Importance for Investors
Investors who hold stocks in these automakers should closely monitor the situation. While it’s crucial not to overreact, it’s also necessary to recognize the challenges associated with reaching an agreement in this negotiation process.
Slow Progress in Negotiations
UAW President Sean Fain recently raised concerns about the sluggish pace of negotiations. In response, Ford Motor and General Motors have expressed their commitment to engaging in productive discussions.
Investor Nervousness
In light of the ongoing labor negotiations, investors have shown signs of nervousness. Over the past week, GM, Ford, and Stellantis shares have declined by approximately 3%, 2%, and 4% respectively. The broader market indices, namely the S&P 500 and Nasdaq Composite, have also experienced slight declines of about 1% and 2% respectively during the same period.
Expectations for a Challenging Negotiation
Anticipating a demanding negotiation process is only reasonable. One significant challenge is inflation. Historically, wages under prior contracts increased by approximately 2% annually, in line with prevailing inflation rates. However, year-over-year inflation skyrocketed to nearly 9% in June 2022, with an average of around 4.5% since the UAW signed the previous contract in 2019.
The Challenge of Negotiations in the Shifting Auto Industry
The automotive industry is undergoing a significant transition as electric vehicles (EVs) gain popularity. Along with this shift, engine plants are being replaced by battery plants where EV components are manufactured. These battery plants, operated by both automakers and partners such as LG Energy Solution, currently fall outside the scope of existing agreements. Naturally, the United Auto Workers (UAW) union is eager to bring these workers under their representation.
In response to the unionization efforts, a spokesman for General Motors (GM) expressed support, stating, “GM respects workers’ right to unionize and the efforts of the UAW to organize battery cell manufacturing workers at our JV sites.” However, there has been no immediate comment from Ford and Stellantis regarding this matter.
While the push for unionization is one concern, the auto manufacturers themselves are also grappling with the challenges of the EV transition and ensuring profitability. Although they are making good profits overall, their profit margins are not leading the industry.
Ford’s second-quarter earnings report highlights this issue. While the company earned $4.7 billion from its traditional car and commercial businesses, it suffered a $1.1 billion loss in its EV business. This discrepancy underscores the need for these companies to maintain healthy profit margins to fund the ongoing EV transition.
Given these circumstances, a strike could become more likely as negotiations continue. However, investors need not be overly concerned, as historical data shows that stocks typically recover after work stoppages. Additionally, it is worth noting that labor costs are expected to grow at a rate equal to or higher than inflation.
It is important to consider that the stock market tends to take a forward-looking approach. As such, certain cost increases associated with labor negotiations may already be reflected in stock prices.
