A Good Deal for Ford?

This could be good news for Ford (NYSE: F  ) shareholders: Concerns that the Blue Oval could be headed for labor trouble may turn out to have been misplaced. Although a deal hasn't yet been announced as I write this, reports suggest that contract negotiations between Ford the United Auto Workers are expected to come to a successful end soon -- perhaps as early as this weekend.

So what will a "successful" deal look like from Ford's perspective? Probably a lot like General Motors' (NYSE: GM  ) new contract, though the proverbial devil will be in the details.

Success for GM. Success for Ford?
GM's new labor deal, approved by its UAW-represented employees earlier this week, contains a lot of provisions that are good for workers -- but its overall structure is one that is very good for GM, and I expect Ford's to follow a similar pattern. By offering workers an expanded bonus structure tied to GM's North American profits, the company was able to avoid increasing wages for its highly-paid "Tier I" workers.

Here's why that's important: Automakers are cyclical companies, meaning their profits rise and fall with economic cycles. In the bad old days of Detroit, GM, Chrysler, and Ford would be profitable during good times but post narrow earnings or losses during recessions. As long as the boom-time profits were fat enough, losses weren't a big deal. For decades, Detroit prospered.

But over time, Detroit's fixed costs grew relative to competitors, thanks to generous union deals and a manufacturing base sized for the kinds of market share the Big Three held in the early 1970s. Simultaneously, the U.S. automakers' margins were coming under pressure thanks to the discounts needed to compete with better-managed global firms like Toyota (NYSE: TM  ) and Honda (NYSE: HMC  ) . Eventually, the profits shrank to nothing and the losses became enormous, and Detroit hit bottom.

Lowered costs key to current success
The last UAW contract did a lot to reduce Detroit's costs, and while Ford was able to bootstrap its own turnaround, GM and Chrysler needed a trip through bankruptcy court to complete the transformation.  Chrysler still has work to do, but GM and Ford are now solidly profitable -- and their newly streamlined cost structures have been carefully kept at levels that should keep them profitable even through a severe downturn.

That's why, for GM and Ford shareholders, the big question going into the UAW negotiations was this: Would the companies be able to complete new labor agreements without adding significantly to those costs? GM succeeded -- executives said on Wednesday that the agreement doesn't add to the company's breakeven costs in North America and should have an minimal overall impact, as the costs of the new bonus programs will be largely offset by other concessions and changes.

The emerging picture is promising
So what will Ford's deal include? We got a small clue on Thursday, when CEO Alan Mulally said that Ford will be adding 7,000 jobs in the United States. My guess is that those jobs are related to the production of future models that had been tentatively planned for Ford's Mexican plants. A similar shift in work by GM was reportedly key to the automaker's final agreement with the union.

More broadly, as I said earlier this week, I expect the deal to follow the pattern of GM's with somewhat richer incentives, as Ford's turnaround is further along than GM's. A deal along those lines could provide immediate benefits for Ford, as Standard & Poor's said on Thursday that it would raise Ford's credit rating two notches if the new contract "does not place Ford at a significant disadvantage."

A two-notch increase would leave Ford at BB+, just below investment grade -- the same level S&P put GM at on Thursday. A return to investment grade is a long-held (and frequently mentioned) goal of Mulally and Ford CFO Lewis Booth, one that now looks like it could happen by the end of the year.

That in turn could lead to a resumption of dividend payments -- something that Ford shareholders have been eagerly awaiting. But first, the company needs a deal with the UAW that keeps its costs in line, and although signs are promising, we'll just have to wait and see.

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Fool contributor John Rosevear owns shares of Ford and General Motors. You can follow his auto-related musings on Twitter, where he goes by @jrosevear. The Motley Fool owns shares of Ford. Motley Fool newsletter services have recommended buying shares of Ford and General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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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  • Report this Comment On October 01, 2011, at 9:46 AM, wigginsrl wrote:

    My concern is that the UAW, thanks to its common-law marriage to the Democratic party, prospers whether its employers prosper or go bankrupt. NOT a healthy situation for free enterprise. If Ford can get the UAW to actually own an interest in company success, this may offset the long-standing unhealthy parasitic relationship of the past.

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