The global automotive industry is currently navigating a complex landscape characterized by numerous challenges, including tariffs in the United States, aggressive marketing from Chinese automakers, and a slowdown in battery electric vehicle (BEV) sales. These pressures necessitate that automakers effectively balance production, right-size capacity, and manage costs to remain competitive. A critical metric in this environment is labor cost per vehicle, which encompasses wages and productivity and provides insight into an automaker's overall efficiency, competitiveness, and profitability.

Our “Harbour Report” team has conducted a comprehensive analysis of labor costs per vehicle across over 250 vehicle assembly plants globally, including a review and incorporation of sourcing strategies. Labor typically constitutes 65% to 70% of total conversion costs, requiring it to be a key focus area for automakers. The report also emphasizes the need to understand overall conversion costs, which include direct and indirect labor, overhead (rent, energy, and maintenance), and depreciation.

The four archetypes of automakers and labor costs

Based on their labor cost per vehicle, the report categorizes automakers into four distinct archetypes, each facing unique challenges.

The first archetype, Euro premiums, has an average labor cost of $2,232 per vehicle and includes premium brands such as Mercedes-Benz, BMW, Jaguar Land Rover, and Audi. This group is characterized by high production costs, complex design and advanced manufacturing processes, and strong labor unions. Within the category, German manufacturers face among the highest labor costs of $3,307 due to stringent regulations and high wage rates.

The second archetype, electric vehicle-only manufacturers, includes startups as well as more established players like Tesla, which do not operate under organized labor contracts. Their average labor costs range from $1,502 to $13,291, and they face high per vehicle production costs due to low manufacturing volumes. EV-only manufacturers also have been heavily reliant on government subsidies, which are now being cut back by the new administration.

The third archetype, mainstream model manufacturers, has an average labor cost of $880 per vehicle and includes traditional high-volume automakers from various countries. Japanese manufacturers enjoy lower labor costs per vehicle, with an average of $769, compared with manufacturers in the United States, where the average is $1,341 — a labor cost per vehicle that reflects recent historic union gains.

The fourth archetype, Chinese car manufacturers, has an average labor cost of $585 per vehicle, characterized by low wages and high efficiency. The group maintains the lowest overall conversion costs in the industry by leveraging its newer factories, efficient supply chains, and high production volumes.

Automakers navigate global labor cost disparities and strategic shifts

The analysis reveals significant disparities in labor costs among different countries. Surprisingly, China no longer has the lowest labor cost, with countries like Morocco, Mexico, and Romania coming in lower. Because of the low labor costs, French automakers have moved a significant portion of their production to Morocco, while Mexico serves as a strategic base for various global automakers. However, proposed tariffs could affect these advantages.

Several variables impact labor costs, including design complexity, which is reflected in engineered hours per vehicle (EHPV). Chinese manufacturers have optimized their processes to require significantly fewer engineered hours, resulting in lower production costs.

Offering a diverse range of powertrains increases complexity and costs, as efficient manufacturers use dynamic sequences to manage variants, but this can lead to higher labor costs and inefficiencies. Additionally, energy prices vary significantly by region, affecting overall production costs; for instance, German automakers face rising natural gas costs, while French manufacturers benefit from lower rates due to nuclear energy reliance. Disruptions in the supply chain, such as those seen during the COVID-19 pandemic, have prompted automakers to rethink their supply chains, focusing on dual-sourcing and nearshoring strategies to enhance stability.

Recommendations for cutting labor costs per vehicle

To address the disparities in labor costs, the report outlines tailored strategies for each archetype. Euro premiums need significant restructuring to optimize their product portfolios and enhance efficiency, targeting a labor cost of $1,500 per vehicle that would require improving productivity and reducing complexity through early supplier engagement.

EV manufacturers should prioritize scaling operations and establishing efficient production systems to navigate the reduction of government subsidies by enhancing operational efficiencies and building robust supply chain networks. Mainstream model manufacturers must invest in technology to maintain competitive labor costs while integrating advanced features, leveraging digital tools to optimize production processes and improve productivity. Lastly, Chinese car manufacturers should focus on enhancing vehicle quality to build brand value in international markets, improving supplier performance, and establishing resilient supply chains to support future growth.

As the automotive industry adapts to a rapidly evolving environment marked by competitive pressures and potential tariffs, understanding labor costs per vehicle is paramount. Our analysis provides critical insights into the levers that influence these costs, guiding automakers in their strategic decision-making.

Future reports will continue to explore vital industry topics, including tariffs, sourcing, and the demand for battery electric vehicles. By focusing on labor costs, automakers can better position themselves in a challenging market and sustain profitability amid ongoing transformations.