A political storm is brewing in the battle for our cars

In the late 1950s, the great Chuck Berry, a keen observer of the aspirations of middle America, sang of the day he would buy a Cadillac and no longer “have to worry about that broken down, ragged Ford”. Today in middle America – especially in the rust-belt states – the worry is that Berry would trade in his Ford not for America’s best-known luxury car brand but for a motor built by one of China’s ‘big four’ carmakers. It is a concern that may yet have a decisive impact on next year’s US presidential election. If so, it’s quite likely to be a major factor driving global equity markets for the coming 14 months and perhaps beyond.

Berry’s imaginary Cadillac was “burning aviation fuel, no matter what it costs”. No prizes for guessing his 2023 incarnation will be running an electric vehicle (EV) burning nothing at all. Not just that, his EV will be simpler and cheaper to build than one propelled by an internal combustion engine (ICE) and, in the process, its success will put US auto workers out of work in their tens of thousands. And therein lies the fear that may yet play a major role in the outcome of 2024’s presidential election and the path followed by equities markets.

The concerns of the main trade union in the US motor industry, the United Auto Workers (UAW), seem real enough. Its report, Taking the high road: Strategies for a fair EV future, cites a study by investment bank Merrill Lynch which estimates that, in a car selling for $35,000 (£28,800), the power train of an ICE vehicle would cost $18,000 whereas the alternative components for an EV would cost $7,000. Think what that saving would do to a carmaker’s profit margins.

Similarly, the report quotes a former chief executive of Volkswagen (DE:VOW3) saying “the reality is that building an electric vehicle involves some 30 per cent less effort than one powered by an internal combustion engine”. And in 2017, Ford (US:F) executives told an investors’ meeting that the product simplification that comes from making EVs rather than ICE cars can mean a 50 per cent cut in capital spending and a 30 per cent reduction in labour time per unit.

Figures such as those suggest big cuts in the US labour force needed to make the auto components for EVs and to assemble the finished product. But, if those numbers also imply that EVs will eventually be made in the US in the same volumes as ICE-driven autos are currently built, that would be a brave assumption; as we just suggested, Chuck Berry’s 2023 car may well be built in China.

In other words, even more US auto jobs will be on the line as the Democrats’ ridiculously titled Inflation Reduction Act swings into action, the chief purposes of which are to subsidise and stimulate investment in low-emissions projects – the original ‘build back better’ aspect of the act – while fostering protectionist economic policies. The irony is that building back better is likely to mean axing blue-collar jobs and especially the fairly skilled jobs tied up in making internal combustion engines and the complex power trains to which they are attached. That much seems intuitively obvious once it is stated that, for example, the petrol engine of a VW Golf has 113 moving parts while there are just three such parts in the e-motor of a Chevy Bolt, the compact hatchback that is the top-selling EV for General Motors (US:GM).

Partly as a result of these concerns, the auto workers’ union has called out its 145,000 members who work at plants run by America’s ‘Big Three’ automakers, Ford, GM and Chrysler, now part of Stellantis (US:STLA).

True, the union also has other matters on its mind. Led by a newish president with something to prove, it is seeking a 46 per cent pay rise over the coming four years (starting with a 20 per cent uplift), a cut in the working week to four days and improvements to various fringe benefits. Yet behind the picketing, walk-outs and rolling strikes that the union has so far used is the worry that, in the words of another great troubadour of blue-collar America, Bruce Springsteen, “those jobs are going, boys, and they ain’t coming back”.

However, there is another dimension to the auto workers’ industrial action; one that has attracted Donald Trump to Detroit this week for a rally that might have been all over the news by the time you read this column. It is the political dimension, which is best explained by the table. This shows key data for five states that Trump won in the 2016 presidential election and that President Biden won in 2020. Conventional wisdom has it that Biden must win them again if he is to remain in the White House into his 87th year.

