TOUGH TALKS
Desperate to Cut Costs,
Ford Gets Union's Help

DETROIT -- For years, Jerry Sullivan, the head of the largest United Auto Workers local at Ford Motor Co., fought for higher pay, job protections and limits on the work his members had to do.

But in the past year, as Ford teetered financially, the 59-year-old Vietnam veteran has changed course. These days he has urged his members to accept the outsourcing of company factory jobs to lower-paid workers, and to work new shifts without the tens of thousands of dollars in overtime they formerly would have earned.

"Ford is in a desperate situation," sighs the burly, bearded Mr. Sullivan, who has spent 36 years at Ford, the last 10 as president of UAW Local 600 in suburban Dearborn. "If this company goes down, I want to be able to look in the mirror and say I did everything I could."

Mr. Sullivan's turnabout reflects the stark reality facing the UAW and the big U.S. car companies, which still employ roughly a third of the union's workers after years of job cuts. The Big Three auto makers acknowledge Japanese and Korean companies are out-earning them on each car by delivering more features for less cost. Now Detroit -- with some help from the union -- is trying to dismantle old business methods factory by factory in an effort to cut costs.

Ford, which lost $12.7 billion last year, so far has persuaded UAW locals at 33 of its 41 plants to accept new agreements aimed at transforming the way work is done on the factory floor. The "competitive operating agreements," all reached in the past 10 months, loosen some complex and often costly work rules.

In past local negotiations, union leaders rarely gave any ground, and talks often stalled over such matters as getting microwaves installed for employees' use. But this time, recognizing their precarious position, Dearborn members agreed that non-Ford workers earning half their pay could take jobs in the plant such as shuttling car components across the factory floor. Thousands of UAW members accepted changing to four-day, 10-hour shifts that can include weekend days, without collecting overtime. At an engine plant in Lima, Ohio, some union workers have volunteered to manage their brethren, for a 50-cent-an-hour bump in pay. Elsewhere, long-honored seniority rules have been waived and job definitions have been broadened.

The new pacts don't deal with UAW members' pay packages, which due to health care and other benefits are about 50% higher than for workers at Asian auto makers' U.S. plants. Those issues are to be handled in national talks between the UAW leadership and the car companies this summer. But company officials and labor experts say Ford's local negotiations -- in which Ford asked for the union's help -- may help set a precedent for the national talks.

An industry consultant's chart used by Ford during some negotiations with locals estimated Detroit's auto makers have an average "profit gap" of $2,400 per vehicle compared with the U.S. units of Toyota Motor Corp., Honda Motor Co. and Nissan Motor Co. That gap is so wide that Detroit is losing money on each car. Labor costs represent $1,080 to $1,335 of the gap, according to the consultant's figures. The biggest share of that, $490 to $705, is attributable to retirees' health-care costs. Next is $250 for work rules, edging out $220 for active workers' health care. Ford estimates it will save $1 billion a year if all plants adopt the various work-rule changes being asked of them.

DaimlerChrysler AG and General Motors Corp. have negotiated some similar changes, but generally only at new facilities, such as an engine plant that Chrysler opened in 2005 in Dundee, Mich. The UAW hasn't given Chrysler similar deals elsewhere, in part because Chrysler was seen as a profitable company until just a few months ago, say people familiar with the talks.

GM officials, taken aback by Ford's success in getting concessions, have begun visiting plants across Michigan, Ohio and elsewhere seeking similar local deals in an effort they have dubbed "True North."

At Ford, the UAW is allowing locals to tear up existing deals months or years before they expire to put the new rules in place. Ford also has said it will close seven unidentified plants in the next few years, and subtly uses that threat with its locals. The resulting changes have allowed Ford to cut 38,000 jobs through buyouts.

Once one of the most powerful unions in the world, the UAW has seen its work force gutted to about a third of its peak in the 1970s. It so far has avoided wholesale concessions, unlike unions in the steel and airline industries where many companies have restructured through bankruptcy proceedings. But just in the past year, GM, Ford and Chrysler have announced restructuring moves that will eventually eliminate about 80,000 UAW jobs, which would lower its membership to just under 500,000. More cuts could be on the way, particularly if DaimlerChrysler decides to sell or spin off its Chrysler unit.

Yesterday Ford announced another big monthly drop in sales -- 13.5% for February. Chrysler said its sales dropped 8.3% for the month. GM announced a 5% cut in production despite a slight sales uptick.

Ford, based in Dearborn, is navigating the worst financial crisis in its 103-year history. It expects to keep losing money until at least 2009 because it banked for too long on its sales of trucks and SUVs continuing to thrive. Instead they have begun sliding because of rising oil prices and increased competition.

