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FCA likely faces higher labor cost increase than rivals under UAW deal: analysts

Fiat Chrysler Automobiles NV will likely face higher cost increases than its Detroit rivals, General Motors Co. and Ford Motor Co., even as all three stand to take fourth-quarter hits after ending labor negotiations with the United Auto Workers, experts said.

The UAW announced it ratified a new four-year contract with Fiat Chrysler on Dec. 11, after approving a deal with Ford on Nov. 15 and GM on Oct. 25.

The three UAW four-year contracts follow a similar pattern in terms of wage increases, and each offered ratification bonuses for their UAW-represented workers. GM workers received $11,000 ratification bonuses after a six-week strike that cost the company $1 billion in the third quarter, but both Ford and FCA full-time workers were given $9,000 bonuses. The union chose to negotiate with GM first, setting the contract pattern for the other two Detroit automakers.

GM stands to feel the most immediate pain, as the UAW strike wiped out as much as $6 billion in adjusted automotive free cash flow and $2.9 billion in net profit for the full year, Morningstar analyst David Whiston said. But FCA, the last of the three to sign a union deal, stands to lose more than the others in the long run as pay raises take effect for a higher share of the Jeep and Ram-maker's employees who have not maxed out their pay, experts said.

Philippe Houchois, an equity research analyst at Jefferies, said that about 25% of GM and Ford workers are in-progression, or those who have not yet reached the top pay rate, compared with about 55% of FCA's.

"Over the next four years, what is going to happen is the proportion of [in-progression employees] is going to go close to zero," Houchois said. "What will happen in 2023, at the end of the contract, is the gap between the labor costs of FCA, Ford and GM will close to pretty much zero."

FCA's wage expenses could increase by $1.5 billion to $1.6 billion over four years, Houchois said.

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Looking at annual cost inflation for labor expenses, Houchois said FCA is facing a 9% average cost increase, while Ford and GM will see a rise of 3.5% to 4%.

An FCA spokesperson declined to comment on increased labor costs, which none of the three automakers disclose.

The ratification bonus will hit each automaker in the fourth quarter, Houchois said, adding that FCA and GM spread the cost over four years in their profit and loss statement, whereas Ford includes it in the fourth quarter.

Ford has said it expects to incur fourth-quarter expenses of $700 million from the contract, mainly associated with the bonus.

Richard Hilgert, Morningstar's FCA analyst, said wage increases and bonuses for the FCA's approximately 47,000 UAW workers will cost roughly $1.4 billion over the four years of the contract. He expects the ratification bonus to cost abour $400 million in the fourth quarter.

Overall, Ford was the "winner" in the UAW negotiations, according to Art Wheaton, an auto and labor expert at Cornell University's The Worker Institute.

"I heard zero drama in terms of worries about ratification," he said, adding that Ford paid $2,000 less than GM for the ratification bonus and did not have anyone indicted, referencing the ongoing federal corruption investigation between the UAW, FCA and GM that led to 13 former union or auto officials being charged in a yearslong bribery scheme.

"I think Fiat Chrysler did great considering all of the swirling headwinds in their way," Wheaton said.

Along with the investigation, FCA is in the middle of a merger with France's Peugeot SA.

FCA was able to stick with the contract pattern, but Wheaton said it did increase future costs for the automaker.

"They had a lot of temps and in-progression workers," he said. "They were in hiring mode."

Wheaton said FCA will start to feel the increased costs in the first quarter of 2020.