Ford says new contract almost eliminates labor cost gap with Japanese automakers

A new contract with the United Auto Workers has almost eliminated a $30- (€20.50)-per-hour labor cost gap with Japanese competitors, Ford Motor Co. executives said Thursday.

Marty Mulloy, the company's vice president for labor affairs, said shifting Ford's long-term retiree health care liability to a union-run trust and a new lower-tier wage scale will remove much of the gap.

"I'd say very close but not all the way," he said during a conference call to explain the landmark four-year deal with the UAW.

The union announced on Wednesday that Ford's 54,000 UAW workers overwhelmingly ratified the contract, reached Nov. 3 after a marathon bargaining session.

Ford also said it will make another round of buyout and early retirement offers to UAW workers by the end of the year, with departures expected to begin in the first quarter of 2008. Terms and timing have yet to be negotiated with the union.

The contract eventually will shift a $23.7 billion (€16.19 billion) retiree health care liability off the company's books and into the trust, which Ford will fund with a combination of $13.2 billion (€9.02 billion) in cash and notes, the company said. That amounts to roughly 56 percent of the obligation.

In the presentation, Ford said it expects a net cash flow benefit of $1 billion (€0.68 billion) per year once the retiree health care costs are shifted to the trust in January 2010.

Ford said the cash flow benefit includes health care cost savings of $1.6 billion (€1.09 billion) per year, offset by the cost of its contributions to the trust, called a voluntary employees beneficiary association.

The company's contribution breaks down to $2.7 billion (€1.84 billion) in cash, $3.8 billion (€2.6 billion) from an existing VEBA, a $3.3 billion (€2.25 billion) note convertible into about 363 million new shares of Ford stock, a $3 billion (€2.05 billion) second lien term note and $400 million (€273 million) in deferred payments.

The VEBA still must be approved by a federal judge, and Ford would continue to be responsible for retiree health care until the trust takes over, the company said.

The other big savings component for Ford is wages, including the UAW agreeing to a pay structure for new hires starting at $14.20 (€9.70) per hour, about half that of a current worker.

Up to 20 percent of Ford's hourly work force can be on the lower tier, plus all the workers at parts-making plants in Ypsilanti Township and Sterling Heights.

Ford would use the buyouts and early retirements to get existing workers to leave, clearing the way for the new, lower-cost hires.

But before the lower wages can be paid, Ford must take on workers who want to return to the company from factories now in a holding company awaiting sale or closure. About 1,100 of those workers have signed up to return and 5,200 remain, Mulloy said, adding that he could not give a timetable on when the company would begin taking advantage of the lower wages.

The contract also includes no base pay increases for hourly workers, but gives lump-sum payments of $3,000 (€2,049) this year plus lump sums in the remaining three years averaging $2,200 (€1,503) to $3,000 (€2,049), Ford said.

Ford shares fell 7 cents to $7.91 in midday trading Thursday.