STLA - Looming UAW Strike: A Self-Inflicted Wound For A Declining Detroit-Based Auto Industry

2023-09-14 10:11:25 ET

Summary

• Impending labor contract expiration between Detroit's Big Three automakers could lead to a prolonged strike, costing the industry hundreds of millions or even billions.
• The United Auto Workers union demands a 40% pay raise and a reversal of concessions, while automakers offer a 10-14.5% wage increase.
• The union opposes hiring temporary workers at lower wages, wants representation for battery plant workers, and the restoration of defined benefit pensions.

In the last day before expiration of the labor contract between Detroit’s Big Three automakers, the prospects look grim for a peaceful settlement. Rather, the stage is set for a prolonged walkout starting midnight Thursday (Sept. 14) that could cost the industry hundreds of millions - if not billions – at a moment when the arrival of battery-electric vehicles is stretching automaker finances as never before.

Shawn Fain, president of the United Auto Workers union, began the fiery negotiations earlier this summer by demanding a 40% pay raise and a reversal of union concessions granted 15 years ago during the global financial crisis. Even those concessions weren’t enough to avert the bankruptcy of GM (GM) and Chrysler and the near-bankruptcy of Ford (F).

Ford and GM have countered with offers of a 10% wage increase, Stellantis (STLA) a 14.5% increase. The automakers want to hire new workers that would receive substantially less than the top union rate for the first five or six years they work in the plants. The union insists that workers should receive the top wage rate within 90 days.

No temps, says UAW

Automakers also want the right to hire temporary workers at a substantially lower wage rate – a practice the union opposes. Non-unionized transplant U.S. factories such as those belonging to Honda (HMC), Toyota (TM) and others routinely employ temps during times of brisk production or during periods when full-time workers are on vacation or leave. Among the UAW’s demands is a restoration of defined benefit pensions, which they earlier relinquished in favor of 401(k) plans.

Electrification is another thorny issue. The union hopes to represent workers at battery plants that are beginning to spring up - but because these are joint ventures with non-automotive companies, workers aren't automatically represented by UAW contracts. The wage rates at battery plants are generally lower than at automotive assembly plants.

Over the 88-year history of the UAW, the union and Detroit managements have weathered periods of turmoil and enjoyed times of relative amity as well. The rhetoric from the union in this go-round has been nasty – provoking an unusual public response from at least one top executive.

Fain criticized corporate “greed” and the “billions in profit” earned by the companies as justification for “audacious demands” in a new four-year labor agreement. He floated the idea of a 32-hour work week and criticized executives for using profits to pump up their pay packages. In an address to members in March, Fain called “corporations” like the Big Three the union’s “one true enemy.”

The comment rankled Bill Ford, Ford’s executive chairman and great-grandson of Henry Ford, the company’s founder. He regards Ford a family company, where union workers and executives regard one another with warmth, concern and respect.

"The day that our employees are considered my enemy is the day I'll retire," Ford said. "The head of the UAW may consider us his enemy, but I'll never consider our employees our enemy."

Strike strategy

This year’s negotiations are different than in years past because the unions and companies this time are making their demands and counter-offers public. And they aren’t shy about accusing one another of bad behavior or filing complaints to the National Labor Relations Board.

Fain on Wednesday announced a strategy of striking a smaller number of selected plants operated by the Big Three automakers if no agreement is reached by midnight. In this manner, the UAW may be able to paralyze the operations of GM, Ford and Stellantis without striking each and every plant, potentially forcing the automakers to pay workers who aren’t on strike.

By striking only selected plants, the UAW could conserve its $800 million strike fund, paid to striking workers, and idle the industry for weeks and possibly months.

Most recently, Stellantis negotiators complained about the high absentee rate of union workers. Stellantis says 23% of its workers are off-the-job or late during work shifts, a rate that falls to 11% when paid vacations and other excused leave is taken into account, according to Bloomberg.

Toyota, which isn’t represented by the union in the U.S., says it averages about a 5% absentee rate.

As transplants such as Toyota began to open in the U.S., starting in the 1980s, Detroit auto executives quietly encouraged the UAW to organize the newcomers, reasoning that if they couldn’t get rid of the UAW, at least they could level the playing field by making sure union wage rates and factory-floor rules applied to Honda, Toyota, Nissan and now Tesla, BMW, Mercedes-Benz and others.

Again and again, UAW organizing efforts failed to win a majority of worker votes. Workers evidently concluded that higher UAW wage rates and benefits weren’t worth the periodic work stoppages and monthly dues payments to the union.

Detroit share falling

The Detroit-based industry, which once dominated automotive sales in the U.S., has fallen to about a 40% share of the market from about two-thirds of the market 30 years ago.

Likewise, the trend in automotive labor mirrors an overall decline in private-sector union membership. The percentage of union workers in all private segments fell slightly to 6% of the work force in 2022 from 6.1%, according to the U.S. Bureau of Labor Statistics. Among public-sector workers, roughly a third are represented by unions.

Union membership peaked in 1954 at about 35% of the work force.

How badly one or more automakers could be hurt by latest labor crisis isn’t yet clear, though the UAW strike against GM in 2019 illustrates the potential scale of losses. After 40 days of a production shutdown, GM said it lost $3.5 billion of profit – privately, GM executives said the contract agreement reached with the union was virtually identical to what GM offered the UAW prior to the strike.

Short term, a labor stoppage could mean a shortage of certain vehicle models – probably those that produce the biggest profit for the automakers, such as GM’s Chevrolet Silverado, Ford’s F150 and Stellantis’s Ram pickup

Unfortunately, investors in GM, F and STLA will be the losers in the event of a prolonged shutdown that hits vehicle production possibly harder than expected. The sides probably will meet in the middle, splitting the difference on wages and benefits.

Longer term, the latest spectacle of lost wages, profits, angry employees and frustrated executives provide a solid reason to avoid the Detroit industry when considering an automaker stock to own. For the time being – and barring a surprisingly favorable outcome from the negotiations – GM, F and STLA remain Holds.

For further details see: