UAW negotiations

Jeff Schuster, President, Americas Operation & Global Vehicle Forecasting

06 August 2019

UAW contract talks under way – timing is everything

The handshakes and forced smiles that kicked off the negotiations between the United Auto Workers and the Detroit Big Three are a couple weeks old, but fireworks could light up the late summer sky leading up to the 14 September expiration of the union’s contracts.

While each round of contract negotiations brings tension, risk and uncertainty, this round comes at an interesting time for the industry. Since the Great Recession, auto sales have grown every year, with the exception of 2017. However, 2019 is the first year in which we expect to see US demand fall below the 17 million-unit mark since 2014. Looking ahead to the next two years, we forecast a decline to 16.5 million units, with the volume at risk of dropping even further if the US enters a recession or vehicle affordability remains an issue.

As if that were not enough of a dynamic backdrop for contract talks, global regulations are pushing the industry towards electrification at the same time as investment is pouring into new mobility and autonomous driving, all of which will have an increasingly negative impact on OEM margins.

So what does this mean for the negotiations?

The UAW has clearly signalled that it will not offer the same level of concession as it did in the previous two contracts, given the strong profits currently being enjoyed by the Detroit Big Three. The union also wants commitments for stable volume levels and growth in US manufacturing jobs. The problem is that capacity utilisation in the US is just at the lower end of healthy, at 80%, with several plants well below that threshold.

GM stands out as having the lowest level of utilisation in the US and the automaker is also expected to be targeted by the UAW, in light of the plant shutdowns announced late last year. Despite GM appearing to do everything possible to find work for those laid off, the union will likely push for the plants to be reopened. It is certainly conceivable that GM may reallocate one of the plants as a concession – such as Detroit-Hamtramck – but the group clearly does not require the additional capacity without resourcing it from elsewhere.

Of the 20 plants in the US currently operating below the 80% utilisation level, GM owns four of the ten with the lowest rates, which leaves little room for bargaining when talks actually heat up.

We would typically expect to see an inventory build-up in a contract year to hedge against a union strike and this often provides an early indication of the level of risk. Looking at current inventory levels, however, this is not necessarily the case for FCA and Ford as FCA’s level is down by 4% from a year ago, while Ford’s is flat. On the other hand, GM’s inventory is 2% higher than a year ago, or 17,000 units, some of which could be a safeguard against a possible strike.

Expect the Detroit Big Three to argue that the heyday of the industry is behind us and look for the UAW to want a bigger piece of the current profits. Only time will tell how the talks will play out, but the industry should brace itself for a turbulent end to the summer.