CARZ - U.S Auto Deals: Ample Ratings Headroom
2023-11-03 02:30:00 ET
Summary
- Higher costs from new union contracts should be manageable for U.S. automakers and provide stability to their labor relations over the next half-decade.
- The road has cleared for U.S. automakers to return to normalcy. Within the past week, the United Auto Workers union reached tentative agreements with the Big 3.
- All three deals have similar terms, and must be ratified by union members - which we believe is likely.
By Gianmarco Migliavacca
Higher costs from new union contracts should be manageable for U.S. automakers and provide stability to their labor relations over the next half-decade.
The road has cleared for U.S. automakers to return to normalcy. Within the past week, the United Auto Workers union reached tentative agreements with the Big 3 - Ford ( F ) first, followed by Stellantis ( STLA ) and GM ( GM ).
All three deals have similar terms, and must be ratified by union members - which we believe is likely. This would end months of uncertainty and establish a stable labor framework until the contract’s expiration in May 2028.
As highlighted in a prior blog , the UAW’s initial demands were extensive, and threatened the automakers’ long-term competitiveness. However, the final agreements are not “worst-case” but more of a middle ground, with concessions made by both parties.
Some of the most contentious union demands, such as a shorter work week and reinstatement of defined benefit pensions, were scrapped.
Additional deal terms are in line with general expectations, including wage increases of 25% (vs. the union’s original 40% demand) and the reinstatement of cost-of-living allowances, which together would increase labor costs by just over 30% over the length of the contracts.
Other key terms include expanded health care and retirement benefits, paid time off, elimination of worker “tiering” and better treatment of temporary workers - all of which were anticipated.
While the union did not achieve its initial goal of extending the UAW master agreement to EV battery plants operating under joint ventures, it did receive commitments to gradually convert some existing (unionized) plants to EV production and assembly, as well as a pathway to transition battery plants fully owned by the carmakers to the UAW contract should a majority of their workers decide to join the union.
Fortunately, we think the new deals will be manageable for automakers, given their strong credit metrics and liquidity, and are unlikely to impair long-term profitability.
Ford, for example, could see an additional $2bn in overall costs by contract’s end, which would reduce operating margins by up to 70bps through 2027, but that could be partially offset by productivity gains.
Importantly, reaching a deal quickly limited damage from the strikes, which had already reached over $1bn as of October. Notably, S&P upgraded Ford’s ratings after the deal was reached.
Overall, we believe that the agreements, despite their costs, should smooth the ride for all three automakers, allowing them to retain solid financial and ratings headroom, and to adopt their U.S. electrification plans with higher confidence.
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U.S Auto Deals: Ample Ratings Headroom