The United Auto Workers (UAW) union, representing almost all of the employees of the Detroit Three automakers, is currently engaged in a high-stakes battle with Ford and General Motors over wage demands and working conditions.
On Sept. 29, UAW President Shawn Fain announced that the union is expanding its strikes against Ford and GM, including 7,000 workers across a GM plant in East Lansing, Michigan, and a Ford factory near Chicago. Including this latest round of strikes, about 25,000 workers at the Detroit Three are currently on strike.
Labor and political arguments aside, spiraling wages could force automakers to significantly pivot their business plans going forward.
One of the central demands of the UAW is a significant wage increase for its members. The union argues that its members deserve a larger share of the automakers’ substantial profits, especially given the rising inflation experienced over the past 18 months.
President Joe Biden on Sept. 26 even personally visited a picket line to voice support for the striking employees’ demand for a more than 40 percent wage increase.
If those demands are met, all-in wages for unionized employees would surpass $100 per hour per person, including salary and benefits. These costs per UAW worker would be more than double the $45 per hour all-in cost at Tesla, which doesn’t use unionized workers.
At a macro level, meeting these demands would exacerbate ongoing inflationary pressures and erode the purchasing power of consumers. Wage inflation is a primary driver of overall inflation, and ever-increasing wages without productivity increases would create the dreaded “wage-price spiral,” in which manufacturers would simply raise prices to cover the increased labor costs to maintain profit margins.
But as the labor standoff intensifies, it could become a catalyst to alter U.S. automakers’ business strategy going forward.
Currently, Big Three automakers are investing heavily in electric vehicle (EV) development. EV investment is costly, and so far, the EV segment for major U.S. automakers is a money-losing endeavor. Currently, profits derived from sales of internal combustion engine vehicles are subsidizing automakers’ EV development efforts.
The UAW strike is going to muck up automakers’ financials this year, and if the union’s significant wage demands are met or even approached, the result is ironically counterproductive for the Biden administration and liberal lawmakers keen on EV adoption. In the end, higher labor costs would slow the development and adoption of EVs in the United States.
“We think the UAW strike situation may be the ‘cathartic moment’ needed by the respective Boards of the D3 [Detroit Three] to accept what they may have already begun to suspect: That spending tens of billions on EVs too quickly may be value destructive,” Morgan Stanley automotive analyst Adam Jonas wrote in a Sept. 29 note to the bank’s clients.
Mr. Jonas’s argument is contrary to the automakers’ historical business models, which focused on scale and volume at the expense of margins.
Currently, the margins of the EV businesses at Detroit Three automakers are negative (a ghastly minus-75 percent for Ford in 2023, as Morgan Stanley estimates). Mr. Jonas—who speaks with auto executives weekly as one of the industry’s preeminent equity analysts—believes that the companies have done the math and a strategic pivot may be in store if all-in wages would rise to beyond $100 per hour per worker.
“As legacy car companies re-calibrate their margin and return on capital calculations on a go-forward basis, we expect to see a host of further announcements pulling back, slowing down, or altogether halting various EV spending initiatives that have only been announced in the past one to two years,” the report stated. “We do not expect legacy manufacturers to completely abandon their EV strategies, but we see significant scope to change the timing and magnitude of the spend including working with partners to achieve scale in more efficient ways.”
And in Morgan Stanley’s estimates, it would be a positive for the Detroit Three automakers’ stock prices. Internal combustion engine vehicles aren’t going away any time soon, and their higher margins can be an important driver for market capitalization going forward.
As for EVs, ultimately the United States will receive a smaller portion of the global EV investment if the UAW has its wish. And that means comparatively fewer EVs—and even fewer U.S.-made EVs—will be on the streets.
The Detroit Three are already playing catch up in EV development against Tesla, as well as EV startups such as Lucid and Rivian, and South Korean and Chinese automakers. China is already the world’s biggest producer, with the Chinese Communist Party regime providing more than $60 billion of subsidies to its domestic EV industry over the past four years.