They are the definitive swing states and they are all rust-belt states where the auto industry is a major employer. They are also five of the seven that flipped from Republican to Democrat in 2020 (the others were Nevada and North Carolina) and the table shows how many times in the past eight presidential elections (stretching back to 1988) that the winning margin was less than three percentage points of votes cast, and how many auto workers are employed in each state. The numbers are plenty to affect the presidential poll. Predictably they are highest in Michigan since its biggest city, Detroit, where each of the Big Three is headquartered, isn’t called the Motor City for nothing. But even in Wisconsin, where the number of auto workers is fewest at 127,000, it is still significant – in 2020, the Democratic party won the state presidential election by just 20,000 votes.

That Trump would seek to make political capital out of this is a no-brainer. After all, the drive away from ICE-powered autos and towards EVs is both a key part of Biden’s economic agenda and almost fits the identikit of an elitist project that would benefit the providers of capital at the expense of labour. It is not just that EVs are simpler and, therefore, cheaper to make. They also fit the narrative that removes agency from the average Joe because they complement the drive for autonomous vehicles. EVs are so much better suited to driverless vehicles than ICE vehicles because, without the need for complex gearboxes, they are easier to run via software. Meanwhile, their big battery capacity is better suited to provide the large amounts of electricity needed to run the processors. It adds up to a populist’s dream, ticking so many boxes that make conspiracy theorists foam at the mouth. It even comes with a riposte to the virtue signalled by driving an EV. ‘How many children died digging the cobalt that went into your EV?’ isn’t yet a familiar question raised by America’s alt-right, but give it time.

Put all this together and it is easy to imagine that in the coming months US politics will be riven and driven by factors similar to – though more frenzied than – those that afflict UK politics and are epitomised by views on the extension of London’s ULEZ zone to cover all of Greater London.

Yet a calmer view of the US economy might question whether the worries of auto-industry workers should ripple outwards to affect the whole nation. It is not that the economy is performing that badly. Using output as measured by gross domestic product (GDP), it is even running above trend. Figures for 2023’s second quarter show GDP growth accelerated to 2.5 per cent year on year. That’s ahead of the 20-year average growth of 2 per cent. But let’s not get carried away – the average for the past five quarters is still just 1.8 per cent.

Meanwhile, the chart distils the electorate’s propensity towards a populist solution by comparing the path of wages in the manufacturing sector with consumer price index inflation. It shows that for most of the past two years, inflation has run ahead of wage growth, although that trend has just been reversed. Over the 16 years shown in the chart, wage rates have had phases of rising in real terms, especially in the six years 2015-21. Overall, however, the chart leans towards the notion that America’s cultural and political malaise is rooted in economics. As wage and inflation rates bobble around, the inflation rate averages out at 2.5 per cent for the whole period while growth in wage rates comes out at 2.6 per cent. For households, that’s barely keeping the metaphorical head above water – waving and drowning in almost equal measure.

Not that you would guess that by looking at the returns from US equity markets over a similar period. The total return from the S&P 500 broad-based index of US stocks has grown at 9.8 per cent a year for the past 20 years, even allowing for the 49 per cent drop in the index’s value over the 2008-09 financial crisis. As such, it leaves the owners of equity capital laughing at those condemned to get by on wages.

It also leaves US equities on a high rating compared with both their historic average and with equity markets around the world, especially the UK’s. True, the US market almost always sells at a premium to the UK’s. But there was a sea change in relative ratings after 2016’s Brexit vote. Shortly before that vote, a relative rating, based on prospective price/earnings ratio for the US market of 1.1 times the UK market’s earnings ratio proceeded to top out at 1.8 times this summer and is still 1.7 times.

Perhaps the prospect of another four years of Trump come 2025 will be sufficient to change that. The UK has been the plague pit of the developed world’s equity markets for seven years now. Four more years of The Donald might turn US equities into a dumping ground. As the title of another Chuck Berry song says, you never can tell.

bearbull@ft.com