It’s hard not to appreciate the point of view of the United Auto Workers (UAW) members who recently walked out of facilities owned by the Detroit automakers known as D-3: Ford Motor Co., General Motors Co., and Stellantis NV. Corporate revenues are high; the labor market is tight; and real wages are getting smaller, not bigger. Further complicating these workers’ efforts to meet monthly expenses are the forces of inflation, which reduces the purchasing power of their money.
As usual, though, things aren’t quite so simple. To whatever extent the strikers in fact achieve wage hikes, this could actually heat inflation up, so restoring the Federal Reserve’s headache on this score. As a result, interest rates could stay higher for longer. Average hourly earnings in the US are already at quite elevated levels. They rose 4.3% in August over last year, with July inflation at 3.3%, and Citigroup say that “labor costs will continue to rise at rates above those consistent with 2% inflation for some years to come”. Considering that unions in the US are presently enjoying a return to prominence, it’s likely that any wage gains earned by UAW strikers would set a standard that could be used to push up blue-collar wages across the nation.
This may sound like a good thing, but it’s questionable whether this is the best time for it. Carmakers in particular, and the US economy in general, are still in convalescence mode from the dampening effects of the pandemic, not to mention a prolonged shortage of semiconductors. “If we were to have a long strike in 2023, the state of Michigan and parts of the Midwest would go into a recession”, says Patrick Anderson of Anderson Economic quite starkly.
Today we ask: What are the UAW strikes liable to do to the bottom lines of the D-3?
Impact on D-3
What makes some strikes more problematic than others is one thing: duration. For each week of stunted operations, Ford could lose up to 5% of adjusted earnings; GM could lose up to 4%; and Stellantis 2%. Which ever way you slice it, the D-3 are going to shed billions of dollars in earnings. A short strike seems to be something the D-3 could ultimately tolerate, but “If it goes on for a couple of months, we’ll back to where we were in 2021 with semiconductor-related shortages”, says Cox Automotive’s Charlie Chesbrough. On the other hand, in the event Ford were to accede to all the union’s demands, the company would actually face bankruptcy, according to CEO Jim Farley.
Lots of Revenue, No Money?
If automakers are pulling in such high revenues, why don’t they have money for worker wages? According to banker and former negotiator with the UAW, Steven Rattner, there are a couple of reasons. For one thing, “the transition to EVs (electric vehicles) is going to be very expensive and painful for these companies”, he says. There’s lots of competition in the market they have to fend off, and the generally high costs they have to pay are augmented by the transition to EV technology. He also mentions that GM shares have hardly gained in stock trading since the company went public in 2010, while the stock market itself went up 275%. Wall Street traders have been less than enthused with the company’s growth prospects, despite its iconic status, so it may be more vulnerable than it seems.
The Path Ahead
Rattner’s view of the path ahead is that the union will give up a good portion of their demands. Jairam Nathan of Daiwa Capital Markets agrees with this likelihood but anticipates D-3 will agree to wage hikes of 25% to 30% over a four-year period. Thereafter, GM and Ford will find themselves unable to pass those extra wage costs onto consumers, “given already low affordability levels amid high interest rates”. The outcome for these companies may then, in fact, be softer revenues down the line, says Nathan.
Motoring On
President Biden was quick to realize the danger of the strikes – to his election prospects for 2024. He therefore decided to become the first ever US president to personally join a picket line. In the event the strike keeps going, however, his enthusiasm may wane. Since Great Lake economies like Michigan, Ohio and Wisconsin rely on the auto industry a lot more than the rest of the country, an extended strike could bring them into a recession. If this happens, it’s not so clear Biden can rely on their goodwill at election time. Indeed, UAW leader Shawn Fain has warned the Democratic Party not to bank on his union’s vote if they don’t do enough to further UAW interests.
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