GM, Ford confident they'll offset costly new contracts with unions

Ford Motor Co. and General Motors are working to convince Wall Street that they can absorb billions of dollars in added labour costs resulting from newly ratified UAW and Unifor contracts — but they'll need to cut spending and run their businesses more efficiently to do so.

The automakers said last week that the financial toll of the agreements, reached after a six-week strike, were higher than they had anticipated going into negotiations. Ford pegged the cost of the four-and-a-half-year deal at $8.8 billion (all figures in USD) — double its expectation — while GM said its UAW deal and a new pact with Canadian union Unifor add up to $9.3 billion. Although the UAW's strategy of targeting select manufacturing facilities with walkouts helped limit damage, both automakers lost more than $1 billion worth of production.

Stellantis has not disclosed the cost of its UAW contract, but it effectively made the same deal as its rivals, with the addition of agreeing to reopen an idled Illinois assembly plant in 2027.

Despite giving the UAW more than expected, Ford and GM projected strong profits for the year, lowering guidance only slightly from what they previously had told investors. Executives at each automaker expressed confidence in the underlying strength of their business, signaling that the labour cost gap with nonunion rivals should not worry investors.

To underscore the point, GM said it would buy back $10 billion in shares while increasing its dividend.

"Labour cost is not as significant from an overall cost perspective as it was in the past," Michael Ward, equity research analyst at Benchmark, told Automotive News. "GM and Ford should be able to offset most of the increase in labour costs with other improvements."

Wall Street responded by sending GM shares up more than nine per cent on Wednesday, Nov. 29, the automaker's largest one-day gain in nearly three years. Ford shares remained largely stagnant last week, however.
Ford has struggled in recent years with warranty costs and other systemic quality issues that have sapped profits, leading CEO Jim Farley to promise change and the automaker to update how it tests and launches new products.

CFO John Lawler, speaking at a Barclays conference, insisted that Ford is making necessary improvements that will stick and allow effective management of the business. In February, officials said Ford was at an $8 billion cost disadvantage against its competitors.

"We have religion on capital efficiency," Lawler said. "We have a tremendous amount of change going on. We're very pleased with where our balance sheet sits."

Ford said its new UAW contract will raise costs by about $900 per vehicle on average by 2028. The 41-day strike reduced profits by $1.7 billion and cut production by about 100,000 vehicles, it said.

As a result, the company reduced its guidance for full-year adjusted free cash by $1.5 billion — to a range of $5 billion to $5.5 billion. It projected $10 billion to $10.5 billion in adjusted earnings before interest and taxes, down from an earlier forecast of $11 billion to $12 billion.

"If we hadn't lost that volume due to the strike, we would be at the high end of our original guidance," Lawler said. "I think what that tells you is that there's strength in that underlying business that's out there, and that's a positive for us."

Ford's business plan hinges on increasing its share of popular gasoline-powered vehicles in high-margin segments to effectively fund its money-losing electric vehicles until they become profitable. The automaker also hopes to boost margins in areas such as commercial vehicle sales as it leans more heavily into software services and other add-ons.

Lawler argued that Ford has been improving its business for some time and has "put some wins on the table" in terms of improving overseas profitability and exiting money-losing ventures, such as last year's shutdown of autonomous vehicle company Argo AI.

Without getting into specifics, Lawler said automation and reducing vehicle complexity would provide opportunities to save money in the manufacturing process.

"Now it's our job to go off and drive productivity and efficiencies," Lawler said. "We need to do that by reducing the number of hours it takes to build a vehicle, simplifying designs and reducing complexity as well as driving increased efficiencies through our factories. We have our work cut out for us, but we knew that was coming."

GM said its UAW and Unifor contracts will increase costs by $500 per vehicle in 2024 and by an average of $575 throughout their duration. It employs about 10,000 fewer UAW members than Ford.

The UAW's strike against GM, which lasted five days longer than the work stoppage at Ford, cost the automaker about $1.1 billion, executives said.

But CEO Mary Barra said the company expects to earn nearly $10 billion for the full year and "fully offset" an anticipated $1.5 billion increase in its 2024 labour costs.

"Now that we have a ratified contract and a clear path forward that includes greater operating investment efficiency, we can resume returning excess capital to shareholders per our plan," Barra said on a call with analysts. "Short-term bumps in the road aside, we are confident in our ability to continue to generate significant free cash flow as we transition to an all-electric future, and we're very optimistic and excited about the road ahead."

GM is working to cut $3 billion in fixed costs by the end of next year, for a net reduction of $2 billion when accounting for depreciation and amortization. The company also is pursuing a strategy called Winning with Simplicity that aims to reduce design and engineering costs along with complexity in vehicle orders and manufacturing.

CFO Paul Jacobson said the company found $500 million in year-over-year savings in the third quarter from lower marketing, engineering and employee costs, and it expects to eliminate another $500 million this quarter. CMO Norm de Greve, who joined the automaker in July from pharmacy chain CVS, has helped reduce marketing spending by about $800 million, Jacobson said.

"Our expectation is that the fixed-cost initiative plus the benefits of Winning with Simplicity will more than offset the higher labour costs next year," he said.

Analysts mostly had positive reactions to the forecasts from GM and Ford. Wedbush Securities Managing Director Dan Ives, in a research note, said GM was "putting the train back on the tracks" in terms of its capital allocation plans.

"Ultimately, while not the most ideal situation for the company amidst the largest EV transformation for a company seen this decade," Ives wrote, "we believe GM has now taken back the reins on this situation with a clear vision forward and remain confident in the company's trajectory heading into fiscal year 2024 with profitability and EV production the two largest focuses looking forward."

But not everyone is sure the automakers can fully absorb the higher labour costs.

David Whiston, a U.S. autos equity analyst with Morningstar Research Services, told Automotive News he thinks the companies can offset a majority of the new expenses, especially in the near term, but that it's harder to predict what will happen closer to the end of the contracts in April 2028.

"The things that they're talking about, in theory, can help — things like reducing vehicle complexity, and you're always improving your manufacturing processes and your supply chain as much as you can to weed out costs," Whiston said. "Both firms have done a lot of head count reduction, too, on the salaried side. But at the same time, these cost increases are quite large from the new deal, so there's only so much you can do. I just think it would be overly optimistic to assume a perfect offset."