The United Auto Workers (UAW) initiated a strike against Detroit's three auto manufacturers, General Motors (NYSE:GM), Ford (NYSE:F), and Stellantis (NYSE:STLA) on Friday. The move, which has led to the temporary shutdown of select facilities and layoffs of employees, is part of ongoing negotiations over wages and working conditions.
The continuation of the strike is likely to disrupt more areas of these automakers' production networks due to supply shortages. This comes as both General Motors and Ford have stated that the layoffs were a necessary response to the impact of the strike on their operations.
Despite UAW's claims that these automakers could afford to double every worker's pay without increasing car prices, the reality appears more complex. Last year, the "Detroit Three" posted a combined operating profit of $37 billion in North America. However, projections for 2023 and beyond suggest a decrease in profitability as new car prices are expected to moderate from pandemic-induced highs.
The average operating profit margin for these companies is around 7% over an economic cycle. This number contrasts with Toyota Motor (NYSE:TM)'s average margin of 9% and Tesla (NASDAQ:TSLA)'s average margin of 13%. If UAW wages were to double without any other changes in the industry or company policies, this could reduce total North American operating profits by 5% to 10%.
Stellantis, Ford, and GM have taken their offers directly to investors and UAW members via press releases. The current offer from Stellantis, similar to those from the other two automakers, includes wage increases of approximately 20% over the contract's lifespan. This falls short of UAW's demands for increases between 30% and 40%.
However, when considering cost-of-living adjustments (COLA), wage increases could average between 6% and 7% annually. This aligns more closely with the UAW's implied request of 7% to 8%. Additionally, GM has proposed a 10% wage increase in the first year to account for recent inflation.
The timing of a resolution remains uncertain, but the gap between the two sides appears to be narrowing. This development could present an opportunity for investors. Wall Street analysts, including John Murphy of BofA Securities and Adam Jonas of Morgan Stanley (NYSE:MS), suggest auto stocks could rebound once a deal is reached or seems imminent.
In the past two months, as labor negotiations have intensified, shares of Ford and GM have fallen approximately 16%, while the S&P 500 has declined around 1%. Stellantis stock, however, has risen about 3% over the same period. The company's shares have performed better than those of the other two Detroit-based automakers, partly due to its lower valuation. Currently, Stellantis stock trades at about 3.2 times estimated 2024 earnings, compared to GM's 4.7 times and Ford's 6.1 times.
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