Image: Auto worker
Carlos Osorio  /  AP
As bargainers for the United Auto Workers and the domestic automakers try to reach a new contract agreement, labor expenses for General Motors Corp., Ford Motor Co. and Chrysler amount to about 10 percent of the price of a new vehicle, including wages, benefits and "legacy" costs for retiree pensions and health care.
updated 8/6/2007 12:47:27 PM ET 2007-08-06T16:47:27

As bargainers for the United Auto Workers and the domestic automakers try to reach a new contract, Kenneth Cooksey is one of many workers who doesn't understand why the companies are so focused on the cost of labor.

By most accounts, labor expenses for General Motors Corp., Ford Motor Co. and Chrysler LLC amount to about 10 percent of the price of a new vehicle, including wages, benefits and "legacy" costs for retiree pensions and health care.

So Cooksey, a 37-year Ford worker from Detroit, doesn't buy the companies' logic that they have to erase a roughly $25 per hour labor cost gap with their Japanese competitors — Toyota Motor Corp., Honda Motor Co. and Nissan Motor Co.

"We can't help it because the foreigners don't have the legacy costs because they just came over," said Cooksey, who works at a plant just west of Detroit that assembles the Focus small car.

Nissan, Honda and Toyota all pay about the same wages as the Detroit Three. The companies say the cost gap comes in other areas such as health care for active and retired workers, absenteeism, paid days off, and the jobs bank, in which workers get most of their pay when laid off.

By some accounts, the biggest chunk of that $25 the companies want to shave is in retiree health care.

But the union likely will focus the contract talks on the nonlabor costs of building cars and trucks, much of which is controlled by the companies. The current pacts with the Detroit Three expire Sept. 14.

"The vast majority of the costs of producing a vehicle and transporting it to a dealership and preparing it for sale — including design, engineering, marketing, raw materials, executive compensation and other costs — are not related to direct or indirect manufacturing labor," the UAW said in a fact book written for reporters covering the talks.

However, the domestic automakers pay $1,200 to $1,500 per car just for health care, a huge competitive difference that has to be addressed, said Laurie Harbour-Felax, managing director at Stout Risius Ross Inc., a financial and strategic advisory company.

"We'll never be able to compete in the same situation with the Japanese because they don't have the same issues," said Harbour-Felax, who wrote a study that found a $2,400 profit gap per vehicle between the Detroit Three and the Japanese automakers.

About half the gap can be attributed to the labor cost difference, she said.

Retiree costs are one reason Ford, Chrysler and GM lost a combined $15 billion last year. Although Ford and GM recently turned profits, they're still losing money in North America.

The Detroit Three have a combined unfunded retiree health care obligation of about $90.5 billion, a staggering number that must be carried on their books and paid over the life of their employees. With far fewer retirees, the Japanese companies have much lower payments.

On the bargaining table is the domestic companies' desire to reduce or get rid of that giant obligation, perhaps by funding a UAW-run trust that would pay retiree health care bills.

Still, the domestic automakers have a lot they can do to become more efficient to reduce costs and close the profit gap with the Japanese automakers, Harbour-Felax said.

Among the inefficiencies, which all three say they are working to reduce, is the lack of standardized parts globally. Ford, GM and Chrysler have multiple parts that are unique to one model, while Toyota and Honda have standardized parts for nearly all models.

The Detroit Three also are less efficient because they don't build as many cars on shared underpinnings, nor do they design and engineer as many models for sale globally, she said.

"When the union says we're not all the problem here, there is a lot of validity to that," Harbour-Felax said.

Greg Gardner, an analyst for Harbour Consulting, a Troy company that tracks manufacturing productivity, said the companies are focusing on labor costs because they can be measured and controlled.

The UAW, he said, has rules that prevent workers from doing multiple jobs, although it is reaching agreements plant-by-plant to become more flexible. Workers already do multiple tasks for the Japanese companies.

The Detroit Three, though, often price their vehicles so they make less money than the Japanese automakers, many times to preserve market share, Gardner said. They also were caught off guard when gas prices rose and consumers shifted from trucks to cars.

The companies and the union won't talk about the negotiations now that they're under way.

But Cooksey says the union, which gave health care concessions to Ford and GM in 2005, shouldn't give up any more.

Patrick Hegedus, an electrician at the same Ford plant where Cooksey works, isn't so sure. He's happy to be employed in a battered Michigan economy and thinks there may be room for compromise.

"I know things are going to change and somebody's going to have to come to an agreement in the middle," said Hegedus, of Brooklyn, who has worked 13 years for Ford. "The more I think about it, the bigger headache I get."

Copyright 2007 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Discuss:

Discussion comments

,

Most active discussions

  1. votes comments
  2. votes comments
  3. votes comments
  4. votes comments

Data: Latest rates in the US

Home equity rates View rates in your area
Home equity type Today +/- Chart
$30K HELOC FICO 4.95%
$30K home equity loan FICO 5.19%
$75K home equity loan FICO 4.58%
Credit card rates View more rates
Card type Today +/- Last Week
Low Interest Cards 13.40%
13.40%
Cash Back Cards 17.92%
17.91%
Rewards Cards 17.12%
17.11%
Source: Bankrate.com