I just spent several days in the Detroit area, the global hub of automobiles. While my trip to Michigan — mainly to visit family and friends — was long planned, it coincided with the biggest auto workers’ strike the US has seen in decades and the annual Detroit Auto Show.
On the first day of the United Auto Workers (UAW) strike, my friend and I drove around Michigan Avenue in Wayne, the site of the huge Ford plant where unionised workers are striking to demand a 40% wage hike over the next four years. We even brought water bottles and snacks for the protestors from a nearby supermarket.
Whatever the outcome of the ongoing strike and my empathy for the strikers, it is clear that the global auto industry has dramatically transformed. It is not just the switch from internal combustion engine-based vehicles that run on petrol to battery electric vehicles or EVs or the recent successful launch of driverless robotaxis in San Francisco by Google’s subsidiary Waymo and General Motors (GM) Cruise, which is expected to expand to 10 more US cities in coming months, but also the way we look at mobility as well as the way we use or buy cars that are starting to change.
Let’s look at the strike first. Only 11% of the American workforce is unionised. Indeed, union membership has been declining for decades. Unionised auto workers in the US are paid a minimum wage of US$18 ($24) an hour, rising to a maximum of US$32 an hour based on seniority.
In 2008, before the global financial crisis, which triggered the bailout of the US auto industry, plant workers were paid a minimum of US$19 an hour. Unions agreed to a wage cut to U$18 an hour. Even as productivity and profits have risen for the auto industry, the minimum wage is below where it was 15 years ago, while the cost of living has gone up.
While Detroit automakers are unionised, the plants of foreign automakers like Toyota, Volkswagen and EV makers like Tesla are not. On average, wages at foreign “transplants” are slightly higher than at unionised automakers. Tesla, Rivian and other EV makers also have an incentive-based wage structure, including stock options.
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If you are a production worker at Tesla’s Fremont plant in California who joined the EV maker a decade ago and got stock options, you would have made a decent chunk of money even if your hourly wages were not much to write home about. Tesla shares are up 22-fold over the past decade and up 147% this year alone.
But forget the stock options and all the perks. The true measure is total labour costs to the company rather than what every worker gets per hour. A leaner, meaner, more productive workforce fares better than a bloated one.
Labour costs
The labour-cost gap between the legacy US auto giants and Tesla is huge. Total labour costs at Tesla are around US$45 an hour, including hourly wages and all the benefits. In contrast, total labour costs at GM, Ford and Stellantis are around US$66 an hour.
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As Detroit automakers make more concessions to unions, their total labour costs will rise substantially even though their workers still make less than Tesla workers.
Nomura Securities estimates that labour costs make up as much as 9.6% of the total production costs of automobiles in the US. Unions are asking for a 40% wage increase over the next five years — 20% now, then under 5% annually over the next four years.
The headline number looks big but not unjustified. Workers were getting US$19 an hour in 2008. Adjusted for inflation, that is about US$28 an hour. A 40% increase will get wages to US$25.20 in four years — or, in inflation-adjusted terms, still less than what they made in 2008.
Unions argue that wages comprise just 6% of the large US automakers’ total production costs. So, a 40% wage increase would hardly make a dent in the total profits of automakers. “They could double our wages and not raise the price of the vehicles and still make billions in profits,” UAW leader Shawn Fain said last week.
But that is a misleading number, as the unions are calculating wages only as a percentage of the retail price of cars rather than what it costs to make a car. Detroit automakers’ wage costs as a percentage of total production costs could rise to 13% if automakers concede to union demands.
The impact on the profitability of US automakers is likely to be more dramatic at a time when interest rates will likely remain higher for longer, US consumer spending is dipping, and the global economy, alongside the US economy, is slowing. Higher wages could add an extra US$2,100 to the production cost of an American car, notes Nomura’s global auto analyst Anindya Das in a recent report. Das argues that automakers are unlikely to be able to pass on additional costs to consumers fully.
Automakers’ gross profit margins, currently in the 7% to 9% range, could plummet to the low single digits if forced to absorb additional costs. Legacy automakers’ gross margins have been in the low double digits to mid-teens in recent years.
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Tesla had gross margins of 25% in the March quarter. Those margins fell to 18.2% in the June quarter as the EV maker aggressively discounted its sedans to gain market share. Tesla is not letting up on its discounting, which will further pressure its gross margins, but as it gains a bigger market share, its production costs will come down, and it will become harder for GM, Ford, and others to price their cars competitively.
