Hot Union Summer is upon us and the possibility of an auto worker strike during the Detroit Auto Show has created the perfect setting for a dramatic showdown. In one corner, you’ve got a United Auto Workers President elected by the slimmest of margins making huge promises. In the other corner, you’ve got the Big Three, who are trying to electrify while also facing down competitors who don’t have to pay union wages. In the middle? America’s most influential automotive analyst saying, essentially: It’ll all be fine, buy Ford and General Motors stock.
While we’re at it, we’ll get deeper into how Ford can win the contract negotiations. Plus, we’ll also look at Toyota’s huge summer amid a potential huge drag for the company.
The Number That Blew My Mind
It is not for me to referee or decide what happens with the UAW negotiations, but my unoriginal view is that both sides have more room to bend than they’re letting on publicly. My slightly more controversial view is that, with the exception of the 32-hour work week, automakers can probably give labor a lot of what they want (raises, the end of two-tier, some unionization for battery plants) and still survive. I have a bigger, wilder theory, but I’m going to save that for a little later. Stick around.
If you don’t know who Adam Jonas is, I don’t blame you. It’s not important for the average enthusiast. But, just so you do know, Adam Jonas is the analyst for Morgan Stanley in charge of automotive (and space!). He’s extremely well-respected, usually right, and mostly judges everything from the view of investors. Check this out:
Really interesting paragraph here from Morgan Stanley's Adam Jonas on why the big automakers can afford to stomach a 40% all-in increase in the amount it pays to UAW employees pic.twitter.com/v7lQzYzkGF— Joe Weisenthal (@TheStalwart) August 28, 2023
What Jonas is saying here, basically, is that even if Ford or GM did in fact give everything to the UAW that the UAW wanted it wouldn’t be that big of a deal (there’s precedent for this: UPS basically gave its union most of what it wanted this year). But let’s get into some more of the detail:
“Ford has disclosed it employs over 57,000 UAW represented workers earning all-in wages and benefits/bonuses equating to $64/hour or $112,000 per year per employee or a $6.4bn bill for total UAW ‘exposed’ compensation and benefits. We estimate Ford will generate global revenues of $168bn in FY23. Ford’s UAW labor ‘bill’ accounts for 3.8% of our Ford global revenue forecast. Let’s assume over the life of the next 4 year contract that Ford’s UAW total all-in hourly wages rise 40% to nearly $90/hour. This adds $2.6bn to the labor bill or a bit more than 150bps to cost headwind to Ford globally.”
To clarify: all-in means benefits/pensions/et cetera, so it’s not like workers are actually getting $90 per hour. This is a lot of money, as Jonas points out, but it’s not as big of a deal as it sounds, and it wouldn’t bankrupt the company, though it would cut hard into the company’s margin. Jonas goes on to note that there are plenty of ways to make up for the cost increases, including passing it onto consumers (which automakers are comfortable doing). I’m not sure that Ford wants to cut into R&D right now, given how much the company needs to do to be competitive, so it’s definitely a difficult balance.
It’s the kicker of the Jonas analysis that’s most important, though:
Bottom line, we’d be a buyer of F and GM right now and during the negotiations as we believe even a ‘difficult’ outcome can catalyze far bigger changes to strategy and capital discipline that will eventually yield significant and longer lasting benefits to shareholders that will exceed today’s labor headlines.
Investors are gonna investor, which means that we can’t expect them to necessarily have completely predictable or logical reactions to a deal. Still, the fact that the main Morgan Stanley guy is saying that investors should see the negotiations as an opportunity to invest in Ford and GM is a big deal and a likely signal to executives to make a deal early rather than risk inventory drops just as sales are heating up.
This leads me to what I think could happen. Many people are predicting a long, Writer-type strike action that cripples the Big Three. I think there’s a likely alternative. Keep reading.
How Ford Could Win The Union Negotiations
I think Ford and, in particular, CEO Jim Farley are trying to do the smart thing. The right thing. But the company is still saddled with quality issues and it’s desperately trying to catch up to competitors by investing in electrification. It’s hard for me to say what I’d do differently than Ford right now, other than resurrect the Cosworth Escort RS as a Ford Maverick and bring the Ford Puma ST to the United States, which are both terrible ideas.
Here’s one thing I would do: Settle early with the UAW and Unifor (Canada’s version of the UAW.)
