Forty-five days, many late nights, and a lot of investor consternation. That’s what it’s taken to get new tentative labor agreements for the United Auto Workers and the Detroit-Three auto makers Ford Motor, General Motors, and Stellantis.
The process isn’t complete. Deals need to be ratified by the members. Still, it isn’t too early to dole out grades for the participants and to look at what the deal means for investors.
Shawn Fain, A-
Fain took over as UAW president in March. “Let’s get ready to rumble!” was how he started a speech shortly after taking office. “We’re here to come together, to ready ourselves for the war against our one and only true enemy,” he said. “Multibillion-dollar corporations and employers that refuse to give our members their fair share.”
Fain was as good as his word. Occasionally wearing camo or a T-shirt that said “Eat the Rich,” Fain devised a Patton-like strategy to strike all three auto makers at once and to expand the strike seemingly without provocation or warning.
It worked. Wages will rise about 25% over the life of the contract, wage tiers, which were prior concessions the Union made when auto makers were losing billions, are gone and there will be electric vehicle jobs filled by UAW workers.
Another positive: He had the support of his members. “He’s hit the companies with some screwballs…I love the idea of negotiating all at the same time,” says UAW Local 862 President Todd Dunn. “He’s done an excellent job.”
It’s tough to argue with results. Still, he was docked takes for some comments about dividends. Companies have to make money and return cash to shareholders or they would be, theoretically, worthless. We also don’t like some of the more extreme rhetoric such as when he said company leadership believed Union members were dumb.
Despite our misgivings, his grade would jump to an A+ if he makes progress on one of his goals: Unionizing the mainly foreign auto makers operating without unions in the U.S. That would be quite a feat.
Auto CEOs, B-
It would be easy to say the leaders of the auto makers—GM’s Mary Barra, Ford’s Jim Farley, and Stellantis’ Carlos Tavares—deserve failing grades because they lost. That’s an oversimplification. No one expected costs to stay flat. No one really expected the 2023 labor negotiation to go down without a strike either.
The 2023 strike will likely end up lasting about 50 to 55 days, a little longer than the 2019 strike that impacted
General Motors
(GM). That isn’t too bad considering inflation averaged close to 4% a year on average over the life of the prior labor contract while general wage increases were less than 2%.
Workers were always going to ask for more. They had lost ground while profit margins at
Ford Motor
(F), GM, and
Stellantis
(STLA) improved. The Union started out asking for 40%-plus wage increases over the life of the contract, depending on how the ask was broken down. It ended up with an increase in the range of 25% plus some inflation protection.
“Honestly none of this was really much of a surprise,” says RBC analyst Tom Narayan. “The narrative is that this was very good for the UAW, but I think this was always going to be a decent-sized concession…you’ve had the [auto makers with] record profits for several years.”
He acknowledges that nonunion operators can have a cost advantage over unionized shops, but it isn’t guaranteed. What’s more, he estimates that labor increases represent about a one percentage point headwind to Ford’s estimated operating profit margins in coming years of about 6%. Not insignificant, but not insurmountable.
For more evidence that the contract isn’t existential.
S&P Global
(SPGI) upgraded Ford’s debt to investment grade Tuesday. Ford’s “Ebitda margins will exceed 8% (our previously stated target) with adequate cushion in 2024 and 2025 given strong momentum in its commercial vehicle franchise and gradual cost reduction,” reads the upgrade.
Ebitda is short for earnings before interest, taxes, deprecation, and amortization. S&P Global didn’t change the estimate post-contract.
Higher than a B- almost misses the point. The job for Barra, Farley, and Tavares isn’t to end a strike or keep labor down. It is to build a winning culture and profitable gasoline and battery-powered cars. There is a lot more work to do on those fronts.
William Clay Ford Jr., B+
Bill Ford Jr. deserves some credit for putting himself out there and trying to reframe a contentious situation. “This is not Ford versus the UAW, it should be Ford and the UAW versus
Toyota,
Honda,
Tesla,
and all the Chinese companies that want to enter our home market,” said Ford on Oct. 16. “We need to come together to bring an end to these acrimonious talks.”
It might sound idealistic, but he isn’t wrong. One barrier to the culture is the difference between profit-sharing and stock-based compensation.
All three auto makers pay annual profit-sharing. Workers, very roughly, get $1,000 for every $1 billion in North American operating profit. It’s designed to reward employees when the company is doing well. But it comes and goes year by year. Stock-based compensation does the same but creates a permanent financial asset for workers.
Tesla pays stock-based compensation deep down into the organization. That advantage Tesla has that might remain no matter who wins and loses in labor talks.
Auto Stocks, C-
Coming into this labor negotiation, shares of Ford, Stellantis, and GM returned about 11%, 9%, and 1% a year on average for the past five years. The
S&P 500
and
Dow Jones Industrial Average
returned about 12% and 10%, respectively.
The strike, though, has been devastating for Ford and GM shares. Both are down in the range of 30% over the past three months.
Wall Street expects a bounce now that investors have all the labor details. Several analysts point out that shares tend to gain back some ground after new labor deals are signed.
It will take more than a bounce back to lift grades. It will take management teams convincing investors there is growth and consistent profitability down the road, and then delivering on those promises.
Write to Al Root at [email protected]
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