Ford's Selection as UAW Negotiating Target Would Put Fiat Chrysler in Precarious Position

NEW YORK (TheStreet) -- Fiat Chrysler Automobiles (FCAU) finds itself in a potentially dangerous position with regard to labor costs as industry negotiations are set to begin between the Detroit-based automakers and the United Auto Workers union. 

Ford  (F) and UAW officials said earlier this week that Ford is best positioned to be the union's negotiating target when talks begin the week of July 13. The union, which hasn't always selected a target, has signaled that it will do so this time. Typically, the target automaker negotiates a deal with the union, after which those terms are brought to the other U.S. automakers for approval. 

If Ford is the UAW's target and shapes the pattern of the next labor contract, that new agreement could be on terms that reduce or eliminate Fiat Chrysler's current labor cost advantage over Ford and General Motors (GM). The current contract is set to expire on Sept. 14. 

Though it's not certain that Ford will be the target -- nor that it could negotiate a contract that Fiat Chrysler might be averse to signing -- it is sure that Fiat Chrysler's CEO Sergio Marchionne can ill afford a clash with the UAW. He's been combing the world for a merger partner or automotive alliance partner, and anything that highlights union tensions will make that task harder. 

Earlier this month, Al Iacobelli, Fiat Chrysler's labor negotiator, abruptly retired and was replaced without explanation. It was a highly unusual development, given the proximity of labor talks. 

During the past six months, Fiat Chrysler common shares have been off about 7%; the stock market has been more or less flat during the same period. 

Compared to the Ford and GM, Fiat Chrysler employs a much larger proportion of so-called "second tier" workers, who are paid significantly less than employees who have been on the job since before the global financial crisis depressed the wage scales of union autoworkers. 

Ford's labor costs, and those of GM, currently stand at about $57 an hour, according to the Ann Arbor, Mich.-based Center for Automotive Research. Fiat Chrysler's average is about $48 an hour -- each dollar difference representing about $100 million in extra costs for Ford. Fiat Chrysler has about 45% of its workers being paid in the lower tier, while Ford, by agreement, was capped at 25%. 

According to the terms of employment in the second tier, to which the UAW consented when financial troubles threatened the industry, entry-level workers are paid $15.78 to $19.28 an hour. The UAW has said it wants to end second-tier wages in this round of bargaining. The industry hopes to avoid wage increases and continue its decade-long practice of offer bonuses and profit-sharing instead. 

Even if Ford is the negotiating target, it's possible that the industry's pattern contract will be modified specifically for Fiat Chrysler in a way that's satisfactory to Marchionne. 

But the steady increase of automotive production in Mexico and in the Southern United States, where the UAW has failed to organize workers, means that the union will have to consider carefully before pushing Detroit's automakers to the brink.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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