150000 people on strike? What should the United States do

As the market waits for the latest August inflation data this week and later the Federal Reserve's September decision, another "black swan" event is feared to sweep across the United States first.

On the 8th local time, the President of the All American Federation of Automobile Workers, Fern, stated that the union has rejected proposals from the parent companies of the three largest American automakers, General Motors, Ford, and Chrysler, Stellantis. If both parties cannot reach an agreement on the new labor contract before September 14th, a strike will be inevitable.

It is estimated that a 10 day strike by workers from the three major automakers could result in economic losses of up to $5.6 billion, and the US automotive industry will also be impacted. Not long after, the Federal Reserve is about to hold its September interest rate meeting, and the strike will make the Fed even more conflicted.

David Huang has worked for many years at consulting firm Roland Berg Automotive Group and a European automotive company, and now serves as the Director of Strategy and Marketing for a leading global automotive parts company. He said in an interview with First Financial News that the rise of new energy vehicle companies, including Chinese new energy vehicle companies, has led to a significant decrease in orders from the three major American companies and many European car companies in the first half of the year. This situation, coupled with the pressure of high inflation and rising production costs in the United States, has led the three giants to consider their next strategic breakthrough plans. In this context, strikes not only affect US car production, but also affect the transformation of the three giants, and their electric vehicle roadmap may be postponed until 2024.

Union: Increase salary by 46%! Three giants: add 10% and others

UAW is the largest workers association in the United States, with 146000 members joining the Detroit Big Three alone, accounting for approximately 56% of all workers in the US automotive manufacturing industry. UAW union employees sign a new contract with the "Big Three" every 4 years, and the current labor contract will expire at 11:59 pm on September 14th.

UAW requires the three giants to increase their salaries by 46% within four years, with an immediate 20% increase this year, which will increase the wages of top assembly workers from the current $32 per hour to around $47. Other requirements include: termination of wages at different levels; 32 hours of work per week with 40 paid hours; Restore traditional fixed benefit pension and other benefits for new employees who currently only receive 401 retirement plans.

At present, workers hired by car factories after 2007 do not have fixed welfare pensions, and their health benefits are not generous. Although assembly workers earn $32.32 per hour, the starting salary for temporary workers is less than $17.

UAW emphasizes that seeking benefits for workers in traditional car factories is crucial in the transformation process of the automotive industry. "Our union will not stand idly by during the transition period when electric vehicle giants replace diesel car giants," Finn said.

Last week, the three giants also put forward their own proposals. Ford's proposal is to accumulate a 10% salary increase during the four-year contract period, plus several one-time payments, including $6000 in inflation compensation. General Motors proposed a one-time salary increase of 10% and an additional one-time dividend plan of 3% to be paid twice a year for four years. Strantis's proposal is for a 14.5% salary increase within four years and a one-time payment of inflation compensation. The three giants agreed to offer overtime pay, but all refused requests to shorten working hours. Ford stated that according to its proposal, the average annual salary, including overtime pay and one-time bonuses, will increase from an average of $78000 per year last year to over $92000 in the first year of the new contract.

The three giants stated that the union's proposal would make their costs too high. They need to absorb huge capital expenditures in the coming years to continue producing internal combustion engine vehicles, while designing electric vehicles, building batteries, and assembling factories. However, excessively luxurious new contracts will drive up costs, thereby driving up retail car prices, causing Detroit car manufacturers to charge higher prices than their European and Asian competitors.

According to external consulting firms, workers at the Detroit Big Three can now earn about $60 per hour, including wages and benefits, while workers at Asian automakers' factories in the United States can only earn $40-45.

At present, labor unions and car companies are continuing to negotiate on wages and benefits, which will continue until the deadline of the 14th. During a video livestream on the evening of the 10th, Fein said, "Negotiations are making progress, but progress is very slow, and we still have a long way to go in the next four days." During the livestream, behind Fein was a trash can with the words "Three Giants Proposal" written on it. He claimed that the waste paper in the trash can was the proposal previously proposed by the three giants.

In this situation, analysts have warned that strikes seem inevitable. According to a survey conducted by Morgan Stanley on 99 investors, 58% of respondents believe that a strike is "highly likely" to occur, 24% believe it is "somewhat possible", and only 16% say it is unlikely. Regarding how long the strike will last, 96% of respondents expect it to last for more than a week, and 34% expect it to last for more than a month.

According to Murphy, a senior automotive analyst at Bank of America Securities, the news on Wall Street is that UAW may soon make a counter proposal to the bids of the three giants. But he believes that a strike is almost certain to occur. "The 2019 General Motors strike lasted for 6 weeks, and we believe there may be a one to two month strike this time," he said.

In the 2019 negotiations, UAW chose General Motors as the key negotiating partner, but the negotiations ultimately failed. Nearly 50000 General Motors workers launched a 40 day nationwide strike.

It is worth mentioning that, unlike previous union leaders, Fein has chosen to negotiate with the three giants simultaneously, rather than choosing a target company as the key negotiation target. He also has a stronger attitude towards car companies, always stating that he will "spare no effort" to ensure that members receive fair treatment.

The confidence of UAW also benefits from the strike fund of over 825 million US dollars. It is reported that the strike allowance for each member is $500 per week, almost twice the amount of $275 per week during the last strike. According to the UAW official website, members can receive strike allowance after the eighth day of the strike, which will be paid one week in advance for Thanksgiving and Christmas. According to this calculation, the weekly strike allowance for approximately 150000 workers will be $75 million, and the $825 million fund will last for about 11 weeks.

