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On November 2, 2009, United Auto Workers (UAW) Union President Ron Gettelfinger announced that over 70% of its 41,000 members rejected a cost-cutting agreement between Ford (F) and the UAW, which was negotiated last month. Under the proposed Ford contract, workers would have received a $1,000 bonus, but entry-level wages would be frozen, and the union would not be able to strike in case of a disagreement on wage or benefit increases.

Ford workers, who agreed to $500 million in concessions earlier this year, felt they were being asked to give up more than the company’s executives, and thus soundly defeated the measure. The agreement would have brought labor costs in line with those of Detroit rivals, Chrysler and General Motors (GM), both of which won concessions from the union as they went into bankruptcy protection earlier in the year. As a result, Ford will end up having higher labor costs than its competitors.

It is rare for union members to vote against leadership. But the workers apparently felt as if they were asked to give up too much, too soon. They also believed that since Ford did not enter bankruptcy protection, and avoided taking federal bailout money, its financial situation wasn’t as dire as that of General Motors or Chrysler. They felt that Ford’s comparative strength made further cutbacks unnecessary. They believe that this is especially evident given Ford’s announcement on November 2, 2009 of better-than-expected third-quarter  earnings. 

Ford reported an operating profit of nearly $1 billion, or $0.26 a share, which was driven by improved North American operations, renewed strength at its credit arm, and the weakness of its rivals. Ford management also stated that it would be “solidly profitable” in 2011, an improvement from earlier projections that it would break even.  Workers now feel that, since they bore the brunt of the company’s austerity measures during the tough times, they should be rewarded with a return of some of the lost benefits now that the company has returned to profitability.

Ford management has been walking a tight rope. On the one hand, it has made a strong case about not having to go to bankruptcy court, while on the other hand, it has stated that it needs additional concessions from workers to stay competitive. Since Mr. Gettelfinger recently stated that he would not continue bargaining or conduct a re-vote , these issues will likely come up again during the next labor agreement, which is scheduled for 2011. If these issues are not resolved by 2011, it could be a major concern for Ford, as it will likely be the only domestic auto company left with a union that has the capacity to go on strike.

Ford believes that it will not be able to compete with its rivals over the long term if its labor costs remain at higher levels than its competitors. Although Ford is better off than GM and Chrysler, it is hardly in good financial shape, given its significant amount of debt, and ongoing uncertainties regarding the global economic recovery. Ford’s goal is to simply attain the same concessions that the UAW agreed to with GM and Chrysler. Without them, Ford may have to consider moving production of some product lines to lower-cost countries, perhaps Mexico or Canada.  

We don’t expect the current situation to go away anytime soon. Although Ford has the option to move some production abroad, this could alienate other domestic workers, which could lead to a devastating work stoppage. On the other hand, union workers need to realize that, without a competitive labor cost structure, Ford will not be able to compete with rivals GM and Chrysler in the long run, which could potentially lead to workforce reductions in the years to come. We believe both sides will have to make difficult concessions, and they will need to work together in order to have a mutually beneficial relationship.