By Liam Denning / Bloomberg Opinion’
Overnight on Friday, Detroit’s strike clock transitioned from countdown to stopwatch. The United Auto Workers’ strike will ultimately end, as all do. Larger forces behind it, however, will grind on through this decade, presenting an existential challenge to the union.
There’s a short-term element to the UAW’s dispute with Ford, General Motors and Stellantis that is both justified and relatively easy to resolve. The last contract was sideswiped by the post-pandemic burst of inflation, which also happened to boost the automakers’ North American profits, and workers want higher wages to compensate.
The backdrop, however, is the biggest disruption to the U.S., and global, vehicle market in a generation. First, Detroit is in the process of turning over to electric vehicles. Second, globalization is in retreat, battered by economic populism and geopolitical tensions. President Biden’s climate-related policy, embedded largely in the Inflation Reduction Act, aims to accelerate both those things. In theory, there’s a lot for the union to like. EVs offer a new route to growth in a mature market saturated already with the last big growth option, trucks and SUVs. And what manufacturing union hates reshoring?
In practice, there are complications.
For decarbonization to really take hold, Americans need to literally buy into it, which means making things like EVs affordable. Subsidies will get you so far but the ultimate goal is to get the market to such a size that scale economies do most of the work. To date, however, the biggest reason the price of clean tech has dropped to a point where decarbonization is even feasible is that much of it was manufactured in China.
Beijing targeted dominance of clean tech as a strategic goal long before Biden showed up, and its combination of subsidies and lower costs, including wages, has worked spectacularly. China’s cost advantage is estimated at up to $10,000 per vehicle, higher than Tesla’s implied gross margin and comparable to Ford’s margin on the best-selling F-150 truck. A fifth of China’s EV models were priced below $15,000 last year whereas there was nothing on offer below $20,000 in the U.S. and Europe. (1) The cheapest in the U.S. today is GM’s Chevy Bolt, at about $27,000, and the market for such compact cars in the land of tanks-with-cupholders is very limited.
Wresting those supply chains to the U.S. will be expensive anyway. Higher wages, not to mention some of the UAW’s other demands like restoring pre-2007 health-care benefits for retirees, compound the issue. “The IRA’s industrial policy isn’t just a green policy but also a blue policy,” says Kevin Book of ClearView Energy Partners, a Washington-based analysis firm. There is an inherent tension between making clean tech cheap and making clean tech here.
The rise of EVs presents a profound discontinuity to both the companies that filled America’s roads with gas-guzzlers and the union that built them. There are parallels with previous disruptions, especially the encroachment into the U.S. of foreign imported vehicles that began to take off in the late 1960s and was turbocharged by the oil crises of the next decade.
Detroit really struggled to make the affordable small vehicles built by European and Japanese automakers which gained in popularity when pump prices spiked. In essence, its business model was centered more on customers trading up rather than squeezing costs down. The small models it did come up with, such as the Chevrolet Corvair, eventually succumbed to the impulse to make them bigger and heavier. (2)
Between 1965 and 1985, the big three’s market share fell from about 90 percent to less than 75 percent. The revival of the 1990s and early 2000s was, once again, centered on heavier trucks and SUVs, aided by the collapse in oil prices and the quirks of fuel-economy regulations. By 2008, amid $100 oil, the Toyota Prius looked like the future and the GM Hummer like a literal dinosaur. Detroit’s market share fell below 50 percent for the first time and GM and Chrysler (now part of Stellantis) eventually succumbed to bankruptcy. The UAW was forced to give up foundational elements of the grand bargain struck during the industry’s 1950s heyday.
It’s fair to say the industry doesn’t have the best track record with change, and EVs present an even tougher challenge. Roughly half of the legacy auto industry’s manufacturing capacity relates to transmissions and engines, which simply aren’t needed by EVs. And assuming a rapid uptake in electrified vehicles, those plants would dip below economic levels of utilization — read: lights out — long before reaching physical obsolescence (a problem writ large for the energy transition).
Meanwhile, EV leader Tesla’s plan to produce a highly anticipated more affordable model centers largely on simplified, automated manufacturing with a smaller footprint. And vehicles that are more chips than pistons also require less maintenance: Whereas a conventional powertrain can have 2,000 components, an EV can have fewer than 20. Altogether, an electrified future is also a less labor-intensive one.
In a way, that incentivizes the UAW to press for more now, both to extract as much as possible under the old paradigm but also to force the Big Three to stick as long as possible with their more profitable trucks. Yet that would also risk repeating the pattern of Detroit lagging where the market is headed, leaving an opening for foreign competitors.
The U.S., as well as the European Union, are of course doing their best to minimize that opening on their domestic industries’ behalf. But the strains are showing already. The E.U. announced this week it will investigate Chinese subsidies for EVs to ward off cheap imports; an absurd proposition given that, if EV subsidies are illegal, then everyone’s in trouble, including the Europeans. Moreover, to belabor the point, there wouldn’t be an EV market in Europe today, or anywhere, without the supply chain built by Chinese subsidies over the past two decades. Similarly, it surely makes some U.S. politicians uncomfortable to see a domestic industrial icon like Ford license intellectual property from a Chinese battery company; wasn’t that supposed to work the other way around? But it will be impossible to reach electrification targets without such collaboration.
A flood of Chinese EV imports to the U.S. seems unlikely; Japanese imports freaked out Washington in the 1980s, and Japan is an ally. Instead, however, the U.S. should welcome Chinese investment in domestic factories and, yes, technology sharing. The solution to the U.S. backlash against Japanese vehicle imports was ultimately for the likes of Honda to simply build the cars here. The IRA’s subsidies are designed to encourage this, if politics allow.
Even here, however, there is a catch for the UAW. Today, states with anti-union right-to-work laws, which skew Republican, account for more than half of jobs associated with traditional vehicles and more than 40 percent for electric vehicles, according to Department of Energy data compiled by ClearView. Higher structural costs represent a powerful impetus to push new EV-related factories, and jobs, to those states. As do strikes.
(1) Source for cost estimates and model prices is “China’s Current Economy: Implications for Investors and Supply Chains,” testimony before the U.S.-China Economic and Security Review Commission by Ilaria Mazzocco, senior fellow at the Center for Strategic and International Studies, Aug. 21, 2023.
(2) See “The American Automobile and the Small Car, 1945-1970,” Lawrence J. White, Journal of Industrial Economics, April 1972.
Liam Denning is a Bloomberg Opinion columnist covering energy and commodities. A former investment banker, he was editor of the Wall Street Journal’s Heard on the Street column and a reporter for the Financial Times’s Lex column.