For most of the 1990s, Ford was rated the most efficient Detroit auto maker. The company made $7.2 billion in 1999, at the time a record for any auto maker, despite a steady rise in market share in the 1990s by the Japanese companies. In 1998, a key auto-manufacturing efficiency study called the Harbour Report estimated Ford could assemble a new vehicle in about 36 hours of labor. That was five or six hours slower than its Asian counterparts like Toyota and Nissan -- but 10 hours faster than GM or Chrysler.

Ford acknowledges it rested on its laurels as the profits from its popular sport-utility vehicles and pickups masked underlying problems in its manufacturing systems. By 2000, GM and Chrysler began to gain on Ford. Last year, the Harbour Report estimated that Ford was two hours slower than GM and Chrysler, and also had slipped to six or seven hours behind the Japanese companies.

"No question, we let others pass us on these things. We took our eye off the ball and got intoxicated with just making trucks," said Chris Bolen, a Ford director of manufacturing who started out as a Lima line worker. "Internally we ignored a lot of waste....We let manufacturing get in trouble, and now we've painted ourselves into a corner where without radical changes we could go out of business."

To avert disaster, Ford asked for the union's help, says Joe Hinrichs, Ford's head of North American manufacturing. Instead of just confronting UAW leaders with a list of work practices management wanted to change, Mr. Hinrichs and his staff have showed their union counterparts how big the cost gaps are at their factories, using the Harbour figures and internal data. (Read a transcript of WSJ's interview with Mr. Hinrichs.)

"We really need our people to realize we aren't competitive," says Mr. Hinrichs, a 40-year-old Harvard graduate who came to Ford after serving as one of the youngest plant managers in GM history. "No one has a right to be uncompetitive."

For many UAW members, some of the changes at Ford would have been unthinkable just a few years ago. The talks have ventured into sensitive areas, such as high UAW absentee rates. At Ford plants, workers only needed a doctor's note to be absent without using a vacation day, and Ford's absentee rate on plant floors has been about 11% -- which the company asserts is about twice the rate of its Asian rivals. Each percentage point costs Ford about $20 million per year, say Ford executives. The new agreements cap the number of absences regardless of excuse, though the company would not discuss the figure.

Still, Ford and other U.S. makers still are not nearly as efficient as their Japanese rivals. "Really they are just now getting to rules or processes that Toyota already had in place at their plants," said Laurie Harbour-Felax, the auto-efficiency consultant whose figures Ford used. "They have a long way to go."

Some work-rule changes remain beyond reach for Ford. At the Dearborn Truck Assembly factory, for instance, if the company wants to bring in an outside company for specialized repairs to its assembly equipment, it must also pay the same number of company repairmen to work.

Last summer, Ford executives went to Mr. Sullivan as the auto maker was looking at its plans for the next generation of its F-150 pickup truck due out in mid-2008. The F-150 is the best-selling and most profitable vehicle Ford makes, but sales slipped last year and it faced two redesigned competitors in GM's Chevy Silverado and Toyota's Tundra, the latter built at a new plant in San Antonio. Ford planned to close its Norfolk, Va., truck plant and make fewer F-150 trucks, and wanted cuts at Dearborn before they would move some of Norfolk's work there rather than elsewhere.

Mr. Sullivan didn't have to look far for a worst-case scenario. He also represents 3,000 workers at nearby Rouge Steel, a steelmaking operation spun off from Ford that began bankruptcy proceedings in 2003. "Bankruptcy is devastating. People's pensions and health care can just be lost, taken away," he says. "We understand our work practices weren't the best. We know how dire it is."

Mr. Sullivan and company officials said he, like other UAW locals, had the national union's backing to negotiate changes, though UAW national officials wouldn't comment on its locals' agreements.

Dearborn Truck Assembly, Ford's most recently constructed U.S. plant, sits at the heart of the company's Michigan home base. It's on the site of a previous plant that hosted famous battles by the UAW in the 1930s to organize the auto maker's workers over founder Henry Ford's resistance. To try to persuade workers to accept what amounted to a retreat from the UAW's tradition of always adding to pay and benefits, Ford plant manager Rob Webber and Kenneth Macfarlane, director of manufacturing operations for Ford trucks, shut down the plant floor one day last July to mount a rousing presentation for about 900 workers seated in folding chairs.

