GM labor contracts will add $1.5 billion to costs, but here's how GM expects to offset it
Jamie L. LaReau, Detroit Free Press
Updated 8 min read
General Motors' North American labor costs will increase by $1.5 billion in 2024 compared with 2019 contracts, but the automaker said it is looking across the company for ways to offset the increase.
GM CEO Mary Barra and CFO Paul Jacobson told investors during a Wednesday morning call that most of the production loss during the UAW strike — which started Sept. 15 and ran through the end of October — is now back to pre-strike levels. In total, the UAW's targeted strike against all three automakers cost GM about $1.1 billion. But GM will recoup that loss and the increased costs of the labor contract in the coming months and years.
GM salaried employees have until noon March 24 to decide if they want to accept a buyout offer of up to 12 months pay for long-term employees. File photo: The Renaissance Center, the headquarters for General Motors, in downtown Detroit on Tuesday, June 6, 2017.
"When you look back over the last few years we've consistently tackled headwinds coming out stronger on the other side, the higher labor costs are no exception, which is why we are putting in place several initiatives to more than offset the higher costs in the coming years," said Jacobson. "In (the third quarter) we realized $500 million of gross savings year-over-year from lower marketing, engineering spend and people costs. We expect to realize another $500 million in (the fourth quarter)."
GM would not disclose the total cost of the 2019 contracts, said spokesman David Caldwell.
Jacobson said GM can maintain the cost cuts its already achieved and he added, “We’re looking at engineering, we’re looking at design, we’re looking across the organization at savings and making sure we can drive efficiency.”
The new contract with the UAW will add about $500 in cost to GM per vehicle in 2024 and about $575 per vehicle on average over the life of contract, Barra said. She did not address what that might do to sticker prices.
It will increase GM’s battery cell cost by about $3 per kilowatt hour. But Barra said GM will continue to offer "strong compensation" to its non-represented salaried workforce, noting that, "how you win is with the best talent.”
GM said earlier in the morning that it is on a good path to robust earnings and it will restate its 2023 earnings guidance, initiate a stock buyback and increase its dividend among other things now that the negotiations with the UAW are behind it.
“GM will deliver very strong profits in 2023 thanks to an exceptional portfolio of vehicles that customers love and our operating discipline,” Barra said in a statement.
But Barra said she is "disappointed" in the company's launch of its new electric vehicles this year due to battery module production problems. She vowed to fix those and improve EV production and increase EV profitability next year.
Barra also confirmed that GM will be making "substantially lower spending" in its self-driving subsidiary Cruise in 2024 than it did in 2023, as previously reported, due to Cruise's current safety issues that resulted in halting operations.
Despite those challenges, Barra said in a letter to investors Wednesday that, "with clarity on our labor costs and production back on track, we are returning to our capital allocation framework by repurchasing $10 billion of common stock through an accelerated share repurchase program, raising our common stock dividend by 33% starting in 2024 and reinstating our 2023 earnings guidance. .... Our results, especially our cash generation, have been very strong."
Financial forecast
During 2023, GM twice raised its full-year earnings guidance before withdrawing it in the third quarter due to the UAW contract negotiations and strike. It now reinstates its adjusted earnings before interest and taxes for the full year to come in at $12 billion to $14 billion, up from its previous third quarter reduced outlook of $11.7 billion to $12.7 billion. GM’s reinstated guidance includes an estimated $1.1 billion EBIT-adjusted impact from the UAW strike, primarily from lost production.
GM estimates its full-year net income to be $9.1 billion to $9.7 billion, compared with the previous outlook of $9.3 billion-$10.7 billion.
GM expects full-year 2023 capital spending to be $11 billion to $11.5 billion, which is at the low end of its prior guidance range of $11 billion to $12 billion, driven by the previously announced retiming of certain product programs and more capital-efficient investment.
GM was the last of the Detroit Three to reach a tentative contract with the UAW on Oct. 30 and GM’s unionized workers ratified it Nov. 16 by a slim 55%. About 36,000 members at GM facilities turned out to vote. There are about 48,000 union members who work for the automaker.
Jason Coburn, 46, of Auburn Hills, center, shares a light moment of laughter on the picket line with Gary Phillips 63, of Harrison Twp, left, and strike captain Vern Armstead, 64, of Davisburg, Mich., at the GM Customer Care and Aftersales plant in Pontiac, Mich. on Monday, Oct. 30, 2023.
