Overnight, Detroit’s strike clock went from countdown to stopwatch. The UAW strike will eventually end, as will everyone else. However, the larger forces behind it will persist through this decade, posing an existential challenge to the union.
The amazing UAW can’t bring back the 1950s or wish electric vehicles away
However, this backdrop represents the biggest disruption to the US and global auto markets in a generation. First, Detroit is transitioning to electric vehicles. Second, globalization is in decline, taking a hit from economic populism and geopolitical tensions. President Joe Biden’s climate policy, largely embodied in the Lower Inflation Act, aims to accelerate both of these things. In theory, there is a lot to like about the union. Electric vehicles offer a new path to growth in a mature market already saturated with the last big growth option, trucks and SUVs. Which industrial union hates bringing manufacturing back home?
In practice, there are complications.
For decarbonization to really take hold, Americans need to literally get in on it, which means making things like electric cars more affordable. Subsidies will get you so far, but the ultimate goal is to get the market to such a size that economies of scale do most of the work. But by far, the biggest reason clean technology prices have fallen to the point where decarbonization is possible is because much of it is made in China.
Beijing targeted clean-tech dominance as a strategic goal long before Biden, and the combination of subsidies and low costs, including wages, has worked amazingly. The cost advantage in China is estimated at up to $10,000 per vehicle, which is higher than Tesla’s implied gross margin and comparable to Ford’s margin on its best-selling F-150 truck. A fifth of China’s electric car models were priced below $15,000 last year, while nothing was on offer for less than $20,000 in the US and Europe. The cheapest car in the United States today is the Chevy Bolt from General Motors, priced at about $27,000, and the market for such compact cars. Cars in the Land of Tanks with cup holders are very limited.
Snatching these supply chains back to the United States would be expensive anyway. High wages, not to mention some other UAW demands such as restoring health care benefits to pre-2007 retirees, further complicate the problem. “The IRA’s industrial policy is not just green, it’s blue,” says Kevin Book of ClearView Energy Partners, a Washington-based analysis firm. There is an inherent tension between making clean technology cheap and making clean technology here.
The rise of electric vehicles represents a profound disruption for both the companies that filled America’s roads with fuel guzzlers and the unions that built them. There are similarities to earlier disruptions, especially the creep of imported foreign vehicles into the United States, which began to take off in the late 1960s and was strengthened by the oil crises of the following decade.
Detroit really struggled to manufacture the small, affordable vehicles made by European and Japanese automakers that gained popularity when pump prices rose. In essence, its business model was more focused on trading up clients rather than cutting costs. Smaller models, such as the Chevrolet Corvair, eventually succumbed to the desire to make them bigger and heavier.(2) Between 1965 and 1985, the Big Three’s market share declined from about 90% to less than 75%. . The revival of the 1990s and early 2000s was once again focused on heavy-duty trucks and SUVs, helped by the collapse of oil prices and regulatory quirks surrounding fuel economy. By 2008, in the midst of $100 oil, the Toyota Prius looked like the future and GM’s Hummer looked like a dinosaur. Detroit’s market share fell below 50% for the first time, and GM and Chrysler (now part of Stellantis) eventually succumbed to bankruptcy. The UAW was forced to abandon key elements of the Grand Bargain reached during the industry’s heyday in the 1950s.
It’s fair to say that the industry doesn’t have the best track record for change and that EVs present a more difficult challenge. Nearly half of the legacy auto industry’s manufacturing capacity is related to transmissions and engines, which electric vehicles do not need. Assuming rapid adoption of electric vehicles, these plants will fall below economic levels of use — read: lights out — long before physical obsolescence is reached (a big problem for the energy transition). Meanwhile, Tesla Inc.’s plan is focused on… Leading electric vehicle manufacturer to produce a long-awaited and largely affordable new model based on simplified automated manufacturing with a smaller footprint. And vehicles with more chips than pistons also require less maintenance: While a conventional powertrain can have 2,000 components, an electric car can have fewer than 20. All in all, an electrified future is also a less labor-intensive future. .
In a way, this motivates the UAW to push for more now, both to extract as much as possible under the old model but also to force the Big Three to stick around as long as possible with their most profitable trucks. However, this would also risk repeating the pattern of Detroit falling behind where the market is headed, leaving room for foreign competitors.
Naturally, the United States, as well as the European Union, is doing its best to limit this openness to the benefit of its domestic industries. But tensions are already emerging. The European Union announced this week that it would investigate Chinese subsidies for electric cars to ward off cheap imports; It’s a ridiculous proposition considering that if subsidies for electric cars are illegal, everyone is in trouble, including the Europeans. Moreover, to drive home the point, there would be no market for electric vehicles in Europe today, or anywhere, without the supply chain that Chinese subsidies have built over the past two decades. Likewise, some American politicians are sure to feel uncomfortable when they see a domestic industrial icon like Ford license intellectual property to a Chinese battery company – wasn’t it supposed to happen the other way around? But it will be impossible to reach electrification goals without such cooperation.
An influx of Chinese electric vehicle imports into the United States seems unlikely — Japanese imports spooked Washington in the 1980s, and Japan is an ally. But instead, the United States should welcome Chinese investment in domestic factories and share technology. The solution to the US backlash against Japanese auto imports was eventually for companies like Honda Motor Co., Ltd. to build cars here. IRA subsidies are intended to encourage this, policy permitting.
However, even here, there is a problem for the UAW. Today, states with anti-right-to-work laws that skew Republicans account for more than half of the jobs associated with conventional vehicles and more than 40% for electric vehicles, according to Energy Department data compiled by ClearView. High structural costs are a powerful driving force to drive new EV-related factories and jobs to these states. As do strikes.
More from Bloomberg’s opinion:
• The future of unions looks very different: Alison Schrager
• Auto-strike threat exposes the IRA’s biggest flaw: Liam Denning
• Auto workers have good reason to demand a big raise: Justin Fox
(1) The 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, August 21, 2023.
(2) See “American Cars and Small Cars, 1945-1970,” Lawrence J. White, Journal of Industrial Economics, April 1972.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Liam Denning is a Bloomberg 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 correspondent for the Financial Times’ Lex column.
More stories like this are available at bloomberg.com/opinion