Current:Home > InvestAuto strike settlements will raise costs for Detroit’s Big 3. Will they be able to raise prices?-DB Wealth Institute B2 Expert Reviews
Auto strike settlements will raise costs for Detroit’s Big 3. Will they be able to raise prices?
View Date:2025-01-12 21:08:40
DETROIT (AP) — From generous pay and benefits to stronger job security, the United Auto Workers union won significant concessions in tentative settlements that have ended their strikes against Detroit’s three automakers.
Now, General Motors, Ford and Stellantis are facing sharply higher labor costs, estimated by some analysts at exceeding $1 billion per year, per company. The automakers will try to absorb those cost increases through expense reductions and efficiencies while still aiming to post strong enough profits to please Wall Street.
In addition, analysts say, the companies will likely try to offset their cost increases by raising vehicle prices for consumers. How much they’ll be able to do so, though, remains unclear. American auto buyers are already facing enormous price runups since the pandemic: The average new-car price has soared roughly 25% since the pandemic struck three years ago.
Customers might assume that nonunion automakers, like Toyota, Tesla or Hyundai-Kia, will now be able to price their vehicles well below what the Detroit automakers can. But history shows that the nonunion companies will eventually feel compelled to raise their factory wages, too, in their effort to ward off the UAW’s efforts to unionize their factories. As their own labor costs rise, they, too, would likely impose price increases.
At the same time, the breadth of competition means that while GM, Ford and Stellantis will seek to raise vehicle prices, it might prove difficult to make significant price hikes stick.
“I don’t think consumers will necessarily readily absorb all the price increases,” said Jonathan Smoke, chief economist for Cox Automotive. “We are bound to see continued growth in discounting, which has just started to recover as supplies improve.”
If approved by 146,000 union members, the settlements that ended the strikes mean that automakers will raise top assembly plant worker pay by more than 30% to around $42 an hour by the time new contracts end in April of 2028. Less-senior workers and temporary hires will receive much bigger increases.
Ford estimates that the contract will raise labor costs by $850 to $900 per vehicle. All three automakers said they have taken steps to pare costs and become more efficient, having known for months that they would have to begin raising worker pay. But they also face huge capital expenses to develop and build electric vehicles as the world transitions from gasoline to battery power.
“When the dust settles from this UAW debacle, the Detroit auto stalwarts find themselves with a bigger cost profile with competition increasing,” said Dan Ives, an analyst at Wedbush.
Natalie Knight, the chief financial officer of Stellantis, the parent company of Chrysler, Jeep and Ram, said her company has already pulled out of two auto shows in the United States to save on expenses.
“You can imagine that is not the end of our activities,” Knight said Tuesday. “That’s an issue for all of our business and something we are working very, very consciously on to see how do we mitigate those costs.”
Even before the strikes, auto prices were rising as a pandemic-related computer chip shortage hobbled factories and made new vehicles scarce. The average sale price peaked in December of last year at nearly $50,000.
This year, computer chips started flowing before the strike, and companies were making more vehicles. Supplies increased, and by September, prices dropped to just under $48,000, said Smoke, the Cox economist.
As factories crank back up after the strikes, Smoke foresees pressure on the companies to keep prices affordable, especially with auto loan rates around 10% driving up monthly payments. Discounts, he said, will likely have to come out of the automakers’ profits.
Detroit’s automakers, Smoke noted, have been jettisoning smaller, lower-cost vehicles for years and instead ramping up production of higher-profit trucks and SUVs that can cover their higher cost of labor.
At present, he said, U.S. auto dealers have more than 2.4 million vehicles on their lots, the highest supply since the spring of 2021. That means that competition for buyers is intensifying as pent-up demand from the pandemic wanes, making it difficult for any automaker to raise prices.
During the contract talks, UAW President Shawn Fain stressed that the Detroit automakers were making billions in profits and needed to share some of the profits with workers, who for years gave up pay raises and other benefits to help the automakers survive the aftermath of the Great Recession. Worker wages and benefits, Fain argued, make up only about 4% to 5% of a vehicle’s costs and can be easily absorbed by the companies.
Ford, GM and Stellantis combined posted net income of $24.5 billion during the first nine months of the year. (That doesn’t include profits from Stellantis, which reports them only twice a year.) But if the Detroit companies report lower income, Wall Street will register its disappointment, and stock prices could fall.
Another force that could keep prices up, though, is wages for nonunion competitors. Art Wheaton, director of labor studies at Cornell University, said history has shown that foreign automakers with U.S. factories have raised wages after UAW contract agreements to try to prevent the union from unionizing their plants.
Fain has said that organizing at those nonunion sites will be a priority for the UAW and that he expects to negotiate with more than just Detroit companies in the next contract.
Already Toyota has increased factory wages, though a spokesman wouldn’t say when and by how much. Wheaton said nonunion automakers, including Tesla, will have to get in the high $30s per hour to make union membership less attractive to their workforces.
“The rising tide lifts all boats,” Wheaton said. “You either raise your labor costs to meet what the UAW is getting or you risk the unionization drive.”
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