The tentative agreement with GM largely mirrors the deals with Ford Motor Co. and Stellantis. The agreement grants 25% in base wage increases through April 2028, and will cumulatively raise the top wage by 33% compounded with estimated cost-of-living adjustments to over $42 an hour. Among other gains, GM will offer three company special attrition programs (SAPs) from January 2024 through the life of the agreement that include a $50,000 lump sum pretax retirement incentive for traditional employees who meet the normal or early retirement eligibility requirements.
GM said it has canceled the $6 billion line of credit it took out in October as protection against mounting costs during the UAW strike. GM plans to enter into a new 364-day $3 billion committed credit facility with the banks executing its stock repurchase program acting as lenders. The stock buyback program is a $10 billion repurchase.
GM's 2024 budget will trim costs
Despite the rich labor contract, Barra said Wednesday that GM's cash liquidity is "at record levels" noting that since the beginning of 2022 through the third quarter this year, GM generated more than $20.5 billion in adjusted automotive free cash flow after investing in its business and paid $4.2 billion in common stock dividends and buybacks. Adjusted free cash flow is basically GM's earnings after accounting for expenses.
GM CEO Mary Barra outlines GM's future for investors at GM Investor Day in New York City on Nov. 17, 2022.
"Our cash balance, which is well above our target, is a function of our recent record profits and our prudent management of resources through the pandemic, supply chain disruptions and labor negotiations," Barra wrote. "I am confident in our ability to continue generating significant free cash flow as we make the EV transition."
Barra said GM is finalizing a 2024 budget that "will fully offset the incremental costs of our new labor agreements" and GM's long-term plans includes reducing the "capital intensity of the business," developing products more efficiently and further cutting fixed and variable costs.
But GM expects to increase its common stock dividend by 3 cents per quarter to 12 cents beginning in 2024.
“With this clear path forward, and our strong balance sheet, we will return significant capital to shareholders," Barra said.
Gasoline vs. EVs in 2024
Barra said GM is well positioned going into 2024 as its gasoline-powered vehicle sales remain robust. EV sales and profit margins will improve next year from dismal 2023 results, she said.
"Although I am disappointed with our Ultium-based EV production in 2023 due to difficulties with battery module assembly, we have made substantial improvements both to the process and to the organization responsible for this work," Barra said. "In 2024, we expect significantly higher Ultium EV production and significantly improved EV margins."
Ultium is GM's proprietary propulsion system that supports its newer EVs such as the Cadillac Lyriq, the Chevrolet Silverado EV work truck, the Chevrolet Blazer EV and the GMC Hummer EVs all being produced this year.
There are the problems at GM's self-driving unit Cruise after an unmanned autonomous Cruise vehicle dragged a pedestrian in San Francisco on Oct. 2. State regulators shut down Cruise and the company then halted all operations and recalled its fleet of 950 specially designed autonomous Chevrolet Bolts. Cruise's problems led to the resignations of CEO Kyle Vogt and of co-founder and Chief Product Officer Dan Kan earlier this month. The company expects to make layoffs, too.
GM will address Cruise's future
Barra said GM is addressing the problems at Cruise with the priority on safety, transparency and accountability.
"We must rebuild trust with regulators at the local, state and federal levels, as well as with the first responders and the communities in which Cruise will operate," Barra said. "This includes making improvements driven by the independent safety and incident reviews that are ongoing."
Barra said GM will share more details on the path forward for Cruise after it reviews the safety review findings and recommendations. But, she added, "We expect the pace of Cruise’s expansion to be more deliberate when operations resume, resulting in substantially lower spending in 2024 than in 2023."
GM has invested about $8 billion in Cruise since 2016. Cruise had $1.7 billion in cash as of Sept. 30, about enough to last nine months at the current cash burn rate, Reuters reported.
GM stays the course with EVs
Barra said GM is "working through our challenges, and we remain optimistic and excited about the road ahead."
The profitability from GM's internal combustion engine (ICE) vehicles remains strong especially in GM's high-margin pickups and big SUVs. Near term, the growth-rate of EVs is slowing, she said, but it is projected to accelerate and grow substantially in the long term with more EVs entering the market and the public charging network expanding.
As sales volumes grow, GM will drive profitability through, "R&D, our scale, our vertical integration, our supply chain strategy and our manufacturing expertise," Barra said, adding that GM will do this while simultaneously reducing its capital spending.
"We’ve spent years preparing the company for an all-electric future, and our long-term EV profitability and margin goals are intact, despite recent headwinds," Barra said. "We have a clear path forward that includes greater operating and investment efficiency that will benefit both our ICE and EV portfolios."
This story has been updated to reflect that the increase of $1.5 billion in labor costs will occur in 2024 rather than in this year.
