Chrysler Group LLC faces a difficult choice as it prepares for contract talks with the Canadian Auto Workers: should it take a tough line to slash costs, or settle quickly to avoid a strike?
The third-largest North American auto maker, three years removed from a brush with oblivion that led to a takeover by Fiat SpA, has the most to gain from a union deal that saves money.
Chrysler's labour costs in Canada are more than $7 higher than U.S. costs of about $51 an hour, with the two countries' currencies at par. That is the biggest cost gap at the Canadian manufacturing operations of the Detroit Three.
But it also has the most to lose if a lengthy strike were to halt production – it's on a hot streak in the showrooms.
The situation at Chrysler could also present the CAW with a tough decision when it decides whether the Windsor, Ont.-based auto maker should be the so-called "target company" for negotiations. The union typically chooses one auto maker with which it tries to nail down an agreement. Normally, that deal is then extended to other two.
Chrysler's sales momentum in both the Canadian and American markets – which includes a double-digit increase in U.S. sales this year – means it will likely lose market share if its Canadian plants are shut down for a long time.
But the company also wants to slash its expenses because it's not competing only with Ford Motor Co. and General Motors Co. More than half of vehicle sales in North America are being won by auto makers that have no unions and lower costs than any of the Detroit Three.
"I think Chrysler would really like to go first [in negotiations]," said Kristin Dziczek, director of the labour and industry group of the Center for Automotive Research (CAR), an industry think-tank in Ann Arbor, Mich. "I think they're going to be really tough."
The wild card in the negotiations, Ms. Dziczek noted, is Chrysler and Fiat chief executive officer Sergio Marchionne, who was closely involved in the 2011 U.S. contract talks with the United Auto Workers.
"He's a tough customer," she said.
Mr. Marchionne has been vocal about how wage rates at Chrysler's Canadian operations are uncompetitive and how Canadian workers need to accept so-called two-tiered wages that provide new workers with pay that's about half of what established workers earn.
The $7-an-hour gap between Chrysler's Canadian and American plants arises mainly from the wage structure in its U.S. factories. Newly-hired Chrysler workers in that country will earn between $15.78 (U.S.) and $19.28 an hour between 2011 and 2015, compared with $29.11 for established workers.
About 35 per cent of its unionized U.S. workers are expected to be on the lower end of that scale by 2015, according to CAR estimates. That's higher than Ford and GM.
The Canadian plants of the Detroit Three also pay lower wages to new employees, but after six years, those workers are brought up to regular union rates.
Chrysler has more at stake in the Canadian contract talks because it has more employees covered by the CAW agreements than Ford or GM do. In addition, its Canadian plants produce 27 per cent of the vehicles it assembles in North America, again higher than Ford and GM.
But a strike would dampen the gains it has made this year. Chrysler has had the biggest sales increases of any of the Detroit Three in both Canada and the United States. Those gains have been powered in part by double-digit deliveries of minivans put together in Windsor, Ont., and large sedans assembled in Brampton, Ont.
Chrysler's Etobicoke Casting Plant in Toronto produces parts for engines and transmissions that are then shipped to all of the auto maker's assembly plants, so a labour dispute here would also quickly affect production at U.S. operations.
UBS Securities LLC analyst Colin Langan said in a research note that Chrysler's Canadian operations will contribute $800-million of Chrysler Group's estimated $3-billion in profit in 2012.
Chrysler said last week when negotiations with the CAW opened, that the talks provide an opportunity to establish a foundation for the company's future competitiveness in Canada.
Canadian Auto Workers delegates have voted unanimously to merge with the Communications Energy and Paperworkers Union of Canada, combining two of Canada's largest private-sector unions. CEP delegates are to vote on the proposal in October.