What's happening: The United Auto Workers (UAW) and Ford (NYSE:F) have come to a tentative agreement on a new four-year labor contract for Ford's U.S. workers. Workers will vote on whether to accept the new agreement over the next several days.
Why it matters: A successful new labor agreement that doesn't drastically boost Ford's costs isn't the kind of news that will have a big effect on Ford's stock price. But it's still important, because any of the alternatives to a successful and affordable labor deal would have an effect on the stock (and on Ford's business), and not a good one.
This deal is a rich one for workers, but it's probably a reasonable deal for Ford, too. It's comparable to the deals made by the UAW with Ford's two Detroit rivals, with somewhat richer bonuses -- and a hefty list of commitments to investments in Ford's U.S. factories.
But for Ford, the good news is that the bonus money is linked directly to Ford's profitability in North America. Ford has been exceptionally profitable recently, but when times get tough, its commitments to workers will get less expensive.
Wage parity with the other Detroit automakers, but richer bonuses
This deal is very similar to the one the UAW got with General Motors (NYSE:GM), which in turn followed the general outlines of the deal the union hammered out with Fiat Chrysler Automobiles (NYSE:FCAU). Like those deals, Ford's tentative contract largely does away with the hated "two-tier" wage system that pays newer workers on a lower scale than veterans. All three deals phase out the system over eight years, and all three will pay about the same hourly wages.
But the Ford deal looks to be a little richer for its workers in some other ways. Ford's "signing bonus," which will be paid when the contract is approved by workers, is higher than FCA's and GM's. The profit-sharing formula is the same as GM's (an annual bonus of $1,000 for every $1 billion in pre-tax North America earnings), but Ford's signing bonus will include a $1,500 advance on this year's profit sharing payment.
Ford's deal gives some additional concessions and money to "skilled trades," the expert tradespeople who have historically been paid on a somewhat higher scale than regular factory workers. Objections from skilled tradespeople have held up approval of GM's tentative agreement -- Ford and the UAW were clearly looking to pre-empt those objections.
Big investments in big changes to Ford's U.S. production
Ford's new deal commits the company to $9 billion in new factory investments in the U.S., and to creating or retaining 8,500 jobs, both higher than its Detroit rivals' commitments. The structure of the product commitments is interesting: Like FCA, Ford appears to be preparing to move production of most of its car models out of the U.S., in order to use its higher-cost U.S. factories to make high-profit-margin SUVs and trucks.
That sounds like a dramatic move, but in reality it will only affect a few U.S. factories. Ford's Michigan Assembly Plant currently makes the Focus and C-Max. But when those models are revamped in 2018, production will move elsewhere, presumably Mexico -- and Michigan Assembly will get a couple of new models to build, believed to be the new Ford Ranger and Bronco.
The Fusion is currently made in two factories, one in Mexico and one in Flat Rock, Michigan. The next Focus won't be made at Flat Rock, which is instead expected to begin production of the Lincoln Continental. (The Ford Mustang is also made at Flat Rock and that isn't expected to change. But it looks like the Mustang and the Continental will be Ford's only U.S.-made car models after 2018 or so.)
The Taurus is made at Ford's Chicago Assembly, which is also home to the Explorer. Given the poor recent sales of the Taurus, it may simply be discontinued. That would allow Ford to boost production of the Explorer -- or to shift production of the compact Lincoln MKC from the extremely busy factory in Louisville that also makes the Ford Escape. Either way, if there is a new Taurus, it too will come from a factory outside of the U.S.
The hope is that the product juggling essentially pays for the workers' raises. We'll know more after Ford comments on the contract, which won't happen until after it's approved by workers.
What happens next: A committee of UAW representatives from Ford locals voted to approve the agreement on Monday, meaning that it can now be shared with workers. The workers will vote on it over the next couple of weeks. If a majority of workers vote to approve the deal, it goes into effect immediately -- with the wage increases retroactive to Sept. 15.
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.