Morgan Stanley reiterated Tesla (NASDAQ:TSLA) as one of their “Top Picks” with an Overweight rating, and a 12-month price target of $380.00, after the UAW made historic gains during labor contract negotiations with Detroit’s “Big Three” automakers.
Gains which saw to the revival of Cost of Living Adjustments (COLA) in the industry.
COLA was seen as a ‘no fly zone’ for car companies heading into UAW negotiations. The indefinite nature of COLA introduces unpredictability into long-term labor inflation forecasts.
According to Ford (NYSE:F), the UAW contract contributes an additional $850 to $900 per unit to the car's cost, gradually eating into around 200bps of margin before any measures are taken to address it.
Are UAW contracts a positive for China?
Analysts at Morgan Stanley also see the new labor contracts as a potential positive for China, Mexico, Thailand, Vietnam and other countries where global manufacturers benefit from broader labor cost differentials.
With the fresh contract in place, investors may see OEMs looking to work with their Chinese EV partners as much as possible.
As EV adoption slows, analysts at Morgan Stanley suggest that it is unlikely the strategies implemented for EVs in the last 3yrs fully considered the speed of rising labor costs in the US market. Once the UAW contracts are officially approved, it's anticipated that automobile companies will rethink their EV plans.
A revision may involve spending at a slower rate, placing more emphasis on partnerships, and possibly declaring losses on assets or facing reduced asset values. Although such announcements could cause fluctuations in headlines, they signify a shift towards more careful spending.
Analysts at Morgan Stanley will be on the lookout for automakers highlighting the flexibility of their EV spending budgets during the 4Q reporting period.
Will Tesla be next?
The UAW leadership plans to organize more manufacturers, prompting some foreign auto companies to proactively increase wages.
Estimates suggest that Tesla has approximately 45,000 to 50,000 factory workers across locations like Fremont, Austin, and Reno, which are in higher cost-of-living areas compared to the average UAW worker. This collectively amounts to a US labor cost ranging between $4 billion and $5 billion for Tesla.
Can Tesla’s Optimus help?
Long before the widespread use of walking robots, analysts at Morgan Stanley expect substantial changes in vehicle design that will lead to less labor.
To produce inexpensive cars in the US competitively on a global scale, new methods and technologies that are not yet available commercially will likely be necessary.
Shares of TSLA are up 4.63% in mid-day trading on Tuesday.