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A Good Deal for Ford?

John Rosevear
September 30, 2011

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 go