Ford executives say that its new four-year labor deal won't significantly increase its costs, despite significant wage increases for some factory workers. Image source: Ford.
Ford said on Monday that its U.S. labor costs will rise less than 1.5% under its new four-year labor agreement.
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It also said its new deal will bring its costs to parity with its two Detroit rivals, both of which were able to cut their costs substantially in the wake of their 2009 bankruptcy proceedings.
Many workers will get big raises under the new deal -- eventually The new labor contract was ratified earlier this month by the U.S. Ford employees represented by the United Auto Workers (UAW). It includes wage increases comparable to those won by the UAW at General Motors and Fiat Chrysler , with more generous bonuses -- and $9 billion worth of commitments to U.S. manufacturing by Ford.
At first glance, it seemed like a substantially richer deal than the last contract, one that could make a noticeable dent in Ford's North American profit margins.
But in a conference call for analysts on Monday, CEO Mark Fields argued that other provisions in the contract will allow Ford to offset the costs of the wage increases and bonuses.
How the new contract will help Ford offset the wage increases
First and foremost, the contract gives Ford more leeway to use lower-cost temporary employees in its factories under certain circumstances, including during new product launches. That will help reduce the cost of those launches and could help increase productivity during other times.
Increased use of temporary workers raises questions about how Ford will maintain high quality, but Ford manufacturing chief John Fleming said that having a steady group of temporary and part-time workers will likely improve quality, on balance.
The new contract also gives Ford the right to schedule additional mandatory overtime shifts. That will help Ford squeeze more production out of its already-busy factories without boosting fixed costs. Given the high demand and tight supplies of products like Ford's white-hot Escape and Explorer SUVs, that's a clear win.
It also, as Fields put it in a carefully parsed sentence, "enables flexibility to leverage Ford's global manufacturing footprint to improve cost competitiveness on products that we might choose to sell here." That seems to hint that Ford is planning to import vehicles to the U.S. from places other than Canada or Mexico.
There have been hints that the next-generation Fiesta might be built in Thailand, and other hints that Ford is thinking about importing its Fiesta-based subcompact EcoSport SUV, which is made in several factories in Europe and Asia.
That wouldn't be unprecedented: GM already sells several Korean-made vehicles in the U.S., including the popular Buick Encore crossover SUV, and it is reported to be planning to import the larger Buick Envision SUV from China next year.
What the deal doesn't do: Close the gap to ToyotaFields' message on Monday was that the new labor deal isn't just a win for workers, it's also in some ways a win for Ford. Fields explained that the deal includes some provisions (including the temporary workers, and the preservation of the lower-cost Supplemental Unemployment Benefit plan) that will help Ford control its costs during the next economic downturn.
What it doesn't do is lower Ford's costs to be more competitive with import brands like Toyota , which manufactures some of its vehicles in lower-cost non-union U.S. plants and haslower production costs overall.
CFO Bob Shanks said on Monday that the gap between Ford's total hourly costs and Toyota's would continue to be "about $8 to $10 an hour," but Fields noted that Ford's margins have been strong despite a similar gap under the old agreement thanks to other efficiencies and its ability to get strong prices on its newest products.
The upshot: New contract brings some gains for Ford, tooThis new contract wasn't a dramatic victory for Ford in terms of costs, but Ford says it wasn't as bad as some analysts (including this humble Fool) initially expected. And it's fair to note, as Ford did on Monday, that the similar deals signed by FCA and GM will bring their costs into rough parity with Ford's over the next four years.
Long story short: The new contract shouldn't make a significant dent in Ford's North American profit margins over the next four years. If that prediction holds, that's good news for investors.
The article Ford: Costs Won't Jump Under New Labor Deal originally appeared on Fool.com.
John Rosevear owns shares of Ford and General Motors. The Motley Fool recommends Ford and General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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