Executive Insight: Business as Unusual. Chrysler, the UAW Meet Project Runway

The fashion police were in force in Detroit this week when negotiations started on a new Chrysler/UAW labor contract.

Both sides' bargaining teams filed into the auditorium where the talks will be held at Chrysler's headquarters wearing identical maroon jackets emblazoned with the logos of the company and the union. It was impossible to tell who was from Chrysler and who was from the UAW.

There was none of the adversarial tone that characterized prior negotiation cycles between the parties. It was more like a prelude to a church picnic.

Instead of talking about “strike targets,” for example, the UAW’s president, Bob King, has been more likely, lately, to speak of “creative problem-solving.”

The symbolism was clear: This time, we are all on the same team.

The stakes are high. What happens at the bargaining table over the next six weeks could determine the long-term viability of both the union and Detroit’s Big Three carmakers. The future of all of them was in question just two years ago when Chrysler and GM were forced into Chapter 11 bankruptcy protection, and the third domestic maker, Ford, avoiding that process only by mortgaging its assets. Although the pain was shared widely among stakeholders, workers were especially hard hit, with their union agreeing to a number of concessions that slashed all-in labor costs from around $76 an hour in 2006 to just over $50 today. The UAW reversed decades of tradition and approved a two-tier wage structure in which new hires start at roughly half the pay and benefits of more senior line workers.

UAW President Bob King said his union and the company understand that they owe it to the American taxpayers — who bailed out the Auburn Hills automaker and saved thousands of union jobs in 2009 — to prove that they have learned from their mistakes.

"We collectively feel we have a huge responsibility to the American public," he said, adding that negotiating a competitive agreement with Chrysler would lead to more job creation.

Chrysler Vice President of Employee Relations Al Iacobelli agreed.

"We have a responsibility to ensure that we do not go back to the old formulas," he said.

Both sides expressed confidence that they would soon hammer out an agreement that rewards workers for their contribution to Chrysler's recent success and protects the competitiveness gains the company has made since the last national contract was negotiated in 2007.

Holding out a carrot, Chrysler says that if the UAW keeps it competitive with the transplants—foreign-owned plants, like the Nissan assembly line in Smyrna, Tennessee, that also pay around $50 an hour—there will be even more work. The maker is looking at more than 300 projects to bring back in house work that it had, over the years, outsourced to suppliers. General Motors will be producing its new Chevrolet Sonic subcompact at a suburban Detroit plant using two-tier workers: the previous Chevy small car had been built in South Korea.

Whereas some American trade unions negotiate cross-industry contracts, the UAW has traditionally had to bargain separately with the domestic carmakers. As always, it hopes that the first agreement it reaches will set a pattern for the rest. However, the Big Three's management seem less likely to go along with that approach this time, reflecting the increasing differences between the companies.

The fragility of Detroit’s Big Three was driven home this week when, on the same day bargaining began, Chrysler and Ford reported lower second-quarter earnings. The numbers were not dire and reflected a variety of factors such as weak spring car sales and some one-off charges. At Ford, these included the cost of scrapping its ailing Mercury brand. Chrysler, meanwhile, would have been more than $180 million in the black but for its decision to pay off its $7.5 billion in American and Canadian government loans six years early, accruing $551 million in non-recurring charges.

Sources:

The Detroit News: Chrysler, UAW contract talks kick off with show of unity

The Economist: The Bargaining Begins