One week ago, when previewing the three events that are about to slam US GDP in the tail end of the 3rd and the 3th quarter (including the return of student loan payments, the UAW strike and the government shutdown), Goldman calculated that reduced auto production from a potential UAW strike would reduce quarterly annualized growth by 0.05-0.10% for each week it lasted, if all three companies currently undergoing contract negotiations are impacted. "Those three companies—Ford, GM, and Stellantis—produce almost half of domestically-assembled cars. Auto production would likely fall sharply—we assume to roughly zero—at any company impacted by a strike", Goldman said in its 30,000 approximation of the impact..
Fast forward to today when Morgan Stanley's auto strategist, Adam Jonas, takes a closer look at the impact of the UAW strikes, which are now in their 5th day.
According to Jonas, investors have expressed a degree of trepidation over the strike outcome in a recent survey and now that it’s here, the path to resolution does appear to have matched investor fears.
Here is his quick calculation: "the value of N. American light production of the D3 (F, GM, STLA collectively) is approximately $750mm per day (approx. 15k units per day). Applying slightly more than a 30% decremental (yes, mix is that high) implies around $250mm of lost profit per day (assuming 100% of production impacted)."
Extrapolating to a full month of lost output (adjusted for production days) could be worth $7 to $8bn of lost profit for the D3, collectively.
According to Jonas, some of the lost production would be made back as some customers may be tempted to buy an import brand - or Tesla - with lack of availability.
But beyond the 1-time losses, Jonas says he is much more concerned about the potential for 30 to 40% labor inflation over the life of the next 4-year contract and how the domestic auto companies may recalibrate their ROIC and payback math for EV onshoring. The MS strategist thinks the outcome will be greater austerity and focus on the ICE run-off (that, however, would make many more workers redundant as EV require far less mechanical intervention than ICEs).
One must also consider that new car purchases account for roughly 5% of US CPI and soon car companies will have to raise prices (structurally) to compensate for higher labor input cost. Put simply, a 3% increase in new car prices could be worth 15bps to CPI over 4 years.
Finally, some thoughts on the UAW strike from One River CIO Eric Peters:
“The money is there. The cause is righteous. The world is watching, and the UAW is ready to stand up,” declared United Auto Workers boss Shawn Fain to his union members on a Facebook livestream. “This is our defining moment.”
Detroit automaker unionized labor costs, including wages and benefits, are estimated at an average of $66/hour. That compares with $45 at Tesla, which isn’t unionized, and $55 for Asian automakers.
Meeting all of Fain’s initial demands would boost average hourly labor costs to an estimated $136/hour.
Fein claims to be matching the roughly 40% compensation gains automaker CEOs have realized in the past decade. Ford’s CEO made $22mm last year. Stellantis’s $24.8mm. GM’s nearly $29mm.
“Competition is code word for race to the bottom, and I’m not concerned about Elon Musk building more rocket ships so he can fly in outer space and stuff,” Fain told CNBC, defending his demands. “Our concern is working-class people need their share of economic justice in this world.”
The secular trend toward ever rising inequality is turning. In August, UPS settled its labor dispute with the Teamsters 340k drivers who on average now make $170k in wages and benefits. That same month, Yellow failed to come to agreement with the Teamsters and ceased operations after nearly a century of trucking delivery -- it awarded ten executives $4.6mm in special retention bonuses, laid off all 30k drivers and went into liquidation.
A secular trend reversal to how society divides its economic spoils is not all that different from revolution. Bitterly fought, treacherous for all involved. And this latest episode promises to be particularly so.
Because in the timeless conflict between capital and labor, it is extremely rare for the imbalance to be so extreme. The wider the gap, the bigger the stakes. And the last time the chasm was so great was at the height of the Roaring 1920s.
