Morgan Stanley observes UAW strike as Tesla influence 'looms larger that it appears'

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Morgan Stanley remains bullish on Tesla (NASDAQ:TSLA) with an Outperform rating and a $400.00 price target on their “Top Pick” as the UAW continues to strike against the auto industry.

Morgan Stanley sees the UAW strike of 2023 as very similar to the 2019 strike against General Motors (NYSE:GM), but with a significant difference. Last time, there was no viable alternative to domestic auto production outside of the Detroit 3 (GM, Ford (NYSE:F), Stellantis (NYSE:STLA)).

In 2019, when the UAW went on strike for a grueling six weeks, Tesla had a 1% US market share and financial troubles. Now, Tesla's share is around 5%, expected to double soon, possibly surpassing GM and Ford combined by the end of the decade.

“Tesla's influence on both sides of the negotiating table looms larger that it appears,” wrote Morgan Stanley analysts.

During the pandemic, the Detroit 3 showed that volume and profit don't always align. Despite reducing production numbers and abandoning entire sedan segments, the D3 saw their profit margins expand. However, this profitability may face some degree of mean reversion as supply stabilizes. But a more permanent shift in product mix has been brewing.

The strike's duration is uncertain. The divide between the two sides, the motivations of OEMs, and the broader political environment make predicting the strike's outcome challenging. On top of it all, doubts loom about the D3's ability to profitably produce high-volume EVs, especially with potential labor cost increases.

UAW-related labor costs make up around 4% of D3 global sales, around 5-6% of North American sales, and even more when supply chain costs are factored in. Tesla is on a different trajectory.

Tesla's labor costs as a percentage of revenues, while not disclosed, may seem similar to traditional manufacturers. However, Tesla's exceptionally high level of vertical integration, both in the factory and downstream infrastructure, combined with its rapid growth and automation efforts, should gradually reduce the labor ratio over time.

Even if the D3 had labor cost parity with Tesla, D3's profitability in the EV market seems challenging without significant taxpayer support or strategic changes.

This raises important questions for the D3 about the size and character of the auto companies they aspire to be. Do they envision themselves as the "next Tesla," or do they want to focus on internal combustion engines and niche $150,000 EVs?

The UAW strike reveals profound issues facing the future of US auto manufacturing, forcing legacy players to redefine their roles in an evolving industry, with Tesla's influence growing larger by the day.

“We see scope for the UAW standoff to bring to light more consequential (existential?) issues facing the future of auto manufacturing in the US and the role of today's players,” added Jonas. “Legacy doesn't have to be history.”

Shares of GM are up 0.50% while F, STLA, and TSLA are down 0.16%, 0.74%, and 0.90% respectively in mid-day trading on Wednesday.