GM - 3 Ways Tesla Benefits From The UAW Strike

2023-09-19 13:42:25 ET

Summary

• Last week, the UAW called a limited strike at all three major automakers for the first time in its history that is likely to escalate quickly.
• Investors face uncertainty as this is uncharted territory for the industry as it disrupts the pattern negotiations the UAW has always used in the past.
• The strike is likely to last for some time given how far apart the Big Three and UAW are in their negotiating positions.
• Regardless of how this strike gets resolved, Tesla, Inc. should benefit from this event in three key ways.

An eye for an eye will only make the whole world blind .”? Mahatma Gandhi.

The UAW called a limited strike at all three of Big Three last week for the first time in its history. Traditionally, the union has chosen one of the major automakers to target in contract talks, and that agreement has set the pattern for the rest of the industry. Given that, investors are in somewhat uncharted territory here.

The sides are far apart as the UAW's initial demands called for a 46% pay raise over four years, implementation of a 32-hour workweek, elimination of wage tiers, and the return to traditional pensions while automakers opened with raises in the mid-teens.

The last time the UAW struck, they targeted General Motors ( GM ) in 2019 in a strike that lasted a month and a half, the longest such action since 1970. In the end, UAW members received an $11,000 signing bonus as well as performance bonuses, two 3% annual raises and two 4% lump sum payments. GM also got to close a few plants that were slated for closure permanently. This contract structure was then used to reach similar agreements with Ford ( F ) and Stellantis N.V. ( STLA ) .

This sounded like a good deal for the UAW members at the time. However, soon after the Covid pandemic struck, and plants closed during the nationwide lockdowns. Extreme supply issues affected the industry significantly throughout 2021 and most of 2022. In addition, inflation has risen over 17% since the beginning of 2021, eroding all the wage gains and then some from the UAW's previous contract. It is easier to understand the bold UAW membership demands in this context.

However, this strike and contract negotiations finally are settled, Tesla, Inc. ( TSLA ) looks set to benefit in three key ways.

Shrink Bulging EV Inventories

First, if the strike spreads, as seems likely it could impact electric vehicle ("EV") production at the Big Three. Hopefully this eventually helps clear some EV inventory off of dealer lots. Overall EV inventory surpassed 90,000 vehicles for the first time at the end of the second quarter. In comparison, EV inventory was just 21,000 vehicles at the end of 2Q2022.

In August, Cox Automotive reported that EV inventories amounted to 92.2 days of supply, up 343% from the same month a year ago. As a result, Tesla has had to cut prices for its Model S and Model X vehicles while getting somewhat higher prices for its Model 3 this year. This is key reason Goldman Sachs cut earnings estimates for FY2023 on Tesla, Inc. this week to $2.90 to $3.00 a share.

General Motors which has struggled solving logistical issues with its nascent EV production efforts and might be forced to stop production if the strike has a long duration. Depending on what the new UAW contract eventually looks like, it might help GM with future EV production efficiency on the margins.

A lengthy strike would delay production and rollout of electric vehicles at all three of the Big Three automakers. Tech Crunch just posted an article stating it believed that if the UAW strike last four weeks, it would " push out production timelines and EV roadmaps out to 2024 ." This should shrink EV inventory levels and be a positive for Tesla.

New UAW Contract Will Cement Tesla's Labor Cost Advantage

Tesla already benefits from a non-union workforce. Not only does this provide the company more flexibility but also results in lower labor costs. A recent piece citing the Wall Street Journal pegged Tesla's labor cost at $45 per hour while the average Big Three wage, including benefits, was $66 per hour. Now if the Big Three accepted the UAW's initial offer lock, stock and barrel, those wages would soar to $136 per hour according to the analysis cited by the Wall Street Journal and provided by Wells Fargo.

Obviously, those proposals are untenable, and the UAW has already climbed down from some of its details of its initial proposal. It is now looking for a 36% raise over four years. Over the weekend, Stellantis over the weekend joined General Motors and Ford in offering nearly 21% pay raises over the course of the contract. This would include an immediate 10% hike in wages. The offer was almost immediately rejected by the UAW.

It is hard to see this strike getting resolved in September, and it likely to escalate further with more walkouts at plants before all is said and done. I don't think the UAW has a chance to get its 32-hour workweek or the return to traditional pensions. In the end, I believe the UAW and the Big Three will agree to 25% to 30% raises over four years along with a significant signing bonus and some other enticements. This should bump up their overall labor costs per hour in the $85 to $105 an hour by the end of the contract, roughly double that of Tesla currently.

The Strike Highlights Tesla's Structural Advantages

Tesla owns and operates all the plants needed to make all the components for its product lines. This solves dependency on outside suppliers and gives it much greater control over logistics and its supply chain. In addition, Tesla benefits greatly from just producing electrical vehicles as it has no legacy production assets like the Big Three have. Electric vehicles are much less complex to produce given they have much fewer parts and components that need to be assembled. Each electric vehicle takes much less labor to produce as a result as well than its internal combustion engine ("ICE") counterpart.

The Big Three auto manufacturers will likely get to close some unnecessary plants as part of their new contract with the UAW, especially in its parts divisions. However, nothing that will substantially impact their overall efficiency or significantly improve the cost structures of their EV operations. As I noted within this recent article on Ford, the automaker had already bumped its estimate of its losses from its EV operations in FY2023 to $4.5 billion before the strike.

It is also important to note that each of the Big Three has joint ventures with technology companies to produce the most important component of an electric vehicle, the battery. The plants that produce these batteries are not wholly owned by the Detroit Three. Which means, their workforce, even if its UAW, is not covered by the national contract currently being negotiated. Another major friction point between the Big Three and the UAW that is unlikely to be resolved through a new contract.

Verdict:

Now, none of this makes me want to go out and buy the stock of Tesla. However, that is strictly a valuation call, as the stock trades at just under 90 times the $2.90 to $3.00 a share Goldman Sachs now thinks the company will make in FY2023. Nor can I buy the stock in any of the Big Three at much, much lower valuations as they seem like " Value Traps ." The last UAW strike in 2019 cost General Motors an estimated $2 billion and lasted six weeks.

The strike is likely to cause a decent dent in profits in the quarters ahead for the Big Three. In addition, whatever conditions are eventually agreed to; they will just worsen the companies' current cost structure in a significant way vis a vis Tesla Motors. Finally, as I highlighted in a recent article, " Shades of 2007 ," I believe the country is heading into recession at some point over the next 12 months. That makes cyclical industries like auto manufacturing an " avoid" from an investment perspective.

However, one can see the longer this strike lasts, the more Tesla is likely to benefit both over the short and longer term.

Never have a battle of wits with an unarmed person .”? Mark Twain.

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