem,” says Ron Harbour, president of Harbour Consulting in Troy. “They all recognize it. They all know there’s a gap, but how do you sell it? They have to make sure they make decisions that protect the viability of the company going forward.”

DTW’s brutal reality bites

Meaning the stock bargaining phrase of just-let-me-get-to-retirement won’t cut it this year. Why? Because doing a creeping, incremental deal means there may be no retirement to go to.

Both sides face a brutal reality. To achieve cutbacks totaling some $21 an hour, material changes likely would be made to pensions, health care for workers and retirees and maybe even wages.

Also possible: Creation of a fund, called a Voluntary Employment Benefit Association, that would essentially transfer the retiree health care liability to union oversight, a closely watched move pioneered by Goodyear Tire & Rubber Co.

As much as the UAW’s understandable response to Ford’s demands might well be “we’ve already done enough,” the facts are that they haven’t if the goal is to be competitive with foreign rivals operating here and, most importantly, to restore profitability to ensure their employer’s viability.

“They’ve got tough choices,” says David Cole, chairman of the Center for Automotive Research in Ann Arbor. “Ford is the most vulnerable. If you run out of cash, you’re gone. It’s a bet. The risk of saying, ‘I’m not going to do it’ is you might lose it all.”

Daniel Howes’ column runs Mondays, Wednesdays and Fridays. You can reach him at (313) 222-2106, or