On to the General: The United Auto Workers (UAW) said on Thursday that it will now turn its focus to securing a new four-year labor agreement with General Motors (NYSE:GM).
What: The UAW is moving on to GM after UAW-represented workers at Fiat Chrysler Automobiles (NYSE:FCAU) voted this week to approve their new contract. That contract was the second to be presented to workers. The first was voted down amid complaints that it didn't adequately address workers’ key concerns.
Those concerns will be front and center in the UAW’s renewed negotiations with GM.
So what: The most significant concern was widespread dissatisfaction with a "two-tier" wage system instituted in 2007, when all three Detroit automakers were in deep financial trouble. Under the system, new hires get paid on a lower scale than veteran workers, and have fewer benefits.
Put another way, two workers doing exactly the same job can be paid at very different rates depending on when they were hired. That didn’t sit well with union members, but it was accepted at the time as a way to help the automakers reduce costs at a critical moment.
With that moment long past, and all three companies returned to profitability, workers want the system gone. The new agreement with FCA essentially phases it out. The top wage for junior-tier workers under the old contract was $19.28 an hour. It will gradually rise to over $29 in steps over the next eight years. FCA also agreed to improved benefits for those junior-tier workers, as well as raises for the veterans.
The upshot is that the new deal is expected to add almost $2 billion to FCA's costs in North America over the next four years, according to sources cited by Bloomberg.
That was apparently a cost that CEO Sergio Marchionne was willing to pay for labor peace. A similar deal with GM may be less expensive. At the time the two-tier system was put in place, Chrysler was in especially dire condition -- it was allowed to hire a greater share of junior-tier workers. GM and Ford (NYSE:F) have fewer of those workers, and that could offset the cost of similar deals.
Now what: UAW president Dennis Williams has tried to set clear expectations with his members. The UAW has historically tended to use the first contract it gets as a template for its negotiations with the other two Detroit automakers. But Williams and his deputies have clearly acknowledged that this time around, the contracts may differ more than usual because each automaker’s situation is different.
GM has outstanding profit margins in North America at the moment. It also has slightly lower labor costs than Ford (by about $2 an hour), although both paid significantly more than FCA under the old agreements. FCA's costs were comparable to those at Toyota's (NYSE:TM) U.S. factories, about $10 an hour lower than GM.
The UAW may see the General as the fattest target this time around and may press especially hard to win concessions, including raises and improvements to benefits. GM CEO Mary Barra, on the other hand, will almost certainly push for a deal that closes the cost gap with Toyota.
The upshot will probably be a deal that gives GM's workers raises comparable to those received by their counterparts at FCA, with some creative rearrangements of benefits that give GM some offsetting savings. If the negotiators agree soon, and the workers approve the contract with a minimum of strife, that could be a win for both sides.
But there's always the risk that negotiations will go awry and workers will choose to strike. That could be an expensive consequence. GM (and Ford) shareholders should stay tuned.
John Rosevear owns shares of Ford and General Motors. The Motley Fool recommends Ford and 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.