Automakers Catch Canadian Fever

By Rekha Marwah - September 20, 2012 | Tickers: F, GM | 0 Comments

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The Detroit automobile industry has been facing many upheavals, first the sluggish economic climate slows the demand for the cars and then European auto sales fell 8.5% in August. Now, dark clouds loom large as the Canadian Auto Workers union decides to go on strike but as of now there seems some respite. The CAW and Ford Motor Co. (NYSE: F) reached a four year labor agreement, on Monday, that avoided the strike. The union extended its contract with General Motors (NYSE: GM) and Chrysler Group LLC and decided to keep working past the midnight deadline. They said they would give a notice of 24 hours if they go on a strike. The President Ken Lewenza said that the union agreed to the extension of the contract because the labor executive of both the companies asked for more time to study the deal made with Ford as the union want GM and Chrysler to accept same terms.

A ratification vote by CAW members will be held this weekend, this will see wage cuts for new hires and pay freezes for current workers. But lump-sum payments will be made to workers to cover inflation and for ratifying the deal. According to CAW, under the Ford deal the new workers would be paid 60 percent of the current top wage of C$33.89 an hour; they can reach the top wage in 10 years. Five years ago similar two-tier wage agreement was made but the workers did not automatically get the top wage after ten years. It is not clear whether GM and Chrysler would agree to the same deal, Chrysler’s spokeswoman said that the company was reviewing the pact and did not have immediate comment. GM also declined to comment. Lewenza feels hopeful and says if the deal is good for Ford it should be good enough for both GM and Chrysler. But Chrysler criticized CAW’s move saying that Ford is not “in the best position to take on this role”. August proved to be the worst month for Ford. The company’s sales plunged 29% year-on-year. Former GM negotiator Art Schwartz says that if both the companies refuse to go along with Ford it could mean labor trouble.

The companies say that Canada is proving to be the most expensive place in the world to make cars and trucks as the Canadian currency has risen 60% against the US dollar during the past ten years. In the past year GM and Ford made moves to reduce operation in Canada. The CAW represents about 21,000 auto workers in Canada and 16% of auto production in North America. In case of strike there would soon be short supply of the popular models of GM and Chrysler, as CAW workers also make key engine parts and other components of US built cars. US factories will also feel the effects of the strike and there will be shortage of some models because the dealers have not built up their supplies due to higher demands for cars and trucks in US.

Lewenza feels that in today’s economic climate the deal with Ford is a good one and it would avert the strike in the company giving back employment to 800 laid-off workers. Stacy Allerton, a Ford of Canada vice president said, “We believe that the tentative agreement offers unique to Canada solutions that will improve the competitiveness of the Canadian operations while providing employees the opportunity to earn a good living.”

Compared to US factories, the Canadian advantages of past are missing, in addition, the United Auto Workers union in US have agreed to a steeper concessions than the CAW making labor cost cheaper in US. Ontario Premier is confident that the companies and the union will reach agreements.

Automakers like Ford, General Motors, and Fiat bore the brunt of the slump in European markets including Italy, France, and Germany. Sales for the first eight months fell 6.6% to 8.59 million vehicles. Ford is considering cuts even as it is preparing to bring in new models to stop the mounting losses and falling shares in Europe.

General Motors set to make job cuts and an eventual closure of factories, saw an 18% dip in total registrations last month which matched the sales decline observed by the Italian motor manufacturer Fiat. Auto markets in Italy and France were hit but British sales showed little change. Sales in Spain rose 3.4% because the customers rushed to purchase before sales tax increases in September.

All these facts and figures may seem alarming but the facts are not so grim. GM and Chrysler are reporting profits as they are launching new vehicles. Few had expected that these companies were capable of this feat so soon after emerging from bankruptcy in mid-2009. GM shares are dragged down due to struggling European business and “company’s pension obligation for hourly workers”. My choice would always be GM if I were to invest in any US automobile company because of its profitability and market value. GM, for the record has total cash of a whopping $33 billion. GM executives want the Treasury Department to sell their shares but it is resisting. Justine Hyde, the senior editor of Motoramic blog said, “GM is probably after bankruptcy one of the most efficient automakers in the world. They have more cash than they need to operate.” 

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