GM’s CAW Labor Deal Can Help Slim The Cost Structure

Canadian Auto Workers’ (CAW) members have voted in favor of a four-year labor deal with General Motors (NYSE:GM) with a 73% vote. Negotiations between the CAW and automakers have been going on for quite a while now with workers of Ford being the first among the ‘Detroit Three’ to ratify the deal. And although the deal doesn’t reduce the labor costs immediately for GM, it does present an opportunity for the automaker to reduce costs in the medium to long term. ^[1]

As per the deal, the new hires will earn 60% of what veteran workers earn. They will also now take 10 years to reach to the top, four years more than what the existing agreement specifies. Thus, the automakers could look to offer lump sum to retirement eligible workers and replace them with lower paid workers. ^[2]

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Also, instead of a percentage hike, the workers will be handed out a  lump sum of $2,000 in the second, third and fourth year to compensate for inflation and increases in cost of living. The workers will also receive a productivity bonus of $3,000 upon ratification of the deal. Any uncertainty regarding the future payouts is effectively eliminated in the process.

The CAW’s deal with GM is similar to Ford Motors‘ (NYSE:F). Unions often use pattern bargaining whereby they take a deal they received with one employer and then use that as negotiating leverage with others.  Chrysler was under pressure to accept a similar deal, but the company’s CEO Sergio Marchionne apparently took a harder stance with threats to shift production outside Canada. But it now seems even Chrsyler has reached a tentative deal with the union which includes a few concessions. Under Ford and GM’s deal with the CAG, the automakers will have to pour in more investment and hire new employees which effectively means rehiring the employees they laid off earlier. Chrysler, on the other hand, has no such obligation.

Still, the labor costs for the ‘Detroit Three’ come out to be in cheaper in the U.S. (ranging from $50-58 per hour including labor and benefits) as compared to around $62 in Canada. A strong Canadian dollar has made the country as an increasingly expensive destination for American auto companies to invest in. The Detroit automakers described Canada as the most expensive place to manufacture cars so getting a concession on the current labor rates was pivotal for the automakers. The CAW union represents about 21,000 employees and 16% of the total North American production.

We currently have a Trefis price estimate of $24.90 for General Motors’s stock, which is about 5% above the current market price.

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1. GM, CAW strike a workable bargain, September 28, 2012, durhamregion.com [↩]
2. New CAW contracts do little to reduce U.S. labor cost gap, September 28, 2012, detroitnews.com [↩]