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Why Ford's New Contract Is a Big Win

John Rosevear
October 20, 2011

Consider that bullet decisively dodged: The United Auto Workers announced on Wednesday that workers at Ford (NYSE: F  ) had approved their new labor agreement with a solid 63% voting in favor.

Voting concluded after more than a week of drama that saw UAW leaders threaten a strike after some influential locals voted down the contract by wide margins. But as predicted, cooler heads prevailed -- thanks, perhaps, in part to pressure from a UAW leadership that very much wanted this agreement to pass.

The upshot for workers is pretty clear: bigger bonuses and more job security. But while those bonuses will increase Ford's costs, the company reaped some pretty significant benefits from the agreement as well -- benefits that could lead to some welcome developments for shareholders.

A solid deal for Ford, as well as workers
Ford held a short briefing for media and analysts this morning, in which executives led by Executive Vice President Mark Fields and CFO Lewis Booth presented highlights of the agreement from management's perspective. As is typical at Ford nowadays, the briefing began with a recitation of the key points of the company's "One Ford" turnaround plan, and the high points of the labor agreement were presented in the context of their contribution to the success of that plan.

The bottom line, as Fields put it, is this: The increases to worker compensation under the new contract will increase Ford's costs, but by less than 1% annually -- a similar percentage to rival General Motors (NYSE: GM  ) in its new labor agreement. Meanwhile, Ford's contract makes changes to some labor rules that will allow the company to get more production out of its plants, a "substantial profit opportunity" that should "more than offset" the increased labor costs, Fields said.

Yes, they're adding jobs and bringing work into the U.S., and the bonuses and other increases due under the contract will cost Ford about $280 million this year alone. But Booth maintained that these moves would lead to increased efficiencies and not, on balance, higher costs -- thanks to this new approach to managing labor in factories that Ford is bringing to its U.S. plants for the first time.

Getting more out of current facilities
It's a significant change, say Ford's executives. The new contract allows the company to introduce what it calls a "3 crew" system in its plants, an arrangement that allows managers more flexibility in scheduling than they would have under a standard shift system. These "alternative shift patterns," as Booth called them, will essentially allow the company to schedule plant maintenance or add (or stop) overtime work on the fly.

This, combined with some changes to the way in-plant teams are put together, will allow Ford to get more production out of its existing plants without significant increases in labor costs (in Ford-speak, to "drive utilization of facilities up to reach world-class levels," comparable to the best achieved by rivals like Toyota (NYSE: TM  ) and Honda (NYSE: HMC