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The UAW’s Mexico Dilemma

Sigma Investment Counselors

February 25, 2016

Ford Motor Company recently announced that it will build a new assembly plant in Mexico designed to increase output by approximately 500,000 vehicles, more than doubling the company’s capacity there.

Detroit auto makers have long assembled cars and trucks in Mexico.  Now, faced with increasing pressure to market smaller, more fuel efficient vehicles that are inexpensive enough to attract more customers, Mexico’s significantly lower labor costs are becoming even more attractive.  The company’s larger vehicles, mostly assembled in the U.S., are substantially more profitable than small cars, but as fuel economy mandates escalate, the industry is going to have to persuade more customers to buy smaller vehicles.

The UAW, not surprisingly, is opposed to moving work outside the U.S.  The union’s leadership contends, with some merit, that the industry is currently very profitable and could afford to absorb the cost disadvantage of U.S. assembly.  Perhaps, but labor costs in the industry’s Mexican plants are less than 20% of the U.S. wage and benefit package.

This is the dilemma.  Ford workers recently received profit sharing checks exceeding $9,000, GM workers even more.  To the extent that the company (and the industry) accepts higher than necessary labor costs, it is not only doing a disservice to its shareholders, but current U.S. employee profit sharing compensation may also suffer.  Union leadership, on the other hand, is always seeking to retain as many jobs as possible and to add new members.  Dues matter.

All comments and suggestions are welcome.

Walter J. Kirchberger, CFA®

 

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