Ford hails success of new US labour contract, to take USD600-mil. charge for signing bonuses

In a conference call yesterday 30 November, Ford president and CEO Mark Fields discussed the impact on the automaker's plans of its recently ratified collective bargaining agreement in the United States with the United Auto Workers union (see United States: 23 November 2015: UAW members ratify labour pacts at GM, Ford). Fields said the key points are the agreement will close the gap between Ford's higher labour costs and those of General Motors (GM) and Fiat Chrysler Automobiles (FCA) by the end of the four-year deal; will increase Ford's US labour costs by less than 1.5% per year, including bonuses; is consistent with the company's full-year 2015 guidance; and provides a foundation for stronger business in years to come. The agreement secures USD9 billion in investment in US production by Ford, creating or retaining 8,500 jobs and confirming US sourcing commitments throughout the contract period (see United States: 10 November 2015: UAW Ford National Council approves tentative contract, proposal being sent for membership ratification). Fields also noted that paying the agreed bonuses will result in a USD600-million expense charge during the fourth quarter of 2015. In Ford's view, the workforce has been rewarded with basic pay increases, bonuses, and other benefits.

Under the deal, in terms of bonuses, regular employees receive a USD8,500 ratification bonus, with temporary employees having a USD2,000 bonus. A USD1,500 profit-sharing payment planned for 2016 is moved forward to December 2015, while other annual bonuses of USD1,750 are maintained. Legacy employees receive two 3% general wage increases and two 4% lump-sum payments, a structure similar to those of the GM and FCA agreements. Key factors in getting the Ford deal passed was the ability for lower-paid tier-2 workers to go up a level to regular worker status over time; tier-2 workers are now called "in progression" employees at all three automakers. In the immediate term, these employees are moved on to the same healthcare plan that "legacy" employees enjoy, while they have an eight-year grow-in model. The defined retirement benefit model is unchanged, though Ford increases its contribution from 4% to 6.4%. All three automakers also restored the Easter Monday holiday; however, during the conference call, Fields said that Ford achieves more flexibility in production scheduling in exchange. Ford obtains additional rights to daily or weekend mandatory overtime and flexibility over alternative work schedules. Those changes should make it easier for Ford to adjust production to demand, without additional hiring or brick-and-mortar investment. Ford has also won the ability to use lower-cost temporary employees to cover "specific types of full-time employee absences or product launches". This will enable Ford to better react to unexpected absences, as well as enable the company to ramp up capacity quickly during launch phases, when consumer interest and demand for a new product are typically particularly high, without requiring the company to hire additional full-time employees or over-rely on expensive overtime shifts. Ford has also won an end to its cap on hiring new entry-level ("in progression") workers; the company had been working with a cap that its competitors did not have. The cap forced Ford to move some workers from the tier-2 (now "in progression") to the tier-1 ("legacy") category earlier than it might have wanted to. With the eight-year plan for moving employees from one group to another, however, the new hires now have a clear line of sight for being able to evolve into the higher-pay, legacy status.

In a company statement that accompanied the conference call, Fields said, "This agreement enables us to further strengthen our business and continue investing in manufacturing in the US." He added, "At the same time, the agreement aligns our labour cost structure more closely with our competition and improves our manufacturing productivity and staffing flexibility." Ford also noted that it exceeded the 12,000 new jobs that it committed to as part of the 2011 Ford-UAW agreement by more than 3,000 jobs, and that it invested more than USD10.2 billion between 2011 and 2015.

Outlook and implications

Ford's follow-up conference call on the impact of the UAW agreement has detailed its impact to the media and analysts, including IHS. Following the ratification of the Ford contract, four-year agreements have been approved at all three of the Detroit-based automakers, though each saw varying levels of resistance by union members. Ford has secured an agreement that enables flexibility to adjust production to meet demand, while providing employees with higher wages and bonuses. The balance between flexibility and wage increases is a key aspect, as the pain of the most recent recession is fresh enough for automakers to prioritise planning for the cyclical nature of the industry within its union contracts - in contrast to earlier decades when unsustainable structures had been agreed.

One particularly interesting element was that the automaker says it has gained "flexibility to leverage Ford's global manufacturing footprint to improve cost competitiveness". During the call, Fields indicated this may mean that Ford will import products for US sale from other markets - as long as its commitments to US production levels and sourcing are met. Fields did not elaborate on what products might be imported or from where. However, IHS Automotive forecasts the next-generation Taurus might be imported from China. While the number of vehicles that Ford is likely to begin importing into the US, from China or any other non-NAFTA source, is expected to be comparatively low, it seems clear that this contract protects the automaker's ability to choose that option. For vehicles with notable volume sales, it will remain in Ford's best interest to retain production in the US and/or the NAFTA region. However, products that might have significantly higher volume opportunities in other markets and low-volume opportunities in the US may be strong candidates for importation. Traditionally, the UAW resists approving or enabling automakers to import in any significant volume, as the union's function is to protect US jobs.

IHS Automotive forecasts that Ford will continue to build more vehicles in the US than any other country through the forecast period, though output will fall back from the estimated 2.50-million units in 2016 to about 2.30-million units in 2021, in part on an expectation that US light-vehicle sales will contract later in the decade. Ford's production in China (excluding joint ventures), its second-largest production source, is forecasted to increase from about 903,000 units in 2016 to 1.04 million units in 2021, though in the longer term it is forecasted to plateau near 1.10-million units per annum (upa). IHS currently projects that only a handful of vehicles in the US market will be produced outside of the NAFTA region through 2021. Our October 2015 forecast projects the next-generation Ford Taurus will be sourced from China at a rate of about 45,000 upa beginning as soon as 2017, followed by a B-segment product from Thailand from 2018 at a rate of about 36,000 upa, in addition to the Transit Connect sourced from Spain and the Focus RS from Germany.

It is important to Ford's - or any other automaker's - overall profitability to leverage a global production network to meet regional demand. Ford's US production footprint, however, will remain its largest and the predominant source for US-market products. In relation to production in the NAFTA region, however, Ford is increasing its output in Mexico, shifting production of the Focus from the US to Mexico as it outfits the Michigan Assembly plant to build a mid-size pick-up and truck-based sport utility vehicle (SUV). Output in Mexico is forecasted to increase from about 433,000 units in 2015 to about 614,000 units in 2021. The company's production in Canada is, however, forecasted to decline from about 286,000 units in 2016 to 214,000 units in 2021.