Lowering Labor Costs to Compete With Japanese Companies Top Priority for Automaker

DETROIT – Contract talks between the U.S.-based automakers and the United Auto Workers formally begin next month, but the key issue is already clear: Eliminating the roughly $25-an-hour labor cost gap between Detroit and its Japanese rivals.

Officials at General Motors (GM), Ford (F) and Chrysler (DCX) said Wednesday that reducing labor costs to the level paid by Toyota Motor Corp. (TM) and Honda Motor Co. (HMC) — Detroit's prime competitors — will be the top priority.

Industry analysts say that survival of the three U.S. companies is at stake. The three automakers based near Detroit generally pay about 30 percent more per hour in wage, pension and health care costs than Japanese automakers.

And nowhere is it more critical than at Ford Motor Co., which lost $12.7 billion last year and has mortgaged its assets to fund a turnaround plan that includes thousands of job cuts to shrink itself to match lower demand for its products.

Ford, according to its annual report, paid $70.51 per hour in wages and benefits to its hourly workers last year. The company, as well as Chrysler Group and General Motors Corp., will seek to reduce costs to around $48 per hour, about the average hourly cost incurred by Toyota, Honda and Nissan Motor Co., company officials have said.

The costs then would be comparable to Asian automakers, who pay similar wages but have far lower pension and health care costs and make thousands of dollars more per vehicle than the three Detroit automakers.

"We know there are competitive gaps," GM spokesman Dan Flores said Wednesday. "We benchmark Toyota in a variety of areas of the business."

GM and the UAW have worked together to cut health care costs and reduce the company's hourly work force by more than 34,000 in the past year through buyout and early retirement offers.

"However more change is required to structure GM for sustained profitability and growth," Flores said.

GM's annual report says its labor costs average $73.26 per hour, while Chrysler's costs average $75.86.

Negotiations are set to begin officially in July, but the UAW already is talking to the Detroit Three.

UAW spokesman Roger Kerson would not comment Wednesday, but union President Ron Gettelfinger said in March that it made major health care concessions in 2005 to Ford and GM that saved the companies billions, and implied that the union wasn't willing to give more. The UAW has completed an evaluation of Chrysler's finances but won't say whether it will give Chrysler the same deal.

"We addressed health care in '05. You don't get two bites of the apple, do you?" he said in March.

Many industry analysts say the Detroit Three, and especially Ford, must be on par with Toyota and Honda to survive. This year's contract, they say, must be "transformational" in reducing pension and health care costs.

Chrysler's parent company, DaimlerChrysler AG, recently announced that it would sell a controlling stake in the company to private equity firm Cerberus Capital Management LP, and analysts have said Cerberus is likely to demand deeper concessions from the union than Daimler would have. Cerberus has said it will leave the negotiations to Chrysler officials.

Combined, the U.S.-based carmakers have more than $100 billion in long-term retiree health care costs that analysts say must be reduced.

"They're all in the same boat for this," said Aaron Bragman, a research analyst for Global Insight, an economic research and consulting company. "They all need to see the same kinds of benefits and structural changes in order to survive. The big challenge is going to be whether or not the rank-and-file in the UAW can be convinced."

Kevin Tynan of Argus Research, a New York-based equity research company, said Ford's situation is so bad that even a compromise to $60 per hour wouldn't help.

"If they're saying $70 vs. $50, $60 doesn't help anybody. Essentially Ford loses," Tynan said. "That's just to be competitive on labor. Now we're talking about technology and innovation and marketing and design, all that other stuff on the product side that you still have to execute on."

GM shares rose 67 cents to close at $32.10, while Ford gained 24 cents to $8.56 and DaimlerChrysler's U.S. shares rose $1.74 to $89.58. Toyota's U.S. shares rose $1.47 to $123.81.