US autos: golden age of profits threatened by strikes and EV switch

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In some ways, these are good times in Detroit. Profits for carmakers have been growing. US consumers, flush with cash since the pandemic, are happy to buy $50,000 sport utility vehicles and pick-up trucks. General Motors, for example, has increased its 2023 operating profit target to as much as $14bn. More importantly, its free cash flow is set to hit $9bn. 

But to whom should such prosperity accrue? Detroit remains on guard of the next bump in the road, wary of a repeat of the financial crisis when the Big Three nearly went under. GM, Ford and Stellantis are careful to sock away cash for a rainy day and to invest in the watershed megatrends of electrification and autonomous vehicles. These are set to eliminate the traditional combustion engine vehicle.

In an era when organised labour is ascendant, the powerful United Auto Workers union want what it thinks is its fair share. A strike — unusual these days — could take 150,000 workers off assembly lines. The stoppage looks likely to proceed, given intransigence on both sides.

The legacy carmakers are in a tricky spot. Car manufacturing is now a high-tech industry with more than a little in common with Silicon Valley. Traditional businesses have huge incumbency advantages — and some serious challenges to contend with.

Chief among these is a high cost of labour. Foreign carmakers have set up shop in southern US states where unions are far less prominent. Start-ups such as Tesla, which recently slashed electric vehicle sticker prices, do not have workers who bargain collectively either.

GM’s magic number is an overall operating profit margin of 10 per cent in North America. That target shows how taut the business remains. For the moment, shareholders are pessimistic. Since late 2021, shares in the company have halved. Even with annual free cash flow approaching $10bn, the market capitalisation is just $45bn.

Today’s profits have little chance of persisting amid existential disruption and labour disputes.