Higher Pay and Benefits Impact Auto Prices

The rise in wages and benefits in the United States and Canada is expected to have a modest impact on the cost of cars. By 2024, this increase will add approximately $500 to the price of a vehicle. Over the four-year contract period with the United Auto Workers, it will reach a total of around $575. Additionally, there will be an impact on electric vehicle (EV) battery production, resulting in an increase of about $3 per kilowatt-hour. As a result, the price of an EV will rise by an additional $200 to $300 per unit.

Minimal Impact on Car Buyers

For battery electric vehicles, these price increases represent less than 2% of the average amount paid by car buyers in the United States. Traditional cars will see an increase of about 1% in the average price received by General Motors (GM) for a vehicle in the third quarter. Therefore, this change is not expected to burden consumers significantly.

Impact on GM's Profitability

Although the $500 increase amounts to 10% to 15% of GM's operating profit per car in the third quarter, it does not pose a significant threat to their profitability. This is because approximately 75% of the cost increases were already anticipated and included in the company's long-term financial forecasts. CEO Mary Barra assures stakeholders that management has accounted for these expected costs.

Offsetting Labor Costs

To fully offset the increased labor costs, GM plans to make certain adjustments. These measures include reduced capital spending, advertising costs, and spending on salaried workers, among other actions. The goal is to maintain profitability despite the rise in wages.

Competitive Dynamics Remain Unchanged

Barra emphasizes that GM's nonunion competitors, such as Honda, Toyota, Hyundai, Nissan, and others, are also increasing wages as anticipated. Therefore, there is no notable shift in the competitive dynamics within the U.S. auto industry due to the new labor agreement with the United Auto Workers.

Positive Outlook for the Future

Although CFO Paul Jacobson does not provide a complete financial outlook for 2024, he expresses optimism. GM's long-term profit-margin goals remain unchanged, indicating confidence in the company's future prospects.

GM's Cruise Unit to Moderate Losses

GM's self-driving robotaxi unit, Cruise, is projected to moderate its losses. In the first nine months of 2023, Cruise reported a loss of nearly $2 billion. However, there is good news on the horizon as GM plans to reduce costs by up to $2 billion in 2024.

Labor Agreements and Structural Improvements

The new labor agreements in the US and Canada are expected to add $1.5 billion to $2.0 billion in annual costs over the next four years. Despite this, the agreements do not erase the significant structural improvements that GM has made over the past 15 years. These improvements include selling underperforming operations, streamlining the product lineup, and restructuring retirement agreements. Benchmark analyst Mike Ward notes that these advancements have been pivotal in GM's progress. Ward rates GM shares as Buy with a $60 price target.

Market Response

Following GM's update, the company's shares saw a significant increase in early trading, up nearly 9% to $31.40 per share. In comparison, S&P 500 and Dow Jones Industrial Average futures were up by approximately 0.3%.

Long-Term Outlook

Despite the positive market response, GM stock remains down approximately 18% since July. The contract negotiations that later led to a prolonged strike created uncertainty among investors. It is worth noting that the current stock price is still below the $33 at which GM shares were sold during their initial public offering in 2010. This indicates that investors remain skeptical about the company's long-term performance.

It is hoped that the 2023 labor deal will serve as a turning point for the US auto business, rather than acting as a millstone weighing it down.