October 14th is an important day for the automotive industry. It marks the day that Ford employees may or may not ratify the new UAW agreement.  The agreement with Ford is similar to the one already ratified by GM, which in a nutshell, has several key provisions:

1. Rewarding employees with bonuses instead of pay raises

2. Promises to “insource” jobs which will bring a lot of manufacturing jobs back to the US, while also expanding capacity at many plants. For details on Ford’s investments go to: http://tinyurl.com/6xtylyt

3. Buyouts of higher income employees

4. Allowance of a certain percentage of Tier 1 and Tier 2 employees on the payroll.  Currently tier 2 employees make about half of tier 1 employees.  (This is one area of contentious debate between Chrysler and the UAW).

Of course there are more details in the plan but ultimately analysts are saying that this plan is for job security over pay increases.  Analysts also expect this to only have a 1% impact on labor costs for Ford and GM over the next four years.  Clearly using bonuses to reward employees is a more effective way to keep fixed costs down while aligning employee pay with the company’s financial performance.

This bodes well for the industry in that it indicates a commitment to maintain the healthy financial situations of the OEMs, which enables manufacturers to continue to align production with demand while also investing in new products.  It is yet another signal that manufacturers will react prudently to market shifts and not resort to short-term pricing tactics to push inventory on the market.  We like that at NADA since a strong new environment promotes strong used prices.

Our government should take a page from this thinking and eliminate the legacy costs of retirement and benefits that have buried our country in debt.  This article is an interesting piece that goes into detail on how difficult it is to maintain a budget when you are saddled with unrealistic benefits and pension plans that were created during times when it appeared our economy would never slow down. 

Auto workers in America should be commended for their thinking and foresight, because sustainable profitability in the automotive industry will play an important role in our economy’s recovery.  Bringing back jobs is just the tip of the iceberg.