It's extraordinarily difficult to break into the automotive industry as a young company and expect to find an advantage. Legacy automakers have made vehicles for decades, in some cases over a century, and have expertise that isn't easily copied overnight.
The barrier to entry is difficult enough that it might cause investors to shy away from companies such as Rivian (NASDAQ: RIVN). But one advantage Rivian has that many investors overlook is currently playing out.
Contract headache
Investors knew Union Auto Workers (UAW) labor contracts were going to be tough to swallow. From the beginning of the latest round of negotiations, the UAW was seeking what the union president called the "most audacious and ambitious" contract in decades, and by the time the book was closed on negotiations, the UAW had won historic gains from Detroit's big three automakers. Let's cover what the new contract means for Ford Motor Company (F +3.91%) and General Motors (GM +3.84%) and why Rivian won a battle it wasn't even fighting in.
After a six-week strike that took its toll on automakers, Ford expects the costs of the four-and-a-half-year deal to be $8.8 billion -- roughly double what it anticipated. GM viewed it slightly worse, expecting its new deal with the UAW and Canadian union Unifor to cost a staggering $9.3 billion through 2028. Even for massive global automakers, this is a huge chunk of costs.
But let's break it down into more manageable terms. Ford believes the new UAW contract will raise costs by about $900 per vehicle on average by 2028, and the 41-day strike already reduced profits by $1.7 billion and hindered production by as much as 100,000 vehicles.
Compared to Ford, GM is better able to absorb the wage hikes because it employs about 10,000 fewer UAW members than Ford. The latter's contract increases will push costs up by roughly $500 per vehicle in 2024, and by an average of about $575 throughout the life of the contracts.
An interesting advantage
While Ford and GM had to work with unionized employees, Rivian, which has only one factory at the moment, doesn't have to deal with unions and bitter, costly contract negotiations. It's one of the few possible advantages to breaking into the automotive industry as a small player.
NASDAQ: RIVN
Key Data Points
Increased wages for UAW members couldn't come at a better time for Rivian either, as both General Motors and Ford are embarking on a huge project to turn their electric vehicles (EVs) from cash-burning machines to profit-producing vehicles. Further, as electric vehicle competition heats up -- remember we've already seen a serious price war ignited by Tesla's price fluctuations -- the wage increases make it that much more difficult for Detroit automakers to slash prices to undercut the products of Rivian and Tesla, which also isn't unionized.
Is Rivian stock a buy?
To be clear, Ford and GM are already hard at work finalizing budgets for 2024 that they believe will offset most or all of the wage hikes. But it's yet to be seen how both will execute, especially considering officials said Ford was already at an $8 billion cost disadvantage against its competitors.
But in addition to avoiding tense negotiations and labor contract increases, Rivian has a lot of positives going for it right now.
Its R1T and R1S have received heaps of praise for their quality, style, and safety. Its next-generation R2 platform is on the way -- and at a heavily reduced price compared to the first-generation vehicles -- and its production has entirely recovered from bottlenecks early in the year.
Further, the company has narrowed its losses on each vehicle sold, and avoided brutal price wars ignited by Tesla, while having over $10 billion in liquidity to ensure it has cash for operations in the near term. It's opening demo-and-drive physical locations in a number of cities to help connect to potential consumers, and its once-exclusive partnership with Amazon for its electric commercial vans is now open to other potential customers.
Rivian will surely face plenty of hurdles carving out its share of the increasingly competitive U.S. EV market, and it's still burning piles of cash. But after shedding 80% of its stock price over the past three years, now could prove a great opportunity to buy into the young EV automaker.
