Auto suppliers, competing with UAW raises, expect higher labor costs in 2024

Auto suppliers have seen inflation moderate on key material prices during the past several months, providing welcome relief as they try to get back on track financially following years of high prices, parts shortages and uneven vehicle assembly schedules.

But during quarterly earnings calls with analysts and investors in February, suppliers frequently highlighted one area in which they expect cost increases to persist during the next few months: labor.

"We anticipate further net input cost increases" driven in part by "higher labor rates," Swamy Kotagiri, CEO of Magna International, said during a Feb. 9 call with analysts.

Magna is North America's largest auto parts maker. Its portfolio includes a range of interior and exterior parts including mirrors, tailgates and functional components.

Publicly traded suppliers identified elevated labor costs as a potential profit headwind.

"Cost inflation continues to moderate, while labor costs have increased globally," Dana Inc. CEO James Kamsickas said on a Feb. 20 call. "We are continuing our efforts to improve cost and price to mute the impact of inflation."

Suppliers will feel higher labor costs moving forward, analysts say, especially following last year's UAW negotiations with the Detroit 3. Union workers at General Motors, Ford and Stellantis will see general wage growth of 25 percent over the course of their new contracts, as well as other gains, including the return of cost-of-living adjustments and improvements in retirement plans.

Those gains triggered wage increases for workers at nonunion auto plants, including Toyota, Honda and Nissan, which doled out pay raises of their own to compete.

The effects of the UAW gains are likely to also ripple throughout the supply chain as parts makers seek to remain competitive for recruiting and retaining workers.

LM Manufacturing, a joint venture between Magna and LAN Manufacturing Group in Detroit, offered its workers a pay raise last year. The increase was not required under LM's contract with the UAW, but the joint venture offered it for retention.

In some circles, the labor market has become "a little bit easier" for suppliers in recent months, said Laurie Harbour, CEO of Harbour Results Inc. That's especially after companies struggled mightily to find enough workers during the pandemic, she said.

"I'm not implying it's easy to get people, but we're seeing fewer issues when it comes to getting people in the door," Harbour said, "but you're still having retention issues."

Smaller suppliers, and especially tooling companies, might have a harder time raising wages and remaining competitive, she said. Tooling jobs used to be "some of the best jobs on the planet," she said, but they have become less so as companies elsewhere in the supply chain pay workers more to make parts.

"They've seen pay increases, but it's hard to give more raises because you don't pass on price increases (to customers) in tooling," Harbour said. "If I'm making a million stamped parts per year, I can (ask customers for price increases to account) for material price increases. But for tooling, it's a one-time spot buy, and you're competing with China."