After President Biden joined striking auto workers on the picket line in Michigan, the United Auto Workers (UAW) union has confirmed its plans to expand its strike on Friday, September 29, if no progress has been made in labor negotiations. Investors are left wondering how long Big Three automakers Ford (F), General Motors (GM), and Stellantis (STLA) can hold out.
Tom Narayan, RBC Capital Markets Lead Equity Analyst — Global Autos, sits down with Yahoo Finance Live to discuss what the profit margin squeeze could look like if the strike continues.
"There is some degree of political theater here, right? Both sides that don't really want to cave in," Narayan says. "UAW coming in with a very unprecedented high demand — 40% increase in labor costs — and then the OEMs they have a situation they're facing which is coming off really high price mix that's probably going to start normalizing. So that is going to pressure their profitability, they definitely don't want to pay higher wages on top of that."
Narayan also reacts to Tesla (TESLA) CEO Elon Musk's beliefs that the UAW strike could ultimately bankrupt the Big Three operators.
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JULIE HYMAN: I think a lot of people are struggling to understand the dynamics at play here. A lot of fingers being pointed at EVs and some of the incentives being given to that industry. In your mind, how much is that-- of that is sort of the culprit for the squeezed margins of the automakers, which maybe then are leading them to this negotiation with the workers? How are you thinking about this?
TOM NARAYAN: Yeah, I mean, I think a lot of this. We have to put everything in context. There is some degree of political theater here, right? You have both sides that don't really want to cave in. UAW coming in with a very unprecedented high demand, right, 40% increase in labor costs. And then the OEMs, they have a situation they're facing, which is coming off really high price mix that's probably going to start normal rising. So that is going to pressure their profitability. They definitely don't want to pay higher.
Wages on top of that, they have given in to as much as 20% wage increase. The UAW wants a lot more. So it's definitely a hot topic. I'm sure it's getting a lot of attention. I do think, ultimately, a resolution will happen, just like it did in 2019. You're getting-- we're in the midst of it, right? It's only been two weeks. So there's going to be a lot of discussion in the media and the press about it. But ultimately, we do think it'll get resolved.
JOSH LIPTON: And Tom, as you noted, this is getting a lot of attention, including getting the attention of Elon Musk. And he warned that the UAW demands, Tom, could drive Ford, GM, Stellantis to bankruptcy. I'm sure you saw this. He posted on next. They want a 40% pay raise, a 32-hour workweek, sure, fire away, he says, to drive GM, Ford, and Chrysler bankrupt in the fast lane. Let me get your response to that, Tom. Is Musk right?
TOM NARAYAN: No, I think that's some-- I don't know for another way to say it, but that's a lot of Elon speak, I think. It's definitely not positive, right, for the auto industry to have 30% or 40% or whatever wage increases. But we were actually run the math on this, thanks to Ford that provided some data.
You know, labor costs is actually only about 3 percentage of sales. So if wages or labor costs increased by 20%, it would only be about a 70 basis point hit to operating income. If it's a 30% increase, which we think might ultimately be what happens, it's only about 100 basis point margin impact. So if you're an 8% margin company, it drops to about 7%.
So these companies are not going to go out of business by any means. They have really rich balance sheets. They went through the pandemic and made a lot of money. They don't want to pay more, but they can survive this. So I think this is on--
JULIE HYMAN: Tom, we want some-- we want some drama. We need the sky to be falling. Come on. Yeah. You know, I'm also curious, since some of this is performative, some of it is politics, not just on the part of Elon Musk or actual politicians, but on the part of the union, on the part of the people running the automakers. You know, what if-- a lot has been made, not just of what the workers make, but what executives make also. I mean, what if Mary Barra comes out tomorrow and says, fine, I'll take a 25% pay cut, she's still, obviously, would be making a lot of money. I mean, is there any chance in hell that something like that could happen?
TOM NARAYAN: No. I don't think so. And I think people realize, right? I mean, all of our pay is based on a free market, right? I mean, the reason why she makes what she makes is because that's what she's worth, right? You can put a CEO in-- a wrong CEO in that job, and it could lose a lot of people's jobs, right?
So ultimately, I mean, look how much money Elon Musk has made for Tesla, right? If I can say something positive about him, right, it's $800 billion worth, right? So him alone is worth them not needing to advertise, because he tweets and that creates marketing value for the company, right? So like a CEO is worth a lot at the end of the day. I think this is, yeah, it comes into the political theater debate. I mean, ultimately, you know, she's worth every penny that her shareholders think that she's worth.