Focusing on Labor Costs

As part of our aggressive restructuring efforts, we have focused not only on the labor costs of our workforce, but on the related costs of providing comprehensive health care benefits to nearly 500,000 current and retired employees, including their dependents, in the United States alone. Previous contracts with the UAW provided lifetime health care benefits for UAW members and their surviving spouses.

Rising costs of health care coverage, coupled with our high proportion of retirees, have put us at a competitive disadvantage, compared with more recent entrants to the U.S. auto market. Our health care costs have been estimated to add about $1,000 to the cost of each vehicle built in the United States.

Over the last two years, we have worked with our UAW partners to help us reach parity with foreign-owned auto manufacturers. The agreements we have reached – including mid-contract modifications that were ratified by the union in March of 2009 – are critical to our efforts to operate through the current economic environment, without accessing a bridge loan from the U.S. government.

In our 2007 contract with the UAW, we agreed to help ensure health care coverage for current and future retirees by shifting $13.2 billion in cash and stock into an independent trust called the Voluntary Employee Beneficiary Association, or VEBA. In the first quarter of 2009, the UAW approved a revised plan that allows Ford to pay up to half our VEBA contributions in stock, rather than cash, enabling greater flexibility when each trust payment is due. The restructuring of VEBA financing will allow us to be more competitive with foreign automakers' U.S. manufacturing operations. These modifications are subject to a number of conditions as described in the Economy section of this report.

We estimate that the modifications from the contract agreement will save Ford $500 million a year – and possibly even more over time – through the VEBA restructuring and other savings that were approved by the union members, such as reductions in paid break time for factory line workers and increased use of alternative work schedules. The UAW also agreed to:

• Suspend Cost of Living Allowance, or COLA, increases for the remainder of the contract, which expires in 2011.
• Suspend lump sum performance bonus payments of 4 percent and 3 percent of base earnings in 2009 and 2010, respectively.
• Suspend $600 Christmas bonus payments and discontinue the "Easter Monday" paid holiday for the remainder of the operating agreement.

The union also ratified incentives for employee participation in a wellness program, which would include regular physicals and other steps to improve individual health.

Implementing these changes will reduce average hourly wages for approximately 42,000 Ford UAW workers from approximately $60 an hour to $55 an hour, which is nearing parity with the average wage for foreign-based competitors in the United States. We believe that the average hourly rates will become even more competitive with foreign-based automakers in coming years.

The modified contract also eliminates the "jobs bank" for laid-off union workers, which had allowed hourly employees to receive almost 100 percent of their salaries and benefits until they received another job offer from Ford. The new agreement will pay laid-off employees a reduced salary until another job offer is received and for a set number of weeks, based on seniority. The employees would forfeit the benefit if they turn down another job offer from Ford.