UAW, automakers to negotiate over labor gap

updated 12:47 p.m. ET Aug. 6, 2007

DETROIT - As bargainers for the United Auto Workers and the domestic automakers try to reach a new contract, Kenneth Cooksey is one of many workers who doesn't understand why the companies are so focused on the cost of labor.

By most accounts, labor expenses for General Motors Corp., Ford Motor Co. and Chrysler LLC amount to about 10 percent of the price of a new vehicle, including wages, benefits and "legacy" costs for retiree pensions and health care.

So Cooksey, a 37-year Ford worker from Detroit, doesn't buy the companies' logic that they have to erase a roughly $25 per hour labor cost gap with their Japanese competitors — Toyota Motor Corp., Honda Motor Co. and Nissan Motor Co.

"We can't help it because the foreigners don't have the legacy costs because they just came over," said Cooksey, who works at a plant just west of Detroit that assembles the Focus small car.

Nissan, Honda and Toyota all pay about the same wages as the Detroit Three. The companies say the cost gap comes in other areas such as health care for active and retired workers, absenteeism, paid days off, and the jobs bank, in which workers get most of their pay when laid off.

By some accounts, the biggest chunk of that $25 the companies want to shave is in retiree health care.

At a glance THE ISSUE: Bargainers for the United Auto Workers union and the Detroit Three automakers are working to reach a new contract, and the cost of labor is a key focus for the auto companies. THE COSTS: By most accounts, labor expenses for General Motors Corp., Ford Motor Co. and Chrysler LLC amount to about 10 percent of the price of a new vehicle, including wages, benefits and "legacy" costs for retiree pensions and health care. THE TALKS: The companies want to erase a roughly $25 per hour labor cost gap with their Japanese competitors. But the union likely will focus the contract talks on the nonlabor costs of building cars and trucks, much of which is controlled by the companies.

But the union likely will focus the contract talks on the nonlabor costs of building cars and trucks, much of which is controlled by the companies. The current pacts with the Detroit Three expire Sept. 14.

"The vast majority of the costs of producing a vehicle and transporting it to a dealership and preparing it for sale — including design, engineering, marketing, raw materials, executive compensation and other costs — are not related to direct or indirect manufacturing labor," the UAW said in a fact book written for reporters covering the talks.

However, the domestic automakers pay $1,200 to $1,500 per car just for health care, a huge competitive difference that has to be addressed, said Laurie Harbour-Felax, managing director at Stout Risius Ross Inc., a financial and strategic advisory company.

"We'll never be able to compete in the same situation with the Japanese because they don't have the same issues," said Harbour-Felax, who wrote a study that found a $2,400 profit gap per vehicle between the Detroit Three and the Japanese automakers.

About half the gap can be attributed to the labor cost difference, she said.

Retiree costs are one reason Ford, Chrysler and GM lost a combined $15 billion last year. Although Ford and GM recently turned profits, they're still losing money in North America.

The Detroit Three have a combined unfunded retiree health care obligation of about $90.5 billion, a staggering number that must be carried on their books and paid over the life of their employees. With far fewer retirees, the Japanese companies have much lower payments.

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