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How could rising labour costs affect US automotive industry?

Strike action in the US has precipitated wage increases even for non-union labour, but the challenges of electrification persist. By Will Girling

With the global 2021/22 inflation surge sparking a cost-of-living crisis in many countries, it is perhaps unsurprising that H2 2023 witnessed a flurry of labour strikes in the US automotive industry.

Special report: Macroeconomic challenges in the global automotive industry

Industrial action initiated in September by the United Auto Workers (UAW) underlined worker dissatisfaction with conditions at the Detroit Big Three (GM, Ford, and Stellantis). Frustrated that record profits were being posted amid wage stagnation and concerned about electrification’s effect on manufacturing, as well as the increasing use of non-unionised labour, the union brokered a new deal within six weeks.

While the UAW has demonstrated the benefit of industrial action for workers, can automakers and their suppliers sustain increasing labour costs while market uncertainty threatens to slow sales during the electrification shift?

The criticality of cost

Prior to the strike, Mark Barrott, Partner at management consulting firm Plante Moran, anticipated a drawn-out battle into early 2024 as the UAW and automakers struggled to reach terms. This was due to the union’s ambitious demands, including an end to tiered wage systems that disadvantage veteran workers and a 46% salary increase. Essentially, workers wanted to benefit from the cost optimisation unlocked by the ramp up of electric vehicle (EV) production. “Full volume EV manufacturing at scale could cut up to 40% of costs through simplification, fewer parts, etc,” says Barrott. “The OEMs wanted to keep those savings as capital to grow the electric industry.” On the opposite side, the union thought it should go to workers.

Barrott partially attributes the strike’s fast results to the UAW’s “escalatory strategy”, although he notes that it did not get everything it asked for—tiered wages were indeed scrapped, but the Big Three granted only a 25% wage increase. More important, he believes, is what the strike revealed about the criticality of cost margins to the US industry during electrification. For example, he relates that Ford’s new US$8.8bn labour deal will add an estimated US$800-US$1,000 of extra cost per EV—small enough for it to still claim a healthy profit on each unit during high volume production. “This is the prize that OEMs are protecting. That’s why, when those deals were put on the table, they took them.”

The UAW’s success in landing a quick deal has subsequently had a ripple effect outside the US’ unionised heartlands of Michigan, Ohio, and Indiana. In November 2023, UAW President Shawn Fain announced that the organisation will push to organise workers at 13 non-union OEMs located in the South, including Tesla and Mercedes-Benz. Later that same month, Volkswagen and Honda both announced salary hikes of 11%, Toyota granted 9%, and Hyundai stated it will raise wages 25% over the next four years.

UAW picketers—after six weeks of strike action, the union managed to reach terms with the Big Three (Image source: AFL-CIO America’s Unions)

Barrott considers Tesla unionisation to be an unlikely prospect, as attractive benefits currently enjoyed by employees like stock option eligibility could be rescinded for those pushing for a union. There is also historically little appetite for labour organisation in the non-union South—workers at Nissan’s Smyrna, Tennessee plant voted overwhelmingly against doing so in March 2023. However, the pay raises offered by OEMs with a non-union workforce are clear attempts to reinforce this sentiment by making unionisation appear unnecessary. “The cost of living is generally lower in the non-union areas, so they’re getting a good deal.”

Automotive World Magazine – February 2024

Satisfying wages amid industry headwinds

The difficulty with which US automakers must contend is satisfying the wage increases demanded by workforces as they struggle to make EVs profitable. Sector-specific losses up to 2023 are estimated at US$6bn for Ford alone.

“Legacy OEMs still lose money on every EV they produce, predominantly because they’re not operating at full volume,” states Barrott. High upfront purchase costs are the primary challenge: in the US, the average EV transaction price in 2023 was US$53,469, according to Cox Automotive. Although this is a significant reduction from the previous year (US$65,000), driven in no small part by Inflation Reduction Act (IRA) subsidies and Tesla’s price war, it is still higher than the US$48,334 average for a gasoline model. “Fundamentally, automakers need to start making EVs for the mass market, not just the high end.”

New models like Chevrolet’s Equinox EV, which is scheduled to enter production in Q1 2024, could be the start of a more affordable and productive era. Barrott calls it “feature rich” with a range (250 miles) and price point (starting from US$34,995) to match customer needs. “If it doesn’t sell like hot cakes, then we might have a problem with the consumer.” US interest rates currently stand at 5.33%, up from 0.05% in early 2022, which a December 2023 report from McKinsey & Co found increased the average annual cost of vehicle ownership 12%. Therefore, purchasing a vehicle may be a decision many customers delay or reconsider entirely.

There is also a possibility that political attitudes to the IRA’s financial scale will change after the 2024 US presidential election, further weakening EV demand through higher prices. Barrott does not consider this likely: “Regardless of how one feels about its content, the IRA was designed to onshore manufacturing—both sides support that.” Despite being cautiously optimistic about the future of EVs, he acknowledges that US automotive is set to face significant near-term headwinds. In this difficult atmosphere, how could the added strain of rising labour costs affect the industry’s direction?

A battle for labour

A significant component of the UAW strikes was concern that the increasingly streamlined EV manufacturing process—using Gigacasting, skateboard architectures, simplified powertrains, etc.—could be achieved with a gradually diminishing labour force. For some, this presages mass layoffs as automakers seek to balance wage increases.

A pre-production model of the Chevy Equinox EV, scheduled to enter production in Q1 2024

Barrott is optimistic that current trends suggest this will not happen. This is not to say that a greater degree of automation will not gradually permeate the industry, particularly in areas like battery cell manufacturing facilities. However, vertical integration and the desire to bring manufacturing in-house could mean labour reductions in one sector are compensated for in another. “For example, components like e-axles that come from Denso and Dana could be made at GM and Ford using union labour.” Such actions may be enough to convince unions that automakers perceive workers’ long-term value to e-mobility. He cites US$40bn of new investment in EV plants, which was ratified as part of the UAW settlement, as evidence of this commitment.

More noteworthy, Barrott continues, is the geographic centre of the US industry moving slowly towards the non-union Southeast, where wage rates are lower on average. As they penetrate these more rural and less population dense areas, automakers may find it increasing difficult to find skilled workers. This, he suggests, is already happening. “Toyota has announced a US$8bn battery plant in North Carolina that will require 3,000 workers. To meet that demand, it will have to ‘steal’ them from existing auto suppliers, and those companies will respond by raising wages to try to retain them.”

It should be noted that the difficulty in securing talent is not restricted to the South. In Ohio, Barrott notes that Honda is taking workers from its own suppliers and then “complaining that their production rates aren’t high enough.” Therefore, rather than negatively affecting automaker workforces, electrification may spark a battle for labour in the US that ultimately proves beneficial in terms of wage growth. The real strain, he concludes, is likely to be felt by suppliers, which will face skill gaps, high material prices, and increasing labour costs as they struggle to prevent workers being poached by their own clients.

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