Impact on the US economy and automotive industry

The automotive industry accounts for approximately 3% of the US gross domestic product, so the US economy and automotive industry are bound to be affected by strikes.

An analysis by labor strike research think tank Anderson Economic Group shows that a 10 day strike by nearly 150000 UAW members of the three giants will result in economic losses of up to $5.6 billion. The CEO of the company, Anderson, said, "Even a brief strike can affect the economy of Michigan and the United States." Another analysis by Deutsche Bank estimates that the strike will result in a weekly production loss of $400 million to $500 million for each giant.

The strike will also impact the US automotive industry. In fact, the industry has not fully recovered from the supply chain problems caused by the epidemic, and inventory levels are far lower than when wage negotiations were held in 2019. Therefore, this strike may face more serious consequences for the automotive industry.

Analyst Fiorani from consulting firm AutoForecast Solutions said that as of the end of July, car manufacturers had approximately 1.96 million vehicles in stock. Before the epidemic, this number was 4 million. At the end of August, the total inventory of the three giants' cars was only enough to sustain for 70 days. This means that consumers may seek out non union member competing car companies to purchase cars, while other car companies can take the opportunity to increase car prices.

"A strike of three weeks or more will quickly deplete inventory and push up car prices," he said.

Other links in the automotive industry chain may also be affected. JPMorgan Chase's Chief Analyst Bligh said that the potential supply chain disruptions caused by the strike will reduce new car production, push up used car prices, and put pressure on the profitability of personal car insurance business.

The three major automakers account for approximately 40% of light vehicle sales in the United States. According to IHS Markit's estimate, the strike will disrupt approximately 75% of North American car production. The increase in second-hand car prices will increase the coverage of car insurance, making claims more expensive. JPMorgan Chase believes that Allstate Corp and Progressive Corp are the insurance companies with the highest potential risks, and Allstate is more susceptible to shocks due to its weaker capital position.

The impact of the physical sector will also spread to the capital market. Since the news of the strike spread on July 31st, the stock prices of the three giants have fallen by 9% to 15%. Murphy predicts that if the strike is realized, negative news may further suppress the stocks of automakers and drive other industry sectors down. However, he also stated that the good news is, "Our discussions with investors and the valuations of General Motors and Ford indicate that these stocks have largely taken into account the risk of strikes."

In addition, David Huang told First Financial reporters that if UAW starts a long-term strike next month, leading to the closure of assembly lines, many small American component manufacturers supplying parts to the three giants will also face a crisis, affecting the recovery process of the automotive industry's industrial chain.

"In the past three years, due to the impact of the epidemic, the financial situation of many small and medium-sized automobile parts manufacturers has been weak. If the three giants' workers go on strike for a long time, some small parts manufacturers may run out of cash and find it difficult to resume production. However, small suppliers are also important to the supply chain of automobile manufacturers. If they stop production, it will also trigger a chain reaction, which in turn will affect the recovery process of large automobile companies from the interruption of the industry chain," he said.

The Federal Reserve is increasingly caught in a dilemma

The Federal Reserve will discuss interest rates again later this month. Currently, there are also disagreements among officials within the Federal Reserve regarding whether the Fed has completed its interest rate hike and when it will be completely stopped.

Chicago Fed President Goodsby said last Thursday that the focus of the debate is shifting towards how long interest rates should remain high, rather than how high they need to be. He hinted that the Federal Reserve had almost completed this wave of interest rate hikes. However, Dallas Fed Chairman Logan stated on the same day that the task of reducing inflation seems to have not been completed yet. She emphasized that if the Federal Reserve does not raise interest rates at its meeting in two weeks, it does not mean they will stop raising rates forever. "Skipping another interest rate hike may be appropriate, but skipping does not mean stopping." She said that some inflation indicators are still quite high. The inflation indicator favored by the Dallas Federal Reserve, which excludes the biggest driver of monthly inflation, has had an inflation rate of 2.8% in the past three months. "These numbers indicate that it is still too early to confidently say that the inflation rate will trend towards 2% in a timely manner."

In this context, strikes will further put the Federal Reserve in a dilemma. On the one hand, the potential impact of strikes on car prices, especially second-hand car prices, could reignite inflationary pressures and support the Federal Reserve's continued interest rate hikes. For a period of time, second-hand car prices have been one of the important factors driving up inflation in the United States. Earlier this month, former US Treasury Secretary Summers stated that non farm data in August indicated that the US economy remains "strong", but achieving a soft landing remains very difficult. It is crucial to closely monitor the potential pressure of labor activity on wages, and the threat of UAW strikes and UPS's significant wage increase agreement may not be conducive to controlling inflation back to 2%. If a strike ultimately occurs, we need to pay attention to inflationary pressure next month.

On the other hand, the negative impact of strikes on the economy does not support the Federal Reserve's continued interest rate hikes. In an article released on September 10th, Wall Street Journal journalist Tim Ras, known as the "mouthpiece" of the Federal Reserve and the "New Federal Reserve News Agency," stated that the Federal Reserve's stance on interest rate hikes is undergoing a "significant shift," possibly suspending rate hikes in September and will scrutinize the future path of rate hikes more carefully. He said, "Some officials still prefer to excessively raise interest rates because they can lower them later. However, other officials currently believe that inflation risks are in a more balanced state, and they are concerned that continuing to raise interest rates may lead to unnecessary economic recession or trigger a new round of financial turbulence."