Labor negotiations can often be intense and overwhelming for investors. With large figures and ambitious claims being thrown around, it’s essential to keep track of the details.
Currently, the traditional Big Three Detroit vehicle manufacturers―Ford Motor (F), General Motors (GM), and Stellantis (STLA), the parent company of Chrysler―are engaged in talks with the United Auto Workers union. The union’s demands, if met, could potentially increase costs by a staggering $80 billion over the course of the contract, which spans from September 2022 to September 2027.
While this is indeed a substantial amount, it’s important for investors to recognize the scale of the auto industry. In 2022 alone, these automakers generated sales of nearly $500 billion. Moreover, their combined operating profit from selling over 13 million cars stood at almost $50 billion.
The requested wage increases equate to an average of 10% per year throughout the contract period. However, it’s crucial to consider this figure in context.
Firstly, it’s worth noting that the initial 10% annual raise is only the starting point for negotiations, and the final agreed-upon percentage may ultimately be lower. Historically, wage increases in UAW-automaker deals have averaged around 2% per year.
A faster increase in wages can be attributed to the current higher inflation rates. For instance, Teamster members at United Parcel Service (UPS) are set to experience approximately 6% to 7% annual wage growth over the next five years.
Nevertheless, it’s essential to approach hourly wage numbers with caution. Determining the total labor cost for a company is a complex task that requires considering factors such as healthcare, pensions, working conditions, and base wages.
According to _’s calculations, the UAW’s wage increase request would raise the average price of a new vehicle by roughly 4%. It’s worth noting that new car prices have already risen by approximately 25% since late 2019 due to a combination of higher production costs and reduced vehicle supply.
Economists, investors, and prospective car buyers have mixed perceptions of this 4% increase. Some may view it as bearable given the broader impact of the pandemic on prices, while others may see it as an additional burden for consumers.
In conclusion, grasping the intricacies of labor negotiation in the auto industry requires careful consideration of various factors and their implications. By analyzing the numbers in context, investors can gain a more comprehensive understanding of the situation at hand.
The Price Increase Dilemma for Auto Makers
The automotive industry is facing a significant challenge as labor costs continue to rise. A rough estimate suggests that in order to maintain profitability, car manufacturers will need to increase sales by an amount equal to the cost of labor. However, this estimate assumes that prices will be uniformly raised across all markets, ignoring the competitive pressures faced by auto makers.
The financial impact on car manufacturers is a separate concern. In 2022, GM, Ford, and Stellantis made an operating profit of approximately $3,500 per car. In comparison, potential wage increases could amount to nearly $1,500 per vehicle. This means that over the course of the four-year contract, the Big Three could end up spending an additional $80 billion on labor, potentially reducing the projected operating profit of $180 billion by about 45%.
This could prove to be a major blow for the industry, but there are strategies in place to alleviate the impact. One such strategy involves implementing future price increases and improving productivity to mitigate the financial strain.
However, it’s worth considering whether auto makers truly need to offset all these costs. After all, aren’t they already making enough money?
The answer is not as straightforward as it may seem. Gross profit margins for Ford, GM, and Stellantis are lower than those of their global counterparts. These below-average margins leave them with less cash for crucial investments in equipment and new products. As a result, their margins can weaken even further, leading to underperformance in the stock market.
This negative cycle is something that everyone should aim to avoid. Striking a balance between fair wages for workers and maintaining the financial health and competitiveness of the companies is a complex challenge.
Looking at recent performance, GM, Ford, and Stellantis shares have seen a decline of about 6% on average over the past month. In contrast, the S&P 500 and Dow Jones Industrial Average have shown positive gains of approximately 1% and 4% respectively. This underperformance is largely attributed to the uncertainty surrounding the outcome of labor negotiations.
In conclusion, finding a solution to the price increase dilemma is crucial for the auto industry. It is essential to ensure that workers receive fair compensation while simultaneously safeguarding the financial stability and competitiveness of the car manufacturers.