Can Tesla Afford An Oncoming Union After Slashing Its Margins?

Tesla (Nasdaq: TSLA) may be facing yet another gargantuan battle in the form of a unionized workforce, as Shawn Fain, the leader of the United Auto Workers (UAW), expressed his determination to “unionize” the carmaker’s employees as “imperative.” The union leader sees CEO Elon Musk as the epitome of the “billionaire class,” which Fain has vowed to confront on behalf of autoworkers.

The UAW’s ongoing strike poses a financial burden for the Big Three Detroit automakers, resulting in lost production and an anticipated increase in labor costs. The struggle has been extended after around 3,900 UAW members employed at Mack Trucks have decided to initiate a strike following a significant rejection of a tentative agreement reached last week between the company and the union. 

Tesla unionized

Ironically, this situation could be a boon for Tesla Inc., as its U.S. plants remain non-unionized, offering lower wages to its workers.

However, this wage disparity would further widen the gap between unionized and non-unionized workers. When considering benefits and incentives, the total cost of full-time employees at Detroit’s automakers is estimated to be around $65 to $70 per hour, compared to Tesla’s $45 per hour. This translates to a labor cost advantage of roughly $1.4 billion to $1.75 billion, or potentially up to $2,700 per vehicle. If base wages for UAW employees were to increase by 30%, which is a likely negotiation point, this gap could surpass $2 billion, a figure that would undoubtedly grab the attention of any labor union.

For Fain, who frames his struggle as part of a broader battle against the “billionaire class,” Musk represents a compelling adversary. As the world’s wealthiest individual who boasts a strong aversion to unions, Musk is an enticing target.

Beyond the immediate concerns over pay and benefits, the UAW faces an existential challenge related to electric vehicles (EVs). The EV industry, characterized by its digital nature, foretells potential layoffs as legacy factories close, even with the creation of new battery plants (many of which are located in states unfriendly to unions). The UAW’s aging demographics further underscore the declining union membership.

The decline in union membership mirrors the shrinking market share of Detroit automakers in the U.S., which was once as high as 90% during the heyday of the 1960s but has dwindled to approximately 40% today. To address this, the UAW must diversify its focus beyond GM, Ford, and Stellantis, as these companies may not have much more to offer in terms of growth.

The UAW has recognized this challenge for some time, attempting to target foreign automakers’ factories, referred to as “transplants,” and even Tesla over the past decade. However, these efforts have yielded limited success.

Tesla, on the other hand, only recently became profitable at scale. Its identity as a disruptive newcomer, distant from the UAW’s traditional stronghold around the Great Lakes, presents another obstacle. It is more challenging to persuade workers to join a union when their employer is rapidly expanding, rather than shedding jobs. Tesla has also strongly resisted unionization, as evident in the National Labor Relations Board rulings (which Tesla is appealing).

One notable characteristic of Tesla is its soaring stock price. In 2018, Musk raised questions about why his staff would choose to unionize and potentially relinquish stock options. While the stock experienced substantial growth, particularly in 2020, it has since stabilized. Consequently, employees hired more recently may wonder if there’s still significant potential for stock gains in a company with an already high valuation.

Tesla’s stock-based compensation for manufacturing in 2022 amounted to $594 million, equivalent to roughly $9,300 per employee or $4.65 per hour. This figure is comparable to the $4.44 per hour in profit sharing and bonuses paid by Ford to its U.S. employees in the previous year. Fain could counter Musk’s argument on stock options by highlighting that Tesla’s stock has remained relatively stable for nearly three years while its annual net income surged from less than $1 billion to over $12 billion.

Moreover, Tesla’s stock price is primarily tied to growth expectations, making it an appealing target for the UAW. The company’s integrated structure, with major auto plants in California and Texas, provides opportunities for disrupting production growth. Recent sales shortfalls attributed to factory retooling underscore the potential impact of union activity.

However, if UAW is successful in unionizing Tesla, it could come as a big hit to the automaker’s profitability, which is deteriorating following a series of price cuts.

But Musk seems unfazed. Tesla is reducing yet again the prices of some of its Model 3 and Model Y vehicles in the US after missing delivery estimates, marking the second price cut in just over a month. The Model 3 now starts at $38,990, down from $40,240, while the Model 3 Long Range is priced at $45,990, down from $47,240. The Model 3 Performance is now $50,990, down from $53,240, and the Model Y Performance SUV dropped from $54,490 to $52,490.

These cuts are smaller compared to previous reductions in September and are pale in comparison to the March price cuts that dropped Model X costs by up to $10,000. Tesla said it has been adjusting prices to respond to market conditions and increased competition.

“I think it does make sense to sacrifice margins in favor of making more vehicles,” Musk said in July.

Berlin started

Union talks at Tesla come on the heels of the workers in the automakers German plant joining the union in the country. Workers at Tesla’s Brandenburg plant are increasingly joining the IG Metall union, citing concerns related to health, safety, and excessive workloads, the union revealed on Monday.

According to the union’s statement, a shortage of staff and inadequate safety measures in the workplace have contributed to a significant number of work-related accidents, leading to approximately 30% of workers being on sick leave.

Union representatives took action by engaging with workers at the factory gates, on nearby station platforms, and inside the factory itself. They distributed stickers that read “Together for safe and fair work at Tesla.”

Furthermore, Tesla managers organized a meeting with employees on Sunday night, offering “free food and a surprise” to discuss IG Metall’s presence at the facility. According to a source who saw a copy of the email invitation, the company aimed to address what it referred to as the “questionable methods and actual goals of IG Metall.”

Dirk Schulze of IG Metall emphasized that the law grants all workers the right to unionize and openly represent their interests in the workplace, a principle that holds true at Tesla’s Brandenburg facility. Although the union did not disclose specific membership numbers, it acknowledged a notable increase in new members joining its ranks at Tesla.

Despite the considerable challenges, the UAW is gearing up for another attempt to unionize Tesla in the US, recognizing that the combination of a successful strike, Musk’s controversial actions, and Tesla’s transformation from an underdog to a powerhouse may provide a unique opportunity.

Information for this briefing was found via Bloomberg, Engadget, Reuters, and the sources mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

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