Corporate mismanagement and union greed almost destroyed the United States auto industry in the late 1960s and early 1970s. Today, the Biden administration is helping pave the highway for the bankruptcy of U.S. vehicle manufacturers.
The U.S. auto industry is marked by corporate failure. The stagnant stock prices of General Motors and Ford are clear evidence of corporate failure. After a financial rescue by the federal government during the Great Recession, GM returned to public markets in 2010. The opening trade in November 2010 was at $35. Today, GM is trading at around $36. The stock is up less than 5% from its initial trade in 2010. By contrast, the S&P 500 index is up 500% over the past 13 years. The stock performance of Ford is slightly better than that of GM. Still, relative to the S&P 500 index, an investment in Ford has been a disaster. In 2010, Ford traded around $10. Today it is trading at around $12.
BIDENOMICS IS A DISASTER FOR AMERICA
On Sept. 14 of this year, the wage contracts between the United Auto Workers and the Big Three auto manufacturers, Ford, GM, and Stellantis, expire. (Stellantis owns Chrysler and Jeep.)
In online remarks posted on Facebook in July, the head of the UAW, Shawn Fain, said the Big Three auto companies have made a quarter trillion dollars in profits over the past decade and could afford to give UAW members their fair share. The UAW is demanding a 40% wage increase. Wages in the U.S. are rising at about a 5% pace. Fain says the auto companies have made a lot of money. Fain misrepresents the truth. What is important from a financial standpoint is not absolute profit but profit relative to invested capital. Return on invested capital for the U.S. auto companies has been a disaster. The cost of equity capital for GM is about 9.35% . GM’s return on invested capital is about 4.5% . GM destroys equity capital.
The investment picture for Ford is even worse. Over the past five years, Ford has generated a return on invested capital of under 3% , but its cost of equity capital is about 12% . In spite of the horrific financial returns generated by the auto companies, the UAW wants to add $80 billion a year to the labor cost structure of the three auto companies. This is economic insanity . Currently, UAW members make on average $64 an hour in wages and benefits. For a 2,000-hour work year, that is $128,000. The UAW demands would raise hourly labor costs to $150 an hour. That $150 an hour number reflects the UAW’s demands for a 40% wage increase, return to defined benefit pensions, cost of living adjustments, going to a 32-hour workweek from the traditional 40-hour week, and increasing retiree benefits.
The UAW wage and benefits demands are prima facie ludicrous. Compounding the precarious financial position of the Big Three, the Biden administration, with its proposed new fuel economy regulations , would force the auto companies to produce and sell more electric vehicles and raise prices for bestselling models of internal combustion engine vehicles. At the moment, American drivers don’t want to buy EVs. Inventories of unsold EVs are stacking.
The combination of the UAW demands and the Biden administration’s EV dreams are a fast highway to financial ruin for the domestic auto industry.
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James Rogan is a former U.S. foreign service officer who later worked in finance and law for 30 years. He writes a daily note on finance and the economy, politics, sociology, and criminal justice.