Fiat Chrysler Automobiles (NYSE:FCAU) and the United Auto Workers said on Tuesday night that they had come to tentative agreement on a new four-year labor contract.
This is significant. The UAW's contracts with the three Detroit automakers run for four years. The union's standard practice is to hammer out a new agreement with one of the three automakers and then to use that agreement as a template for contracts with the other two.
We don't know all of the details of the new contract, because they weren't announced. That's also standard practice. The contract won't be official until it's approved by the UAW members who work for FCA, and the union's leadership shares the details of the tentative agreement with its members before revealing them to the public.
But we do know that the contract addresses two big hot buttons: healthcare costs and the two-tier wage system.
A need to rein in spiraling healthcare costs, without cutting benefits
Here's the starting point for these negotiations: Ford's average U.S. labor cost is roughly $57 an hour and GM's is $55 an hour, according to Center for Automotive Research figures cited by Bloomberg. FCA and Toyota pay about $10 less than Ford.
Those costs include wages and benefits, including very expensive healthcare plans. Both Ford and GM would like to close that gap to Toyota, and FCA would like to hang on to its advantage.
Healthcare is a big component of that spending. It's a huge expense for all three automakers. Between them, they pay over $2 billion a year to fund health insurance for active workers and blue-collar retirees. All three say that medical expensive have been growing too quickly.
UAW President Dennis Williams has floated the idea of a healthcare purchasing pool that would represent active workers and blue-collar retirees from all three automakers, about a million people. The idea is that the size of the pool would give it leverage to reduce costs.
It's not yet clear whether FCA agreed to participate in such a pool. But FCA CEO Sergio Marchionne said on Tuesday night that healthcare is "an important piece" of the new deal.
Williams is motivated to help reduce the automakers' healthcare costs, because it could give the automakers' room to give UAW members a raise while still reducing their overall spending. I think that all three automakers would like that trade-off, and I suspect we'll see that that's the intent of the new agreement.
But some UAW members are more in need of a raise than others.
Big pressure to change a wage system that the workers consider unfair
Healthcare costs are a big concern for the companies. But the two-tier wage system that was introduced in 2007 is a very big concern for the union members who work in the Detroit Three's factories.
For years, workers at all three automakers all had the same wage scale. But over time, Detroit's labor costs rose far beyond those at the non-union U.S. factories of companies like Toyota and Honda.
In 2007, the UAW (very reluctantly) agreed to a system that capped the pay of entry-level workers hired after that date at $19.28 an hour. Veteran workers, those hired before the 2007 agreement, earn about $28 an hour. (They haven't had a raise in many years.)
The idea was that, over time, Detroit's costs would fall as the older workers retired. Such an agreement was seen as necessary to bring Detroit's costs closer to non-union rivals'. But it was an exceptionally bitter pill for the workers to swallow, and the UAW leadership has felt a great deal of pressure to eliminate the two-tier system -- or at least to close the gap.
This new agreement may do the latter, over time. Marchionne said on Tuesday that the deal includes "a very careful process" that will eliminate the two-tier system in time. The Wall Street Journal reported that the deal will gradually raise the lower-tier pay ceiling to around $25 an hour. The exact time frame and dollar amounts aren't yet public.
The upshot: This could be a very good deal for both sides
If you own shares in any of the Detroit automakers, here's the big takeaway: Labor peace is a very, very good thing.
Imagine the cost of even a short strike at, say, a factory that is working around the clock to meet surging demand for super-profitable big SUVs or pickups. Avoiding such strikes is always a huge win for shareholders. Always.
That said, we can't get too excited yet because this isn't quite a done deal. We don't yet know what's in the agreement -- and we don't yet know how the UAW rank and file will feel about it. We also don't yet know how the UAW will try to adapt the deal struck with FCA to its negotiations with Ford and GM, and we obviously don't know how those separate negotiations will play out.
But Detroit has had decades of contentious labor relations. The UAW under Williams has taken a much more collaborative approach, treating the automakers as business partners. That seems to have worked well with FCA, and negotiators at Ford and GM say that they're optimistic.
If the UAW and the automakers really do get new contracts that lower overall costs while giving the workers a raise, it'll be a good deal for everyone concerned. We'll know more in a few days.