Two employees in Kentucky Truck Plant work on the door line. Wages and benefits of more than 12,000 local workers will be on the line when Ford and the United Auto Workers begin contract talks next month.

Ford employees at Kentucky Truck Plant work on the door line. | Courtesy of Ford Motor Co.

The wages and benefits of more than 12,000 Louisville workers will be on the line when national contract negotiations between Ford Motor Co. and 55,000 members of the United Auto Workers union begin next month.

The current contract ends in September, and a labor expert told Insider that turbulence in the auto industry and the economy as a whole will make the coming tug-of-war the toughest since before the financial crisis.

“These negotiations, I think, are going to be tense and challenging on a number of different fronts,” said Marick Masters, professor of management and director of the Douglas A. Fraser Center in the Mike Ilitch School of Business at Wayne State University.

The local union leader told Insider that he’s been preparing union members and their families for a fight.

“I feel it’s going to be a battle,” said Todd Dunn, president of UAW Local 862. The union represents 3,900 hourly workers at Louisville Assembly Plant who make primarily Ford Escapes, and about 8,500 who work at Kentucky Truck Plant, mainly to make the Super Duty. Ford is Louisville’s second-largest employer.

The UAW simultaneously will negotiate with General Motors and Fiat Chrysler America, meaning the outcome of the talks will affect more than 150,000 American workers.

A portrait of Marick Masters

Marick Masters

Masters said that the automakers are entering the negotiations as they’re seeing stagnating sales — but at the same time are facing enormous investments into new technologies. The union, meanwhile, will want raises and commitments for investments in American manufacturing plants to increase job security.

While automakers always have to spend money on developing new products, Masters said rapid technological changes in the industry are requiring additional investments in electrification and autonomous vehicles. Ford and other U.S. automakers have to invest in new technologies or fear losing sales to foreign competitors.

Ford also still is feeling the drag from investments in China that haven’t paid off, and from staying in the small car market longer than competitors, Masters said.

Generating additional capital through higher revenue will be difficult, he said, as sales are stagnating and input costs are rising. Ford’s first-quarter vehicle sales fell 2.1 percent compared to the same period last year, and Masters said potential tariffs on vehicles could cut sales further. Ford last year already had three of nine plants operating below recommended capacity, according to the Detroit Free News.

Meanwhile, tariffs on steel and aluminum are costing Ford about $500 million annually.

That means Ford will have to look for additional money elsewhere, and, Masters said, labor costs will be an obvious target.

However, the labor economist Art Schwartz told Insider that while auto sales are slowing a bit, they remain strong and are nowhere near the collapse that the industry saw during the last recession.

Schwartz is president of Ann Arbor, Mich.-based consulting firm Labor and Economics Associates and formerly served as general director of labor relations for GM, where he was a member of seven sets of national contract negotiations with unions including the UAW.

While the industry is facing some uncertainty related to tariffs and the renegotiated trade agreement among Mexico, Canada and the U.S., Schwartz said the industry remains strong and he believes the risk of a strike over this year’s negotiations is low.

Wages, health care costs

A side profile of a red 2020 Ford Escape resting on a blue carpet

The all-new 2020 Ford Escape, made at Louisville Assembly Plant. | Photo by Boris Ladwig

Ford’s hourly labor costs are the highest in the industry in North America, according to the Center for Automotive Research. In 2015, Ford paid about $61 per hour on wages, benefits, pension contributions and bonuses, about $1 more than GM but about $5 more than Toyota. A $5 hourly difference, at 40 hours per week, would be $10,400 per year per worker, or about $572 million annually for Ford’s entire unionized workforce.

To put that another way: If Ford didn’t have the labor premium, it could introduce an additional brand new vehicle every year.

However, Schwartz said that Ford has dealt with the labor cost premium for a long time, and the union made some concessions in 2007 that narrowed the gap with other automakers. The gap is widening again a bit, he said, and the company is sure to bring that up this year, but a vehicle’s production costs are far less affected by labor than by logistics expenses and prices of components, including electronics and steel.

