During the difficult Government bailout time in 2008 and 2009 the Labour Unions in North America and in particular the CAW in Canada began using an interesting new angle as to why they didn't need to offer concessions to the unionized OEM's. A new phrase entered the lexicon of automotive lingo ... “Wages only represent 7 percent of the cost of a vehicle but get 99 percent of the attention" was the clarion call of the CAW. Their argument obviously was that since 'wages' were so little a portion of the cost of a vehicle then labour didn't need to come to the table to help the OEMs that were threatened.
It is worth examining this contention in more detail because nothing can be further from the truth and we do have Labour negotiations later this summer. When a group is in trouble (and labour unions are in serious trouble across all industries in North America) they usually revert to miss-leading statements and or in some cases outright lies. The above statement is miss-leading to the N'th degree and needs to be dispelled as an outright myth.
Assembly worker wages actually do represent only about 7 percent of the manufacturing cost of a vehicle (actually between 7 and 10 percent depending on the plant). So the Unions are not lying when they make this statement but they ignore a number of other things that add significant labour cost to a vehicle. In actual fact labour costs represent between 40 and 60 percent of the cost of a vehicle in your driveway depending on the type and source of manufacture. And indeed this is no different than most other manufactured goods.
So where is the difference between what the unions say and the actual truth? Well first of all the unions only refer to 'assembly' wages. They ignore the wages embedded in the automotive parts used to make vehicles which adds and addition 15 to 25 percent to the equation. They ignore the wages embedded in raw materials which adds additional labour content. They ignore the wages paid by the vehicle distributors to market and sell vehicles and get them to the vehicle dealers across North America. They ignore the wages paid by every vehicle dealer to market, sell and keep their dealerships open. Add up all the 'wages' paid from the beginning of the value chain to the final selling price of a vehicle and they would represent at least 30 percent of the final transaction price and as high as 50 percent of the transaction price.
But this ignores another cost related to labour. This is only 'wage' cost. These workers also have significant benefit costs with one of the richest pensions in society, high healthcare costs and other benefits which can cost a lot of money. And union workers have a significantly higher benefit cost than non-union members.
Add wages together with benefits and the costs related to "compensation" embedded in a vehicle can easily be between 40 percent and 60 percent of the final transaction cost of a vehicle.
But labour costs do not stop there. There is also a massive fixed cost to bring a new vehicle into fruition related to research, design, development and testing of vehicles. An all new global platform can cost between $1.5 and $2.5 billion in fixed costs that also are embedded in the transaction price of a vehicle. And the labour content of these costs are very high since it is professionals who account for most of the work.... designers, engineers, scientists and other highly skilled workers and thus highly paid workers like those in the tool, mould and die sector. These are all very high paid help and their compensation adds significantly to the price of a new vehicle. The exact amount is dependent on the volume of each platform, the length of time it is in the market and other factors so can be relative low... perhaps another 5 to 8 percent of a price of a vehicle but could also be quite high ... maybe as much as 15 percent of the price of a vehicle.
Add it all up and the labour content of a typical vehicle in North America is at least 40 percent of its final transaction price and in some cases as high as 60 percent.
And the unionized labour contracts negotiated with the CAW and UAW are at the centre of this rubrics cube. Assembly worker wages are obvious but a significant portion of automotive components are also sourced inside any OEM and with the unionized OEMs all these workers are also covered by the master contract negotiated with the unions. And everyone gets the same or nearly the same benefit package and it doesn't matter where you are situated in one of these OEMs. The white collar and pink collar jobs in unionized OEMs are also often unionized but even if they are not unionized they benchmark their compensation (particularly benefits) off the negotiated Labour Agreements. And most of the fixed costs with bringing a vehicle to market are 'in-house' and these also are benchmarked to the negotiated Labour Agreements.
The parts that are supplied from independent suppliers have more non-union than union content in them but to the degree that suppliers are unionized they also benchmark their compensation to the negotiated Labour Agreements. And even the non-union suppliers have to be competitive on labour rates in their geography in order to attract workers so if union wages escalate some of this morphs over to non-union plants as well.
The average transaction price of a vehicle in Canada last year was over $35,000. We don't know exactly but at least $15,000 and as much as $25,000 of this cost is directly related to labour costs both wages and benefits.
So don't for a Nano-second believe that labour costs don't matter since only “Wages only represent 7 percent of the cost of a vehicle but get 99 percent of the attention". Holding the line on labour costs is absolutely critical for any OEM and especially so for the unionized OEMs in Canada this year ... GM, Ford and Chrysler.
Each of these companies have to make an important decision on investing in one of their Canadian plants this year ... GM at their plant in Ingersoll, Chrysler at their plant in Brampton and Ford at their plant in Oakville. And unfortunate for Canada their current ‘all-in’ compensation is already higher than the recently negotiated ‘all-in’ compensation of their brothers in the UAW. There is also nothing that prevents any OEM from moving their production to lower cost facilities in the US and or Mexico and in selected cases to plants overseas.
Canada no longer has an exchange rate advantage and indeed it recently has been an exchange rate disadvantage. We no longer have an advantage related to the structure of our healthcare costs. We no longer have an advantage related to the cost of energy. So, more the most part, whether these companies choose to renew their investments in Canada, or not, will come down to the Labour Negotiations with the CAW later this year.
The CAW is going to be in a very difficult situation and I’m optimistic that they GET IT. The recent battle at a plant in London, Ontario does not bode well for the automotive sector. In that situation the CAW was not willing to even consider a two tier wage system where wages of existing workers were protected but new hires were to start at 50 percent the existing wage. The plant was closed by the owners.
I’ll be watching very closely since the future of vehicle and parts manufacturing in Canada could be determined by the outcome.
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