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Ford Says Increase in Labor Costs Will Be Less Than Inflation

11/30/2015 | 09:05am US/Eastern

Ford Motor Co. said a new union deal will have minimal impact on profitability, projecting labor costs will grow less than inflation and the pace of hiring will slow in the domestic auto industry as more temporary workers are used and outsourcing becomes more common.

Ford executives, speaking during a conference call on Monday, said costs for workers represented by the United Auto Workers will rise less than 1.5% annually through 2019, including a $600 million charge booked in the fourth quarter to cover $10,000 signing bonuses. Still, Ford's average hourly labor costs will be about $8 to $10 higher than at U.S. factories owned by foreign rivals.

Covering 52,900 U.S. hourly workers, the agreement delivers higher pay, an end to a controversial two-tier pay structure and hefty profit-sharing and other bonuses.

The No. 2 U.S. auto maker said the new deal offers flexibility on costs, pointing to why the company and its Detroit rivals agreed to auto-workers contracts that the UAW initially billed as being among the richest in history.

Ford will use significantly more lower-paid temporary workers and schedule more mandatory overtime, executives said, moves to reduce the need for expensive full-time employees being added to the payroll.

General Motors Co. and Fiat Chrysler Automobiles NV also signed new UAW pacts in recent weeks, although neither has provided investors with specific details on how the deals will affect profits.

GM estimates its U.S. labor costs will remain through 2019 at about 5% of its North American revenue, which was $101.2 billion last year. Fiat Chrysler estimates labor costs will rise by about $2 billion over the next four years.

Ford's hourly labor and benefit costs are expected to rise to $60 in 2019 with the new contract, up from $57 under the prior agreement, according to a joint forecast provided by Kristin Dziczek and Art Schwartz, president of consultants Labor & Economics Associates. That's far above Toyota Motor Corp.'s average U.S. labor rate of $48 an hour.

GM's hourly labor cost will rise to $60 from $55 over the next four years, the researchers estimate. Fiat Chrysler will see the biggest jump in average hourly labor costs, rising to $56 from $47 over the next four years.

After years of granting concessions or holding the line on wages, the UAW this year pushed for terms that likely will cap Detroit companies' ability to hire and potentially lead to more sourcing of factory work outside the U.S.

Ford, for instance, said the agreements give more flexibility to move production outside the U.S., indicating more small-car manufacturing will relocate to lower-cost countries like Mexico.

Such moves could generate significant savings with Mexico's labor costs being about one-fifth of the wages auto workers earn in the U.S., according to labor experts. "We're not restricted from sourcing products anywhere in the Ford world," Chief Executive Mark Fields said.

U.S. auto sales are tracking near-record levels amid low gasoline prices and favorable economic conditions, leading to high production-capacity utilization rates and low inventories. If demand sags, Ford said the cost of laying off workers is lower than it once was, making it easier to downsize.

The contract won't "break the bank," RBC Capital Markets analyst Joseph Spak said in a note to investors. He pointed out a large percentage of Ford's more expensive veteran workers will be retirement eligible in coming years and the attrition rate is expected to accelerate.

For decades, laid-off workers would continue to collect pay for months, sometimes years, under a job-security program known as the Jobs Bank. After costing the car makers billions of dollars, the benefit was killed during the auto industry downturn and GM's bankruptcy last decade.

Now, nonworking factory employees at all three auto makers get only supplemental pay to top off unemployment benefits but for a limited number of weeks.

Ford committed to spending $9 billion on its U.S. factories by 2019, creating or retaining about 8,500 hourly worker jobs. Ford didn't specify how many of those jobs would be new and how many temporary workers it will use in the coming years.

Ford has taken steps to end some passenger-car production in the U.S., and move it to Mexico or other low-cost locations. Mr. Fields said he is "comfortable with how we're positioning the business."

Write to Christina Rogers at christina.rogers@wsj.com

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