If we take the above analysis from Jonas as a hint of how the markets should respond to a UAW deal then I don’t see what the upside is to drawing out a fight. The small amount that Ford could gain by pushing back against union demands could easily be wiped out by dwindling sales right at the time the company is launching a new F-150 and other important products. It probably can’t (and some argue probably shouldn’t) give UAW President Shawn Fain everything he’s demanding, but the end of two-tier wages, some clarification on how to deal with joint-venture battery plants, and the restoration of some of the pre-2008 contract benefits seems like something Ford might swallow.
Even better, Ford has the biggest UAW footprint and making a deal early means that GM and Stellantis will essentially be forced to accept what Ford bargained for first or fare even worse. It’s a weird Prisoner’s Dilemma situation. There’s precedent for this as well: Delta made a big deal with the pilot union and now every other airline is being pressured into accepting similar deals, which negates the competitive disadvantage. Of course, many of Ford’s competitors don’t have union labor, so it’s not a perfect analogy, but in general it could work.
I think GM could probably swallow it if it had to, but I’m not sure Stellantis has positioned itself well here and may end up with a strike exactly when it doesn’t need one. This furthers Ford’s advantage as it could potentially have products for sale while one or more of its competitors suddenly run short of inventory. Plus, I think Ford coming out right before the Detroit Auto Show and saying “We’ve got a deal” would help it win the auto show and maybe give it a stock price bump. It’s a crazy idea and probably won’t happen, but it’s what I would do.
Oh, also, I should just randomly insert this little bit from The Detroit News about how Unifor has decided to start its negotiations with Ford:
“I’ve concluded that the best opportunity for our union’s 18,000 members in the auto sector to achieve our bargaining objective is with Ford Motor Co.,” Unifor President Lana Payne said during a news conference.
Payne noted that she had previously said Ford might make the most sense as the lead company. As the talks shift to focus on reaching an agreement with Ford ahead of the current contracts’ expiration at 11:59 p.m. Sept. 18, negotiations with GM and Stellantis will pause. The deal that Unifor reaches with Ford, once ratified, will set the pattern for agreements with the other two companies.
Crazier things have happened. Plus, I think Fain has puffed up his chest a lot and probably has more support than the automakers think among his workers, but there’s a huge risk that maybe he doesn’t.
Toyota’s Back, Baby
Toyota reports its sales on a weird delay, so we’re just getting July numbers globally as August is about to end. How’s it going? Per Reuters:
Toyota Motor’s (7203.T) July global sales rose 8% from the same month a year earlier to a record 859,506 vehicles, the Japanese automaker said on Wednesday…
That’s awesome for Toyota. The automaker has been behind the times on full-battery EVs and has been one of the automakers hardest hit by global shortages. Wait, what was the rest of that sentence?
a day after a system malfunction shut output at all of its domestic assembly plants.
Huh. That seems bad.
What Is Going On With Toyota’s Computer Network?
Yesterday, Toyota had to shut down 14 assembly plants because the e-kanban computer network it relies on to build cars just stopped working. This is a big deal. Most global automakers have borrowed from Toyota’s lean production model, but for the system to work the underlying communication network needs to work.
How bad is it? Again, from Reuters:
[Toyota’s] average global vehicle sale price in the most recent quarter was equivalent to $26,384, based on its financial reporting. Using that as a proxy would mean a full-day of production at the 14 plants would be equivalent to $356 million in revenue.
That’s not nothing. It’s quite possible that this is a weird fluke, it’ll get fixed, and it’s not a cyberattack that caused this. Toyota, though, needs to reveal what this was. What happened?
It’s yet another reminder of how fragile these just-in-time systems can be, especially in the more complex world we seem to live in at the moment. Whatever this is caused as much as $350 million worth of problems in a single day.
The Big Question
Guys, it’s time for some Game Theory. You’re the CEO of one of the Big Three automakers. You’ve got the auto show coming up, a strike on the horizon, problems with EV chargers, feds getting up in your business about driverless cars, Elon Musk, China, et cetera to deal with.
How do you approach the strike? Teach your execs to weld and say to hell with the workers? Let your competitors figure it out and focus on building cars? Make a deal? Let’s hear your thoughts.
- Readers Aren’t Having Georgia’s Bullshit Reason For Banning Kei Trucks: COTD
- Fiat Panda Six-Wheeler, Volkswagen Golf Country, Indian Sport Scout: Mercedes’ Marketplace Madness
- The Second-Generation Saturn Vue Lived, Then Died, Then Lived Again: GM Hit Or Miss
- Can You Guess The Three Cars The Autopian Has Tried To Buy This Week?