Strike averted! Fiat Chrysler Automobiles (NYSE:FCAU) reached a tentative deal with a Canadian labor union late on Monday night, just minutes before workers were set to walk out at three critical factories.
What's the deal?
As expected, the deal between FCA and the Unifor labor union was patterned after a deal the union reached with General Motors (NYSE:GM) last month. Like their GM counterparts, hourly workers at three FCA factories in Ontario will receive modest wage bumps, a boost in the pay rate for newly hired workers, and some changes to their retirement plans.
Perhaps more important from the union's perspective, FCA agreed to make substantial investments in a key Ontario factory. A lack of investments in recent years had led to concerns among the workers that FCA was gearing up to close the facility.
Why the factory investments are important
First, some background. The tentative agreement covers about 9,650 Unifor-represented workers at three FCA factories, all in Ontario:
- Brampton Assembly builds the Chrysler 300, Dodge Charger, and Dodge Challenger.
- Etobicoke Casting makes die-cast aluminum parts, including pistons for engines.
- Windsor Assembly builds the Dodge Caravan and Chrysler Pacifica minivans.
Unifor's president, Jerry Dias, said late last month that upgrades at Brampton were his biggest point of concern going into negotiations with FCA.
A particular concern was the area of the factory in which vehicles are painted, called the "paint shop." The facility is old and in need of significant updates. But FCA CEO Sergio Marchionne has stalled on those updates for several years, raising fears that the company might try to close the factory when production of the current-generation Charger, Challenger, and 300 ends.
Under the new deal, FCA promises that those updates will happen. The company committed 325 million Canadian dollars ($245 million) for what union officials described as a "complete rebuild" of Brampton's paint shop next year. It's not clear if FCA also committed to bring future products to the plant.
FCA will also invest CA$6.5 million ($4.9 million) in upgrades at the Etobicoke Casting facility, the union said.
Windsor Assembly wasn't a big concern for the union, as it was recently upgraded to produce the all-new Chrysler Pacifica minivan. But FCA agreed to add an upcoming plug-in hybrid to the product mix at the factory, union officials said.
What FCA gets out of the deal
First and foremost, assuming that workers ratify the new agreement, FCA gets four years of labor peace in Canada. That's important.
But FCA also won some concessions similar to those in Unifor's deal with GM, including an agreement that new hires will be enrolled in a defined-contribution plan -- similar to a U.S. 401(k) plan -- rather than in the defined-benefit pension plan that covers existing workers.
Is this a good deal for FCA?
Yes. The wage increases are unlikely to have a significant impact on FCA's cost structure in North America over the long term. As in GM's case, most of the concessions FCA gave up were not a huge price to pay for four more years of labor peace.
The new paint shop at Brampton is expensive, but the alternative was probably a messy attempt to close the factory. The truth is, that new paint shop is probably long overdue. At least in their higher-trim versions, the Charger, Challenger, and 300 are among FCA's most profitable (and most visible) models, bought by some of the company's most devoted and knowledgeable customers. Investments that will improve the quality of those products will have a visible impact over time.
The takeaway: Good news for FCA investors
The situation at Brampton may seem like inside baseball, and the rest may appear inconsequential. FCA avoided strikes at three important factories with a deal that isn't likely to come back and haunt it later on. For its investors, that's clear good news.
John Rosevear owns shares of General Motors. The Motley Fool recommends 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.