Detroit Three Profitability: Between UAW Demands and the Global Auto Evolution

Infotrading.io - The Detroit Three - General Motors (GM), Ford, and Stellantis - have been in the spotlight recently. The United Auto Workers (UAW) has mobilized almost 13,000 of its members against these automotive giants. The crux of the dispute? The allocation of automaker profits. Over the past dozen years, GM has poured a whopping $21 billion into stock buybacks. The UAW believes that these funds could have been better served in the hands of the assembly-line workers. And as the strike gains momentum, the PR battles and negotiations intensify.

In a recent statement, GM president Mark Reuss emphasized the company's commitment by presenting a "record offer" to the striking workers, underlining the company's investment back into new facilities over the past decade.

Counteracting this, UAW vice president Mike Booth has accused GM of prioritizing Wall Street over the workforce, particularly through stock buybacks. The UAW is firm in its conviction that the Detroit Three owe a larger share of their profits to their employees.

It's undeniable that post-Great Recession, the Detroit Three have seen commendable profitability. In the last five years, they've cumulatively earned $99 billion in net income. But in the vast sea of the auto industry, this profitability pales when juxtaposed with competitors like Toyota, Volkswagen, and the electric vehicle pioneer, Tesla. Last year's statistics paint a clearer picture: while Stellantis managed decent profits, both GM and Ford trailed behind their counterparts, with Ford even experiencing a slight loss.

A comprehensive decade-long review reveals Toyota's average profit margin at an impressive 7.3%. Meanwhile, Tesla, despite its early years of negative margins, has now reached enviable double-digit profit margins.

Assessing the future is complex. Share prices are often indicative of market sentiment regarding a company's future profitability. Sadly, over the last ten years, both GM and Ford's stock prices have declined by 15% and 29%, respectively, while the broader market has surged by 141%. Stellantis paints a slightly more optimistic picture, having appreciated by 283% since 2013.

These automakers' recent successes have been largely attributed to the strategic shift towards larger vehicles like trucks and SUVs, which offer substantial margins. This shift was bolstered by consumer spending patterns, impacted first by lower interest rates and later by COVID-induced stimulus packages.

However, as the automotive market evolves, challenges loom on the horizon. The transition from gasoline to electric vehicles demands hefty initial investments, new technology, and an overhaul of existing infrastructures. While Tesla is already in the EV game, the Detroit Three are still grappling with the complexities of this transition.

With the Detroit Three already having higher labor costs due to unionization, the UAW's demands for further pay increments could exacerbate the situation. While it might seem feasible for the Detroit Three to divert more profits towards workers on paper, they face stiff competition from rivals who aren't burdened with similar demands.

The current scenario underscores a pivotal realization: the Detroit automakers are no longer the indomitable entities of yesteryears, and perhaps it's time for the UAW to recalibrate its expectations.