Ford has been taking costs out of its system, most recently by announcing the elimination of 7,000 white-collar jobs, but industry observers have said that more is yet to come — though cuts likely will be concentrated outside of the U.S.

Masters said the union is likely to say that it has made sacrifices through the recession and expansion to keep the company afloat, and while it has made some progress in reclaiming some of what the workers sacrificed, the company still owes them.

The Detroit-based automaker in the last four years has generated an average annual net profit of $5.8 billion. In the last three years, the company has rewarded shareholders with average annual dividend payments of about $3 billion. Investors have not been impressed: The company’s shares have lost about a quarter of their value in the last three years, in a period in which the Dow Jones industrial average has risen by 50%.

A portrait of Art Schwartz

Art Schwartz

Schwartz said that while Ford’s profits may have been disappointing for Wall Street, the company will have a tough time if it means to suggest in negotiations that it is struggling, especially if company leaders are telling investors publicly that the company is doing well.

In labor negotiations it’s typical for the company to “plead poverty,” while the union is going to say that it won’t budge on its demands, Schwartz said, but both sides have to pick their non-negotiable items carefully.

Masters and Schwartz also said that Ford might try to get workers to pay more for health insurance, as they currently pay only a single-digit share of the costs, with no deductible. Ford’s health care costs are rising and are projected to exceed $1 billion for its U.S. hourly workers next year.

However, Masters said cuts to health benefits are a “nonstarter” for the union, while Schwartz said it’s a “go-to-war issue for the UAW.”

Schwartz said the parties have worked together in the last few years to contain health care costs without changing the basic benefits structure, by encouraging workers to get care in less expensive settings. That effort likely will continue and may help the union retain most if not all of the health care plan.

Dunn, the local union president, said that the union will want the company to reduce the eight-year in-progression period, or the number of years it takes for new employees to reach the maximum wage. 

“It’s got to be reduced,” he said.

Dunn also said that the company has to curb its use of temporary workers, because many of them work for Ford for years without seeing the same pay and benefits as in-progression employees. In addition, he said, temporary workers can lose their jobs at any time, which makes it difficult for them to plan their families or purchase cars and homes.

However, Schwartz said that while unions always complain about temporary workers, automakers need them to replace vacationing full-time workers and to react to short-term volume spikes. The use of the lower-wage temporary workers, much like long in-progression periods, helps automakers balance the cost of higher-wage employees, he said.

Workers start near $17 per hour, but can earn about $30 after eight years.

‘Balancing act’

A portrait of Todd Dunn

Todd Dunn

Dunn said that if additional Ford products are available, they should be moved to Louisville, especially Louisville Assembly Plant, which has capacity. About 500 LAP workers migrated to Kentucky Truck Plant this year because of lower demand for the Escape and high demand for the Super Duty and Lincoln Navigator.

“We need to get another product here,” Dunn said.

Masters warned that both sides have to be careful about asking for too much, because a contract that favors either the union or the company by a large extent could jeopardize the long-term viability of some manufacturing plants — or even the company as a whole.

The company can’t alienate its workers or it will risk higher turnover-related costs, lower product quality or even work stoppages and lost sales. Workers, meanwhile, want the company to share some of the wealth, but they also want assurances of continued investments in U.S. auto plants, which would provide job security, he said.

“All those things sort of eat each other up, because ultimately there’s only one pool of resources to draw from,” Masters said.

It’s a “relentless balancing act” that both sides have to get right, he said.

A UAW spokesman told Insider that the union won’t comment before negotiations have begun, but it is amassing cash to prepare for a potential strike, just as automakers are warning about more cuts.

Ford declined to discuss specifics about the upcoming talks but told Insider via email that it wants to reach “a fair agreement … that allows the company to be more competitive so we can continue to preserve and protect good-paying manufacturing jobs and maintain our track record of investing in our U.S. plants.”

Schwartz said the outcome of the negotiations will have repercussions beyond the autoworkers, their families and their communities. The UAW and the Detroit Three will negotiate one of the nation’s biggest labor contracts, which will serve as a bellwether for workers and businesses in other industries.