GM, Ford and Stellantis can afford a much bigger walkout than the union has called, but for investors it isn’t just about the financial cost
Updated Sept. 15, 2023
By guest author Stephen Wilmot from the Wall Street Journal.
The strike in Detroit could cost General Motors, Ford andChrysler-owner Stellantis STLA 2.18 % increase; green up pointing triangle billions of dollars. Worse than that, though, it is a reminder that these scions of a fast-changing industry aren’t set up for change.
To nobody’s surprise, the United Auto Workers union and the Big Three didn’t come to a last-minute agreement on Thursday, triggering a walkout overnight. For investors, the immediate questions are how much it could cost, and what is already factored into the stock prices since this outcome was expected.
The cost is highly unclear given new UAW President Shawn Fain’s unusual tactics and the strike’s uncertain length. What is clear is the Detroit Three’s capacity to withstand almost anything the UAW throws at them after two years of high profits. There is an irony here: Fain has made the companies’ finances a central part of his campaign- “record profits mean record contracts”—but their fortress balance sheets also weaken the union’s negotiating position.
This time round, the UAW is targeting one plant at each of the three automakers rather than all plants at one. It announced the factories at the last minute, which will add to the costs for the automakers; planning counts for a lot in the choreography of vehicle assembly. Even so, the cost of one plant closure is low in the context of such large companies.
To give a rough idea, the UAW picked the Ford factory in suburban Detroit that makes Broncos and Rangers for the American market. In the first half, Ford sold roughly 83,000 of those models in the U.S.—almost 3,200 a week. U.S. sales are an imperfect guide to production, but assuming some equivalence the fixed costs associated with 3,200 lost vehicles might be around USD 45 million. That is affordable for a company that, before the strike, expected to make between $11 billion and USD 12 billion of adjusted operating profit this year.
Of course, the tally will snowball if the UAW picks more factories to ramp up pressure. Over a number of weeks, the fixed-cost bill across all three automakers could easily run into the billions. The two sides still seem far apart on the basic question of a pay increase, with GM GM 0.86 % increase; green up pointing trianglefor example offering a 20 % raise over the four years of the contract and, according to Ford’s statement on Thursday, the union still demanding not much less than the 40% raise where it started negotiations.
But whatever the final cost, it is likely to be lower than the amount investors have written off the stocks. GM and Ford have each lost about $10 billion of market value since negotiations opened on July 13. There have been other factors, notably increasing sales incentives that will also hit manufacturers’ margins, but the growing risk of a strike has been front of mind for U.S. investors. (Shares in Stellantis, which has a bigger global business and shareholder base, are roughly flat.)
Autoworkers 4 MMMM
Another reason the selloff seems exaggerated is that lost production might have the counterintuitive effect of shrinking inventories and hence those costly incentives. The semiconductor shortage showed the industry that lost production isn’t the same thing as lost profit: Last year’s record earnings were made despite light-vehicle production in North America of 14.2 million, 13% lower than in 2019.
On a less strictly financial view, though, the strike is certainly a valid reason for investors to worry about Detroit. High labor costs helped drive much of the sector into bankruptcy during the 2007-2009 financial crisis. Since then it has found a profitable oligopoly in big sports-utility vehicles and pickup trucks, helped by a favorable shift in consumer tastes. But high labor costs make it vulnerable again at a time when competition from new, non-unionized players such as
Tesla and Rivian is just around the corner.
Instead of working together to combat this threat, Detroit is once again fighting itself. This doesn’t bode well for an EV transition the industry has barely begun.