Detroit’s Big 3 Heading for Labor Showdown

by Will Ashworth | August 28, 2012 1:49 pm

Detroit’s Big 3 Heading for Labor Showdown

There are charges that Canada is one of the most expensive places in the world to produce a vehicle, so Chrysler, Ford (NYSE:F[1]) and General Motors (NYSE:GM[2]) are trying to change that.

Workers, though, already made concessions during the recession and want to share in the success of the now-profitable automaker business. And they mean business. The Canadian Auto Workers (CAW) union recently voted unanimously to support strike action if necessary — and no company got less than 97% approval.

There hasn’t been a CAW strike since for over a decade, when workers puled out on GM in 1996. So, what would it mean today? Here are the details:

What They Are Fighting About

According to the CAW, the top hourly rate in Canada for its production workers is $34, about $6 more than UAW production workers in the U.S. So it’s not surprising that the comments section of the Globe and Mail article[3] discussing support for a potential strike is filled with readers that are overwhelmingly critical of the auto workers[4] for being so short-sighted and ungrateful.

The union, on the other hand, asserts that because consumer prices in Canada are approximately 23% higher than in the U.S., Canadian auto workers are actually paid less. The problem with the entire wage argument, though, is that there is no agreed upon standard for comparing workers north and south of the 49th parallel.

Ford, for one, says its all-in labor costs including pensions and health care is $79 an hour compared to $64 in the U.S. GM says its all-in cost is approximately $60 per hour in Canada, while Chrysler’s costs are slightly lower at $58 per hour.

Then, the Center for Automotive Research suggests the average cost in Canada is $60 an hour compared to $55 in the US. It’s impossible to know who’s actually citing accurate information. The one thing we do know is that $60 an hour is rather generous in any profession, whether it be teaching or auto assembly.

What’s Actually Important

Ken Lewenza is the boss of CAW, and the one who pointed out the wage difference. And some, like Globe and Mail reader J. Henry, don’t agree with what he is saying. Henry writes about labor costs and inflation, concluding that, “The hard reality is U.S. labor costs are $14 less per hour. Whether [American workers] enjoy cheaper prices on consumer goods in the U.S. is irrelevant to labor costs.”

Henry makes some interesting points in his comment, but this one is off the mark. Ken Lewenza is actually correct to point out that wages are higher in Canada because our cost of living is 23% above that in the U.S. If you live in New York City or San Francisco, I’m sure you can relate to this. Is it unreasonable for a union to seek wages that are commensurate with consumer prices? Absolutely not.

As in America, where the middle class has gradually disappeared, Canadians in all sorts of industries have accepted stagnant wages for far too long while their costs continue to rise unabated.

Who Would Be Hit the Hardest

The company that would be hurt most by a strike is Chrysler, who produce about 27% of its North American vehicles in Canada. Chrysler will make approximately $800 million of its $3 billion in overall profit in 2012 from its Dodge Caravan, which it makes in Windsor, and its Chrysler 300 which is made in Brampton.

At present, Chrysler workers in the U.S. are on a two-tier wage system where new workers are paid approximately 40% less than the $29.11 hourly wage for established workers.  Speculation has it that a two-tiered wage system will be on the table during the negotiations, which officially began on Aug. 14 but start in earnest this week.

Chrysler’s CEO, Sergio Marchionne, is considered to be a tough negotiator, though, and is on record as opposed to a two-tier wage system because it’s divisive to labor. Lewenza, on the other hand, believes the real reason is because Marchionne wants to significantly lower the wages of first-tier or established workers.

And that’s where the rubber meets the road. How badly does Chrysler, Ford and GM want to keep making cars in Canada?

If one of them goes on strike, I think we’ll find out pretty quickly.

The Bottom Line

American car companies came to Canada to acquire cheap electricity, universal health care for their workers and a Canadian dollar 40% lower than the greenback. Now that two of three of those are gone and the third is hanging by a thread, it seems there’s little motivation to remain except under serious wage concessions.

In the end, though, too much is at stake for the Big Three — especially Chrysler — to call the CAW’s bluff , as they are doing just fine under the existing arrangement.

And frankly, a strike at this point makes no sense to both the workers or the companies. Momentum is still on their side and a work-stoppage would change that and let rival Toyota (NYSE:TM[5]) back into the game.

As of this writing, Will Ashworth did not own a position in any of the stocks named here.

Endnotes:
  1. F: http://studio-5.financialcontent.com/investplace/quote?Symbol=F
  2. GM: http://studio-5.financialcontent.com/investplace/quote?Symbol=GM
  3. Globe and Mail article: http://www.theglobeandmail.com/globe-investor/caw-overwhelmingly-support-strike-mandates-at-big-three-in-contract-talks/article4500630/
  4. overwhelmingly critical of the auto workers: http://www.theglobeandmail.com/globe-investor/caw-overwhelmingly-support-strike-mandates-at-big-three-in-contract-talks/article4500630/comments/
  5. TM: http://studio-5.financialcontent.com/investplace/quote?Symbol=TM

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