The UAW’s Dilemma

The UAW and the Detroit based auto manufacturers are currently in the process of negotiating a new four year agreement.

UAW members generally resent the two tier wage system and long-time employees feel that they have been left behind as the industry recovers from the bailout/bankruptcy era.  It should be noted that UAW auto workers have received substantial profit sharing payments.  For Ford and GM workers, these payments have amounted to approximately $5.00 per hour over the last four years.

The manufacturers are concerned about the cyclical nature of the business and the durability of current strong demand.  They are also cognizant of the continuing difference in their labor costs compared to foreign owned U.S. assembly.  The Center for Automotive Research has estimated that the labor cost disadvantage for the Detroit three was approximately $3,000 per vehicle in 2007 and is still approximately $1,100.  Wage increases in a new contract, particularly those narrowing the gap between tier one and tier two employees, could affect the industry’s relative labor costs.

A $1,100 per unit cost differential is not an insurmountable problem for vehicles retailing for more than $50,000, but is a big problem at the low end of the market, an essential segment in the average fuel economy challenge.

This gets to the heart of the UAW’s problem.  Following the resumption of auto production after the end of WWII, UAW members assembled substantially all of the vehicles sold in the U.S.  During the ensuing period, UAW members enjoyed a significant wage premium over average domestic manufacturing wages and employee pay at foreign owned U.S. assembly plants.*  The Detroit three saw their market share of U.S. light vehicle sales go from almost 100%, to less than 50%.

Investors should be aware that labor costs matter.  While it is in the long term interest of employers to treat their work force fairly, in the near term, material wage increases, in highly competitive industries, can be a problem.  Note Wal-Mart’s recent decision to materially improve wages and benefits for most of their associates, the larger than expected adverse impact on the most recent quarterly report, and the sharp decline in the company’s share price.

*Sources:  Center for Automotive Research & U.S. Department of Labor, Bureau of Labor Statistics.

All comments and suggestions are welcome.

Walter J. Kirchberger, CFA®