Prominent auto analyst on UAW contract talks: 'I think we're going to see a strike'
Jordyn GrzelewskiFarmington Hills — Auto analysts at Bank of America feel confident in the likelihood of a United Auto Workers strike of at least one of the Detroit automakers later this year — and they expect the union to secure wage and benefit improvements that result in 25% to 30% higher labor costs for the companies over the four years of the contract.
That's according to comments made Wednesday by John Murphy, managing director and lead U.S. auto analyst in equity research at Bank of America, during the financial institution's annual "Car Wars" presentation. The event was hosted by the Automotive Press Association.
“I think we’re going to see a strike on Sept. 15," said Murphy. The UAW's current contracts with Ford Motor Co., General Motors Co. and Stellantis NV expire Sept. 14. Talks on a new agreement are slated to start this summer. Murphy said he's highly confident in at least one strike happening, and that the chances of a subsequent strike at one of the other automakers is "much higher than normal."
Though he acknowledged there's a case to be made for each of the Detroit automakers to serve as the lead company and strike target in the union's negotiations, Bank of America analysts believe Stellantis will be targeted for a strike, based on rhetoric from UAW President Shawn Fain, who worked for the company and has criticized its idling of an assembly plant in Belvidere, Illinois. Stellantis declined to comment.
Murphy contrasted the expected rise in labor costs at the three companies with tailwinds analysts expect the industry to see from declining raw material costs, which he said typically make up about 11% of a vehicle's average transaction price. More recently, raw material costs have stood at about 8% of ATP.
"The opposite side of the spectrum is what's happening with labor costs," Murphy said.
Murphy noted that labor costs typically make up about 16% of auto companies' operating costs. The increase that his team is expecting would represent about half of the Detroit automakers' current margins, which could be partially offset by the downward movement on raw material costs: “This is going to be a significant structural headwind the industry is going to have to deal with for the next four years," Murphy said.
For their part, UAW leaders have pointed to the hefty profits that the automakers have generated in recent years.
"They can afford our demands, and we expect them to pony up," Fain said during a recent town hall for UAW members.
UAW leaders have repeatedly said the decision on whether to strike will depend on what the Detroit automakers do at the bargaining table. They've said that their top priorities are ending tiered wage and benefit structures, reinstating cost-of-live adjustments, and securing strong job protection language. The union, which is preparing to launch a national contract campaign, heads to the bargaining table with $825 million in its strike fund.
'Pony up:' UAW leadership details priorities for Detroit Three contract talks
Meanwhile, Murphy noted that Bank of America analysts see signs of a more robust recovery in the auto industry than they'd previously expected. They had forecast 14.3 million new-vehicle sales in the United States this year, but the current sales pace is closer to 15.4 million, driven by "significant" recovery in fleet sales to buyers like rental car companies.
“This is really important, because when you look at the auto industry, in the U.S. it’s about 4% of GDP. It’s larger in Europe and China," he said. "So if the industry is actually really recovering, it should drag the rest of the economy with it."
Inventory is still tight, with about 1.8 million vehicles on dealer lots, but that's up from a pandemic low of 1 million — and Murphy noted that all three Detroit automakers are running at or slightly above normal inventory levels.
The annual "Car Wars" report forecasts every product that will launch in the U.S. market over the next four years. Analyst calculate the auto companies' replacement rates, which represents how much of their product portfolio will be replaced with brand-new product over the next four years.
That rate trickles down to impact the age of products in showrooms, companies' market share, and their profitability, Murphy explained: “The lower your replacement rate, meaning you have less fresh product, the more market share you lose, and higher your replacement rate is, the more market share you gain.”
To that end, automakers are slated to launch an average of 61 new nameplates per year over the next four years, higher than the traditional 41 launches, according to Car Wars. But Murphy noted that much of that is lower-volume products, such as new electric vehicles: “It’s going to be a few tough years here on a lot of product launches and not a lot of payback on volume."
Overall, replacement rates will be near the historical average of 15% for model years 2024-25, according to the report, but strengthen in model years 2026-27.
Hyundai, Kia and Ford are all well-positioned to gain market share in the next four years because of their higher forecasted replacement rates, according to the report, while Stellantis, Nissan and Honda stand to lose market share to new industry entrants — which could prompt them to cut prices, Murphy said.
GM's replacement rate is forecasted to land close to the industry average of 22.8%. Ford's forecasted replacement rate is the highest in the industry, at 24.8%, while Stellantis is at the bottom of the list with a forecasted replacement rate of 15.9%.
Analysts also concluded that there are likely to be more last-minute product cancellations in the years ahead amid increased volatility, writing: "The next four+ years could be some of the most uncertain and volatile for product strategy ever."
Meanwhile, EVs are taking over as the majority of new nameplates launching over the next four years. As legacy automakers ramp up production of EVs, longtime EV market leader Tesla Inc. is slated to see its market share slip from the 60% range to 18% by 2026, according to Car Wars, while GM and Ford are slated to reach 14% market share by then.
Bank of America analysts also noted the dramatic impact of subsidies and consumer incentives included in the Inflation Reduction Act; thanks to the legislation, they expect EVs to reach price parity with internal combustion engine vehicles around 2025. Without the IRA, consumers wouldn't see that until the early 2030s.