Detroit's gamble on the future
The deal between one of Detroit's biggest automakers and striking workers is a calculated bet on a vision for the auto industry that's far from certain.
The big picture: GM can afford the rich contract terms negotiated with the United Auto Workers — as long as nothing goes wrong. Higher gas prices, an economic downturn or a new president with different priorities could throw off the entire equation and put GM and other domestic automakers in a financial bind.
- On top of those worries, the industry is facing the most disruptive technology shift in 100 years, leaving companies like GM awkwardly straddling the past and future.
- Jonathan Smoke, chief economist at Cox Automotive, says it's not clear when the inflection point for giving up the steering wheel will be, if ever.
Driving the news: UAW members and General Motors approved a four-year labor contract on Friday, which secured better pay and benefits for workers. The union will now turn its attention to Ford, with the GM contract as a template.
- The end of the nearly 6-week-old strike comes with a promise from UAW to not oppose GMs' plans to close four facilities across the U.S. The strike has cost GM $1.75 billion in lost profits, according to Anderson Economic Group.
- GM committed to adding thousands of new jobs and said it would decrease the number of years required for workers to earn the top wage of more than $32 an hour. Union members were divided prior to the deal on whether it provided enough long-term job security.
GM is more aggressive than most in the push toward the future with its majority stake in self-driving startup Cruise Automation and a plan to introduce 20 EVs by 2023.
- The automaker is sustained, however, by the fat profits from traditional pickup trucks and SUVs.
- To pay for the R&D on future technologies, GM needs to keep pushing those gas guzzlers for the foreseeable future.
- "They're really trying to run 2 auto companies," says Barclays automotive analyst Brian Johnson.
GM tried to protect its flexibility in the labor agreement by trading higher wages and benefits for the ability to close a massive car factory in Ohio and two transmission plants.
- Yes, but: Detroit's total labor costs remain significantly higher than foreign-based rivals with factories here: $63 per hour at GM vs. $61 for Ford, $55 for Fiat Chrysler and $50 for the so-called transplants.
But all 3 Detroit carmakers left their flank open by getting out of the traditional sedan business — effectively ceding that market to Asian competitors.
A new president could alter the landscape, too. Sen. Elizabeth Warren, for example, has pledged to halt fracking, which would likely drive up oil prices.
- That would make those thirsty trucks and SUVs less appealing to consumers, squeezing Detroit's primary profit source.
- Trade policy and emissions standards are also wild cards, depending on who is in the White House.
What to watch: Auto sales are already trending downward. A recession would cause them to drop 20%, Smoke tells Axios.