The EV revolution is no pie in the sky. Americans bought nearly a million battery EVs in the year’s first six months. Thanks to Tesla’s discounting as well as the entry of other EV makers, sales of battery EVs are gaining momentum. Tesla still accounts for two-thirds of all EVs sold in the US. Over 7% of all new cars sold in the US in the first eight months of this year were EVs. In China, 40% of the cars sold now are EVs. Even in Europe, where hybrids are popular, battery electric cars are now 16% of total new car sales.
Winner and losers
Ironically, 2023 was the year the legacy automakers of Detroit, their European counterparts, and the Japanese and Korean car manufacturers were finally going to get their act together and mount a serious challenge to Tesla, which is still worth more than all of the world’s automakers combined. The EV pioneer currently has a market capitalisation of US$850 billion.
The strike and its ripple effects through the entire auto supply chain are now putting legacy automakers at a disadvantage against Tesla, which is expected to roll out nearly two million EVs from its US, China and Germany factories this year. If the strike spreads, Detroit automakers could lose 24,000 cars daily because of strike-related production shutdowns.
GM, Ford and Stellantis should use the profits from selling fuel-based cars to make more EVs. The strike sets the legacy automakers back many months, and with Tesla’s aggressive discounting and higher market share, catching up with the EV pioneer and far-and-away market leader will become even harder. “Tesla’s competitors now face mounting costs and complexities in the years ahead, depending on how this ultimately plays out,” notes Wedbush Securities Tech analyst Dan Ives.
In June, Tesla won an important battle when it got several big competitors, including GM, Ford, Volvo, Nissan, Mercedes-Benz and others, to adopt its own proprietary North American Charging Standard as the de-facto industry standard in place of the more broadly adopted Combined Charging System that the Biden Administration was pushing.
Consumer interest in EVs is at an all-time high in the US, with 48% of car buyers intending to purchase an EV in the next 24 months. That is up from just over 30% a year ago. In anticipation of demand, legacy carmakers from the US, Europe, Japan and South Korea are flooding the market with new EVs.
Although no Chinese EVs are sold in the US, GM imports a Buick Envision model it makes in China. Tesla aside, 33 new EV models will be introduced into the US market this year, and more than 50 new or updated models will likely be introduced next year.
Though half of US car buyers say their next car would be an EV, they are reluctant to buy one. They are looking at the price tag and not at the savings they will make in fuel and maintenance by switching to an EV.
Even those who can afford an EV worry about adequate charging infrastructure. According to Bank of America auto analyst John Murphy in a recent report, EV prices are likely to reach parity with fuel-based vehicles in the US within the next 12 to 18 months. And infrastructure is improving, aided by legacy automakers embracing Tesla’s charging network.
The way I see it, the battle for supremacy in EVs is over. Tesla has won. It is time for other carmakers, regulators and unions to realise that the world needs fewer but stronger car companies that will help transition from the EV era to the next phase — driverless or autonomous vehicles (AVs). Once every few decades, almost every industry goes through a seismic shift, and the result is the merger of weaker competitors and the emergence of fewer, stronger players ready to take the industry to the next level.
The curtain is falling on the era of petrol-based cars, which were mechanical hardware. The new EV era is all about software and electronics. Mechanical cars have lasted 115 years since Henry Ford rolled out his Model T from Dearborn, where I walked around last weekend. It’s a small, sleepy town where 43% of the population is ethnically Arab and whose mayor is a third-generation Arab.
The EV era is unlikely to last more than 20 years because AVs are almost here if the success of robotaxis in San Francisco is any guide. Driverless cars are robots on wheels.
As it is, there are far too many car makers worldwide. Aside from Tesla, the US has three legacy automakers and eight EV manufacturers. There needs to be a consolidation. Unfortunately, that will lead to layoffs and rationalisation of capacity.
Yet, that will also pave the way for faster moving from fuel-based cars to EVs. Aside from Toyota, there are Nissan, Honda, Mazda, Mitsubishi and Subaru in Japan. In Germany, there are Volkswagen, BMW and Mercedes-Benz. In Europe, there are Renault Group (which has a tie-up with Nissan and Mitsubishi) and Stellantis, which owns France’s Citroën and Peugeot. In South Korea, Hyundai already controls the Number two carmaker Kia. In 1900, eight years before Ford introduced the Model T, there were nearly 2,000 car companies in the US. That number dwindled to just three 70 years later.
I don’t believe we need so many car makers to lead us in the coming era of AVs. Cities like Detroit and Dearborn will do fine. Walking around the dilapidated sections of Detroit and Dearborn last week, I saw early signs of a tech-led resurgence. Many start-ups are focused on software or services related to the auto industry. Detroit is already positioning itself as the next Silicon Valley, if only a niche one.
Assif Shameen is a technology and business writer based in North America
