Toyota to hold pay advantage over GM, Ford years into future

3/1/2010

FORD Motor Co. will invest $1.6 billion and General Motors Co. $1.4 billion to retool their U.S. factories to build fuel-efficient vehicles to compete with Toyota Motor Corp. models.

Being able to hire employees paid on par with Toyota's, however, will have to wait.

After cutting 47 percent of its North American work force since 2006, Ford isn't ready to resume adding employees even as it upgrades factories and grabs a larger share of U.S. sales, said Chief Financial Officer Lewis Booth. One analyst estimated Ford may not hire for two years.

Ford's jobless recovery shows the constraints on the only U.S. automaker to avoid bankruptcy in 2009. With fewer employees taking buyouts and with auto demand about a third less than in 2007, Ford doesn't have openings for a new class of lower-paid union workers who would help cut labor costs.

"It's probably just a little premature to talk about hiring," Mr. Booth said. "The first thing to do is to take our existing employees and make sure they're fully occupied. That's very important for us and very important for them."

GM, meanwhile, has 5,000 to 6,000 workers on indefinite layoff, and those employees have first rights to any openings from the factory upgrades, including a third shift with 1,200 positions in Lordstown, Ohio, announced last week.

" … it really depends on how many people decide they want to take the jobs," said Diana Tremblay, GM's manufacturing and labor chief. "Then we would fill up the rest of the work force with new hires."

But how many hires, and when, is unclear.

This year, the company is recalling more than 350 laid-off employees because of new work at its Toledo and Defiance powertrain plants. Officials said it is possible that limited hiring of new workers could occur at those plants in the next year.

Toyota, the world's largest automaker, was the benchmark for labor costs when GM, Ford, and Chrysler Group LLC reached their current union accords in 2007. The U.S. companies won the right to give fewer benefits to new hires and pay them about $14 an hour, half what current employees make.

Laid-off workers, though, must be recalled before new hires are made.

GM and Ford will generate enough jobs to add new hires "when there is a significant recovery in actual automotive sales," said Sean McAlinden, chief economist at the Center for Automotive Research in Ann Arbor.

For Ford, he said, that could take two years. The company has about 600 employees on indefinite layoff.

That means, with workers recalled from layoff making $28 an hour, it will take some time for the two big domestic automakers to match Toyota's lower labor rate, Mr. McAlinden said.

He said that for GM to match Toyota, one-fifth of its 46,000 U.S. hourly workers would have to be at the lower rate. Mr. Booth said that for Ford to match Toyota, one-fifth of its work force of 41,000 would have to be at the lower rate.

GM's U.S. hourly compensation costs, including wages and benefits, are about $1 to $2 higher than the $50 an hour for Toyota workers, Ms. Tremblay said.

Mr. McAlinden said his estimate for GM is $55 an hour, which matches the figure Mr. Booth cited for Ford.

"The difference between a dollar or two an hour is not what makes or breaks a company's success," Ms. Tremblay. She said she couldn't estimate when GM would match Toyota's labor costs because it's not clear how quickly U.S. auto sales will rebound from last year's 10.4 million, the lowest since 1982.

Ford predicts U.S. car and light-truck sales will range from 11.3 million to 12.3 million this year. The annual average from 2000 to 2007 was 16.8 million.

Alan Mulally, Ford's chief executive officer, said, "What we're seeing is a relatively slower recovery than what we've seen in the past." Hiring at Ford "really depends on what the swing of the recovery is because all of us don't know right now," he said.

Besides the 600 hourly employees now on layoff, Ford plans to cut a shift of 900 in July from its Flat Rock, Mich., Mustang factory.

"The market [stinks] and it needs to recover by 30 percent to 40 percent before Ford can hire," Mr. McAlinden said. Based on that, the automaker may not match Toyota's labor costs until 2014 or 2015, he said.

But Mr. McAlinden said that by 2012, Ford, of Dearborn, Mich., will be at a labor-cost disadvantage to GM and Chrysler because its UAW members voted in November to reject concessions freezing new hires' wages until 2015.

GM, based in Detroit, and Chrysler, of Auburn Hills, Mich., won those givebacks as the automakers slid toward bankruptcy last year and will reach U.S. labor-cost parity with Toyota and Honda Motor Co. by 2012, he said.

"Investors should be careful not to count on labor cost savings in North America from Ford," said Brian Johnson, a Barclays Capital analyst in Chicago. "To the extent that they should look for a rebound in earnings, it's going to come from a growing market and a fine new product line."

The lack of a tailwind from low-wage hires underscores the urgency for Mr. Mulally to keep shrinking costs and sell more profitable autos after reporting a profit of $2.7 billion in 2009 to end Ford's streak of three annual losses.

Ford is investing $1.15 billion to retool factories in Michigan, Kentucky, and Illinois to make more fuel-efficient vehicles this year, along with spending $450 million to build hybrid models in Michigan starting in 2012. Capital spending will rise by $1 billion this year, Mr. Booth said.

Factory upgrades, a 25 percent jump in U.S. sales in January, and Ford's first annual U.S. market-share gain since 1995 haven't brought an end to the company's retrenchment, with pullbacks such as the shift reduction at the Mustang plant. Ford said employees are being offered transfers to factories in Wayne, Mich., and Chicago.

"We're going to redeploy almost all the workers," Executive Chairman Bill Ford told reporters on Feb. 16.

Ford's relative prosperity compared with GM and Chrysler has shrunk the acceptance rates for buyouts, Mr. McAlinden said. The result has limited Ford's need for new employees.

GM, the largest U.S. automaker, is revamping its production after exiting bankruptcy with government aid in July. The company had scaled back as it lost U.S. sales and market share before seeking court protection.

The Lordstown factory will operate around the clock to produce the Chevrolet Cruze small car. GM is investing $350 million at the plant, with the third shift to start in this year's second half, Ms. Tremblay said.

GM has about 300 indefinitely laid-off employees who live near the plant, and others on furlough who live elsewhere could take the remaining jobs if they agree to move or commute, she said.

The company anticipates strong demand for the Cruze, which has the interior space of a midsize car and is expected to get 40 miles per gallon in highway driving, Ms. Tremblay said.