DETROIT (Reuters) - Ford Motor Co expects operating savings of $500 million per year from an agreement with the United Auto Workers that also will make its labor costs competitive with Japanese rivals, the company said on Wednesday.
The agreement trims average wages and benefits for UAW hourly workers to about $55 per hour this year, from more than $70 per hour when Ford was negotiating a watershed contract with the union two years ago.
That figure is expected to drop to about $50 per hour by 2011, or roughly on a par with what Japanese automakers led by Toyota Motor Corp will be paying their non-union U.S. factory workers, Ford said.
Labor costs represent only about 10 percent of the total cost of producing a vehicle in the United States, but Detroit automakers have faced increasing pressure to eliminate a wage and benefit gap with the U.S. operations of their Japanese rivals, referred to in the industry as transplant automakers.
Ford’s cross-town rivals General Motors Corp and Chrysler LLC are required to make wages and benefits paid to U.S. factory workers competitive with Toyota and other Japanese automakers under the terms of their government bailouts.
Chrysler, about 80 percent controlled by Cerberus Capital Management LP, and GM have received $17.4 billion of emergency government loans and have requested billions more in emergency loans to complete restructurings.
GM and Chrysler also have reached tentative agreements with the UAW on labor issues, but have withheld details until talks are completed on the funding of their healthcare trusts.
Wages and benefits in the GM UAW agreement are patterned on the Ford contract, but the contracts differ in other areas such as employee placement and company-specific details, UAW Vice President Cal Rapson said in a letter to members on Monday.
Ford’s agreement with the UAW, which workers ratified earlier in March, suspends some performance and bonus payments, reduces overtime costs and cuts a paid holiday, as well as restructuring funding of a union retiree healthcare trust.
Joe Hinrichs, Ford’s global head of manufacturing, said the savings from the operating agreement and restructuring of the funding of the trust, the Voluntary Employee Beneficiary Association (VEBA), are “critical to our future competitiveness.”
“This gets us to within the ballpark of where the transplants are,” Hinrichs said in a conference call with analysts and reporters.
The annual savings could exceed $500 million if industry conditions allowed Ford to exercise all of the changes in the agreement, Hinrichs said.
Ford has about 42,000 hourly workers covered by the contract. About half of the annual savings would come from the elimination of performance bonuses and the Christmas bonus and the suspension of cost of living increases.
Ford restructured payments into the VEBA, including the option to contribute about half in company stock, to conserve cash. The plan to make payments in stock requires shareholder approval at the Ford annual meeting this year.
Ford, which posted a record $14.7 billion net loss for 2008, has said it believes it has adequate liquidity to operate through the economic downturn without seeking emergency U.S. government loans.
One analyst said Ford’s deal with the UAW appeared to meet the cost savings targets set out by the Treasury Department for its aid to GM and Chrysler.
“If correct, we believe this is a significant milestone and investors should now turn their attention to negotiations with the bondholders,” KeyBanc Capital Markets analyst Brett Hoselton said in a note to clients.
Ford has announced salaried job cuts and executive pay reductions and last week launched an effort to reduce $25.8 billion of automotive debt by up to 40 percent through conversion of debt to equity and tender offers.
Ford also has agreed to offer buyouts to UAW-represented workers from April 1 through May 22. Ford has offered buyouts previously to hourly workers and the offers will be lower than those in the past due to the current economic conditions.
Ford plans to consolidate assembly work between adjacent Michigan Truck and Wayne Assembly plants near Detroit. The automaker is converting its Michigan Truck plant to build the European-designed 2010 Ford Focus small car.
The Wayne facility will continue to perform stamping and some body work and the consolidation is not expected to result in job cuts from the Wayne facility.
Ford shares rose 11 cents, or 5.95 percent, to $1.96 Wednesday on the New York Stock Exchange.
Reporting by David Bailey; Editing by Lisa Von Ahn, Gerald E. McCormick and Carol Bishopric