"This is about the uncompetitiveness of us," Mr. Webber announced, and put on a video of Toyota unveiling its new Tundra at the Chicago Auto Show. "Notice it is Ford blue," shouted Mr. Macfarlane. He pointed out Toyota used the same George Thorogood song, "Bad to the Bone," that Ford had used in commercials for its F-Series. "Make no mistake who they are after," shouted Mr. Macfarlane. "It is us." The crowd roared back at him.

To cut costs, Messrs. Webber and Macfarlane asked Local 600 to let Ford hire workers employed by outside contractors to handle unskilled tasks such as wheeling bins of parts and sweeping up the plant floor. This kind of outsourcing has long been anathema to the UAW.

Gary Walkowicz, a 57-year-old former UAW plant chairman who has 32 years with Ford and now works on the line installing engine wires and other parts, handed out fliers to rally dissent. "I don't believe in concessions. The company will always want more from us," he says. About 65% of the workers at Dearborn Truck Assembly and other Dearborn plants in Local 600 voted in favor of the new agreement. Elsewhere, winning margins have been even higher.

Now, UAW members making $18 to $26 an hour, plus benefits that more than double their compensation, work for Ford at the Dearborn truck plant alongside hourly workers making about half the wages and few of the benefits. Painted yellow safety lines marking walkways between assembly areas on the shop floor now also divide the Ford assembly-line work force from the outside workers, who stay between the lines.

While Ford outsourced about 100 to 150 jobs, the UAW didn't lose that many members. As part of the contract, Ford agreed that any outside firm it hired would have to support the UAW organizing the new workers, albeit at the lower pay scale.

Mr. Webber, the plant manager, says the agreement at Dearborn Truck saves Ford about $70 million, the largest savings at any one Ford plant. Ford says it also will avoid paying about $30 million it would have had to pay in annual overtime for workers to adopt four-day, 10-hour shifts in place of five-day, eight-hour shifts. The four-day schedule allows Ford to save on utility bills and schedule maintenance on weekdays.

At an engine plant in Lima, Ohio, Ford has achieved savings a different way. Workers there were faced with the threat that engine work could be shifted south to Mexico or another plant. In addition to accepting outsourcing of work, they agreed to shift many managerial duties to union employees. This allowed Ford to cut the nonunion head count at Lima from 280 people to about 90. With the new agreement Lima's union work force dropped to about 800 workers, from 1,100.

The UAW supervisors are called "team leaders," and work in a structure borrowed from Japanese assembly lines. Overseeing eight to 12 other union members, the team leaders use big electronic scoreboards above their heads to track each day's target for assembling engines. If line speeds need to be increased or slowed, "rebalanced" in Ford parlance, the decision is made by UAW members instead of salaried engineers, who typically were paid $60,000 or more annually.

Ford had long given up on the union accepting such a move. "There are days I wonder why I am doing all this," says Brad Caskie, now a team leader and veteran of 22 years at the Lima plant. "It's pretty much like being a manager, and also a worker. Ford said to us this is what Toyota and Honda do, so it's what we need to do."

Until last summer, Mr. Caskie's job at Ford was to put timing components on car or truck engines as they chugged down the line, just under 100 of them an hour. When the plant adopted a competitive operating agreement last May and team leader jobs opened paying 50 cents more an hour, Mr. Caskie volunteered.

Now the 49-year-old Ohio native manages 11 workers, scheduling vacations, overseeing quality of work, and arranging meetings to discuss safety or downtime problems. When he gets a chance, he jumps on the computer near the engine line to see how his team stacks up in terms of quality and speed compared with other teams.

"I'm loyal to the company. They put my kids through college," said Mr. Caskie, who got his first Ford job in part because his stepfather and uncle, both UAW workers for Ford, helped him get in. "I feel like we had no choice, really, but to do this."

Plant manager Jan Allman says the Lima agreement saves the auto maker about $27 million a year overall. Her goal is for Lima to pass Toyota in the Harbour efficiency studies in 2008.

The process hasn't always gone smoothly. Earlier this year Ford, despite its continuing losses, said it was considering giving bonuses to white-collar workers -- in part thanks to the cost savings it achieved in getting the new local agreements.

At the Michigan Truck plant in Wayne, Mich., workers were furious that they were taking cuts while their managers were in line for bonuses. A vote on a cost-cutting deal there was delayed for weeks. After Ford acknowledged any bonus plan must include the union, the vote was rescheduled and the agreement passed.

"That bonus thing sent a bad message," says Mr. Sullivan. "This is a partnership, right? We are in this together, right? We made our concessions, so let's be fair." The company is still working out details of the bonus plan.

Write to Jeffrey McCracken at jeff.mccracken@wsj.com