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Ford Says Cost Gap Almost Gone

A new contract with the United Auto Workers has nearly eliminated a $30-per-hour labor cost gap with Japanese competitors, setting up Ford Motor Co. to roll out more new products and return to profitability, the automaker said Thursday.
/ Source: The Associated Press

A new contract with the United Auto Workers has nearly eliminated a $30-per-hour labor cost gap with Japanese competitors, setting up Ford Motor Co. to roll out more new products and return to profitability, the automaker said Thursday.

Marty Mulloy, the company's vice president for labor affairs, said shifting Ford's long-term retiree health care costs to a union-run trust and a new lower-tier wage scale will remove much of the gap.

"I'd say very close but not all the way," he said during a conference call to explain the landmark four-year deal with the UAW.

The union announced on Wednesday that Ford's 54,000 UAW workers overwhelmingly ratified the contract, reached Nov. 3 after a marathon bargaining session.

Ford also said it will make another round of buyout and early retirement offers to UAW workers by the end of the year, with departures expected to begin in the first quarter of 2008. Terms and timing have yet to be negotiated with the union.

The contract eventually will shift a $23.7 billion retiree health care liability into the trust, which Ford will fund with a combination of $13.2 billion in cash and notes, the company said. That amounts to roughly 56 percent of the obligation.

In the presentation, Ford said it expects a net cash flow benefit of $1 billion per year once the retiree health care costs are shifted to the trust in January 2010.

Ford said the cash flow benefit includes health care cost savings of $1.6 billion per year, offset by the cost of contributions to the trust, called a voluntary employees beneficiary association.

The company's contribution breaks down to $2.7 billion in cash, $3.8 billion from an existing VEBA, a $3.3 billion note convertible into about 363 million new shares of Ford stock, a $3 billion second lien term note and $400 million in deferred payments.

The VEBA still must be approved by a federal judge, and Ford would continue to be responsible for retiree health care until the trust takes over, the company said. But benefits from the reduced health care liability will begin to show up on Ford's balance sheet next year, the company said.

The other big savings component for Ford is wages, including the UAW agreeing to a pay structure for new hires starting at $14.20 per hour, about half that of a current worker.

Up to 20 percent of Ford's hourly work force can be paid the lower wages, plus all the workers at parts-making plants in Ypsilanti Township and Sterling Heights.

Ford would use buyouts and early retirements to get existing workers to leave, clearing the way for the new, lower-cost hires.

Before the lower wages can be paid, Ford must take on workers who want to return to the company from factories now in a holding company awaiting sale or closure. About 1,100 of those workers have signed up to return and 5,200 remain, Mulloy said, adding that he could not give a timetable on when the company would begin taking advantage of the lower wages.

Unlike similar deals the UAW reached with Chrysler LLC and General Motors Corp., the Ford contract allows the company to pay the lower wage to any new hourly employee. The Chrysler and GM pacts only allow the lower wage for jobs not directly involved in making vehicles or parts.

Ford also won the ability to contract out grounds maintenance, housekeeping and janitorial functions at its facilities, and contract language requiring minimum employment numbers at each plant was eliminated, the company said.

The deal was tailored to Ford's needs and "is a product of collaborative bargaining with the shared goal of creating a viable and profitable Ford Motor Co.," President and Chief Executive Alan Mulally said. "We are now in a position to really accelerate our new product development with great new products built by our UAW work force."

The contract, like those with GM and Chrysler, has no base pay increases, but gives lump-sum payments of $3,000 this year and in the remaining three years averaging $2,200 to $3,000, Ford said.

In exchange for the deal, Ford agreed to save from closure five factories that it had planned to idle under a restructuring plan. The plants are Louisville Assembly in Louisville, Ky.; Wayne Assembly and Wayne Stamping in Wayne, Mich.; the Rawsonville parts plant in Ypsilanti Township, Mich.; and Dearborn Diversified Manufacturing near Ford's headquarters in Dearborn, Mich.

In addition, the company agreed to extend for one year the life of the Cleveland Casting plant in Brook Park, Ohio, and Twin Cities Assembly in St. Paul, Minn., both of which were to close.

The company also decided not to build a low-cost assembly plant in North America, giving it one assembly plant more than it had targeted in the restructuring plan, said Joe Hinrichs, Ford's vice president of North American manufacturing.

Ford has the ability in the contract to idle a factory if necessary, "but that's not what our plans entail going forward," Hinrichs said.

Ford also will spend millions to build state-of-the-art body shops at five assembly plants, making them flexible enough to build multiple models, Hinrichs said.

Still, Ford has too much factory capacity, but the benefits from the deal seem to be worth keeping the plants open, said Erich Merkle, vice president of auto industry forecasting for the consulting firm IRN Inc. in Grand Rapids.

"I think they did what they had to do," Merkle said. "They probably did not want to approach it at this particular time, but the capacity issue at some point is going to have to be addressed."

Ford shares fell 18 cents, or 2.26 percent, to $7.80 in afternoon trading.

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