Last week, General Motors (NYSE:GM), Ford (NYSE:F), and Fiat Chrysler (NYSE:FCAU) began negotiations with the United Auto Workers for new four-year contracts that will cover more than 150,000 workers.

The current round of contract talks could be the most contentious in recent memory. All three automakers have made a lot of money since the last set of contracts was implemented four years ago, yet U.S. auto sales have peaked and could fall significantly if there's a recession in the next few years. But GM -- which is in the midst of idling several underutilized factories in the U.S. -- faces the greatest risk of an impasse that could lead to a damaging strike.

The big issues for this round of bargaining

Back in 2007, with the U.S. auto industry sputtering, the UAW accepted big concessions: most notably, the implementation of a two-tier wage scale that paid new hires significantly less than the existing workforce. In 2011, the automakers were starting to bounce back, but the union had to settle for modest pay improvements and promises of more jobs.

By 2015, Ford and GM were highly profitable, and Fiat Chrysler was in a much healthier state than it had been four years earlier. As a result, the UAW was able to negotiate the phasing out of the two-tier wage system over an eight-year period. However, the union accepted some trade-offs to achieve that result, such as allowing the automakers to use more low-wage temporary workers.

A white Chevy Silverado driving on a road, with a green field in the background

Strong truck and SUV sales have boosted U.S. automakers' profitability. Image source: General Motors.

This year, the UAW hopes to rein in the use of these temporary workers, while also winning wage and benefit improvements and ensuring job security for its members. Given that the Detroit Three have earned big profits in North America in recent years, achieving those objectives might seem easy.

That said, Ford reported an operating profit of $7.6 billion in North America last year, down about 14% from $8.8 billion four years earlier. While the company is revamping its product lineup to boost profitability, it won't want to spoil its progress by agreeing to an onerous labor contract. At Fiat Chrysler, adjusted operating profit for North America doubled to more than $7 billion last year, compared to $3.5 billion in 2014. That should enable the union to win wage gains that would narrow the pay gap between Fiat Chrysler and its larger rivals. The real question is whether that pay gap can be fully eliminated in one contract.

However, these issues pale in comparison to the scenario at GM. In North America, the General posted an industry-leading adjusted operating profit of $10.8 billion last year, up from $9 billion four years earlier (excluding recall costs). Yet despite this prosperity, General Motors is idling four plants in the U.S. -- forcing workers to retire, transfer to other locations, or seek other work after being laid off. That sets the stage for contentious negotiations.

GM workers are fed up

General Motors may have announced the decision to leave several plants "unallocated" -- that is, with no products to build -- to put the UAW off balance ahead of the 2019 contract talks, according to The Wall Street Journal. The idea may have been that the threat of layoffs would force the union to focus on saving jobs rather than winning wage increases in the next contract.

A Chevy Cruze parked in front of a building

GM has idled the plant that used to build the Chevy Cruze for the U.S. market. Image source: General Motors.

If that was actually the plan, it may be backfiring. Many GM workers are becoming increasingly militant in reaction to the company idling plants during a run of strong profitability. They want higher wage gains and new products to keep all of the U.S. production facilities open.

Labor tensions were aggravated by GM's decision to build its new Chevy Blazer crossover at a plant in Mexico. That product was announced last June -- the same day that the company's plant in Lordstown, Ohio, dropped its second shift due to falling demand for the Chevy Cruze compact car. Five months after that, GM revealed that the Lordstown plant would be idled in 2019.

The General also builds several lower-volume models for the North American market in South Korea and China. While there are reasons for those decisions -- and GM has invested $26 billion in its U.S. manufacturing operations over the past decade -- the optics are still bad for the company.

There's no easy answer

GM's strong profitability and its solid product road map do give it the flexibility to meet some of the union's likely demands. That said, the company has too much production capacity in North America, and the facilities it wants to close aren't profitable.

While the decision to build the Chevy Blazer in Mexico attracted lots of criticism, U.S. dealers delivered just 11,772 Blazers last quarter. For comparison, domestic deliveries of the Cruze totaled 16,166 -- even though production had ended before the quarter began.

Indeed, at the peak in 2014, Chevy dealers delivered about 273,000 Cruzes in the U.S. Just to make one assembly plant like the Lordstown facility viable, GM would need to move production of several models to the U.S. from abroad. That would just push GM's labor tensions outside of the U.S., to places like South Korea, where production has been falling steadily in recent years.

It wouldn't be that surprising if GM agrees to revive production in the future at one of the U.S. facilities it's idling this year -- even if that forces it to shutter a more efficient plant abroad. The additional costs might be worthwhile, if that's what it took to head off a labor strike. But given how far apart management and labor seem to be at the outset of talks, there's a significant risk that they will be unable to resolve their differences without a work stoppage.

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