Detroit’s striking auto workers want a 36% pay hike, mostly to cover inflation. Morgan Stanley thinks automakers can afford it

Nearly 13,000 auto workers left their jobs at key factories for picket lines on Friday after union leaders failed to agree to a contract with Detroit’s Big Three automakers.

United Auto Workers leaders are asking for a 32-hour week for full-time pay, the restoration of traditional pensions, retiree medical benefits, and more. But perhaps most importantly, they’re looking for a significant pay raise for their members. Union leaders initially targeted a 46% pay bump, but have since dropped it to 36%.

The demands—which even the UAW’s own president has labeled “audacious”—have led to criticism from the automakers. Ford CEO Jim Farley, who made nearly $21 million in total compensation last year, told CNBC Thursday before the strike that there is no way his company would be “sustainable” if it accepted the UAW’s salary demands, while clarifying that he is still hoping for a “historic deal.”

The gap between the automakers and the union remains large when it comes to salary, with GM and Ford both offering a 20% raise, while Stellantis, formerly Fiat Chrysler, has offered just 17.5%.

However, according to Harry Wilson, CEO of the corporate restructuring advisory firm MAEVA Group, the UAW’s latest mid-30% raise offer—which would be phased in over a four-year period—isn’t too far from what is “fair” after years of inflation.

“If you look at just the compounding of inflation from 2019 when the last agreement began through today—and even if you assume normalized inflation going forward, which I think is more likely than not—that ends up being 30% above where they are today,” he told CNBC Friday of UAW workers’ salaries.

Wilson, who served as a senior member of President Obama’s auto task force, which handled the bailouts of GM and Chrysler in 2009 after the Global Financial Crisis, argued that a 30% raise merely “allows workers to keep up with inflation.” He believes that automakers should come to the table and offer a larger salary increase to end the UAW strike, but forgo demands that have “bankrupted” their companies in the past, including the 32-hour workweek and retiree medical benefits. These issues, Wilson said, would be significant long-term strains on automakers’ bottom lines because they hinder worker productivity, risking “the long-term success and viability of automakers.”

Can automakers afford it?

When it comes to Farley’s claim that his company can’t afford the UAW’s proposed salary increase, analysts have pushed back.

According to a recent note from Morgan Stanley’s auto analyst Adam Jonas, Ford can afford the pay increases, but it would be challenging. Jonas explained that a 40% pay raise would equate to an additional $2.6 billion labor bill for the company. But given that Ford’s forecasted revenue for 2023 is $168 billion, that would only mean a shift from the company’s current expected “UAW labor bill” of 3.8% of revenues to a new labor bill that is 5.3% of revenues.

Jonas noted that although the increase in labor costs is “substantial,” Ford should be able to offset some of its labor expenses by raising vehicle prices as well as cutting costs in other areas, like research and development or capital expenditures.

“Are the headwinds material? Yes. But we think the labor inflation is well known and properly estimated. We believe the offsets are likely underestimated,” he wrote, arguing the UAW strike and contract negotiations will eventually create better “capital discipline” at Ford and GM.

Still, Wedbush tech analyst Dan Ives, who has taken to covering the automotive industry during its EV and autonomous driving transition, believes that the strike and the requests from the UAW are a “nightmare scenario” for automakers.

“In this crucial period of EV execution, model roll-outs, distribution, marketing, with EV competition rising across the board the timing could not be worse,” he wrote in a Friday note. “We spent time in Detroit a few weeks ago and sense a ‘very nervous time’ across the auto industry as there is a lot riding on these negotiations.”

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