The Furious Frenzy of Car Firms to Find Fair Ground

Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Chrysler workers can strike with just 24 hours’ notice.  Scary.  That’s why the firm, owned by Fiat (NASDAQOTH: FIATY.PK), negotiated with its union, the Canadian Auto Workers (CAW), into the early morning hours last Wednesday. 

Chrysler Canada produces 25% of all Chrysler automobiles, including vehicles like the Town and Country, the Dodge Charger, and the Grand Caravan.  Though producing a high volume of cars, the company has encountered a few labor problems with its Canadian operations, forcing the firm to enter tough negotiations with its workers.

Car Headaches

For starters, Chrysler has higher costs than both General Motors (NYSE: GM) and Ford (NYSE: F). GM and Ford both pay hourly costs per worker that are $5 more in Canada than in the U.S.  Chrysler, however, pays $10 to $15 more per hour, per worker, than in the U.S.  The pricing disparity has Chrysler angling for ways to cut costs.

Also, these costs are exacerbated by Chrysler’s high number of employees.  GM has the most workers at its Canadian plants, with Chrysler coming in second.  However, Chrysler covers 8,094 workers under its new contract compared to 5,500 for GM. 

Ford has also applied pressure to Chrysler by signing its own agreements.  Ford inked a deal on the eve of September 17, when all three automakers’ contracts were set to expire.  As Chrysler workers were comparing their desires with the Ford deal, GM struck a four-year deal with workers, putting even more pressure on Chrysler.

Despite all the pressure, Chrysler is holding out for better terms.  Fixed costs threated to drop the company’s profits – a huge issue because Fiat would not have been profitable last quarter without its Chrysler unit.  Chrysler is concerned about cost-of-living payments to workers, which total $9,000 per worker.  The company is open to continuing the payment, but it hopes to gain some flexibility in timing the payment, hoping to coincide the lump-sum payments with quarterly profits.

Through the entire negotiating process, the U.S. firms face a sense of urgency, fearing that the foreign automakers will gain even more ground.  Toyota (NYSE: TM), for example, sold more cars this year than any other automaker, pushing 4.97 million onto the market through June 30. 

Toyota is also making strong strides toward increased profitability.  The company has moved some of its production to Mexico, where it can export vehicles.  The move resulted from a strong yen, which is causing Toyota slimmer margins.

Also, Honda (NYSE: HMC) is pulling farther ahead of Chrysler.  Honda is setting up more exporting operations in the U.S. and Mexico, where it can take advantage of the weak U.S. dollar.  The company plans to focus on exports to countries with strong currencies.  Honda exported 50,000 vehicles in 2011 but plans to quadruple that amount to 200,000 in 2012.

By reaching a settlement with workers soon, Chrysler can put the brakes on a labor strike and can rev up its car production to keep pace with its foreign competitors.  GM and Ford have already signed their labor deals, and Chrysler must carefully weigh labor cost savings with the revenue cuts that a strike would bring.

And Chrysler had better act fast – a 24-hour strike notice may not be enough for Chrysler and the CAW to agree. 

Interested in Additional Analysis?

Ford has been performing incredibly well as a company over the past few years -- it's making good vehicles, is consistently profitable, recently reinstated its dividend, and has done a remarkable job paying down its debt. But Ford’s stock seems stuck in neutral. Does this create an incredible buying opportunity, or are there hidden risks with the stock that investors need to know about? To answer that, one of The Motley Fool’s top equity analysts has compiled a premium research report with in-depth analysis on whether Ford is a buy right now, and why. Simply click here to get instant access to this premium report.


ChrisMarasco has no positions in the stocks mentioned above. The Motley Fool owns shares of Ford. Motley Fool newsletter services recommend Ford and General Motors Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

blog comments powered by Disqus