Wall Street got busy Monday calculating the impact of a strike on the Big Three automakers amid increasingly fraught labor negotiations between union workers and companies, and a “greater likelihood” of a walkout next month.
Also on Monday, President Joe Biden weighed in, urging the United Auto Workers and Ford Motor Co. F, +0.49%, General Motors Co. GM, +0.53% and Stellantis NV STLA, to “to work together to forge a fair agreement.”
Negotiations so far have been tense, and the contract expires in one month.
Citi analyst Itay Michaeli estimated that a strike at GM lasting about two weeks impacting roughly about 100,000 vehicles would result in an impact of around $1.3 billion before interest and taxes; a five-week one, impacting about 280,000 vehicles, would result in a $3.4 billion impact EBIT. That would be a similar hit as GM’s 2019 strike, he said.
Recent headlines are “pointing to increasingly challenging labor negotiations and a greater likelihood of a strike next month,” Michaeli said.
A longer stoppage would result in shrinking dealer inventory and possibly start to impact sales sometime during the second half of October.
For Ford, Michaeli calculated an impact of about $1.6 billion EBIT for a two-week strike affecting about 130,000 Ford vehicles, growing to $4 billion in the case of a five-week strike affecting 330,000 Ford cars and trucks. Like GM, sales would be hobbled roughly by mid-October in the case of a longer strike.
“For both companies, the exact volume impact will in part depend on the extent of any Canada/Mexico downtime, and to that, GM appears somewhat better positioned than Ford due to GM’s higher exposure to Mexico production (including for pickup trucks) and other supply-chain considerations,” the analyst said in his note Monday.
Both companies likely can keep their guidance intact in the case of a brief, one-week strike, but a strike beyond the two-week mark “likely triggers a [fiscal-year guidance] cut, though it would set 2024 up with reduced inventory and greater volume/price recovery prospects,” Michaeli said.
A big question is whether a strike targets one specific automaker, as it was the case with GM in 2019, or all three at the same time — with more industry volume loss but also potentially a shorter strike, Michaeli said.
“To that, Ford is generally viewed to be the least likely to be selected as a target,” he said.
Deutsche Bank analyst Emmanuel Rosner said in his note Monday that he estimates an impact on earnings of about $400 million to $500 million for every week of production for each automaker, for a total of about $1.4 billion.
GM’s 2019 strike lasted almost six weeks, with a loss of about $3.6 billion EBIT; GM North America lowered revenue estimates as nearly 300,000 fewer vehicles were delivered.
Extrapolating the same $13,000 per unit in EBIT hit, Ford, GM and Stellantis could see [$550 million, $480 million, and $400 million] in weekly profit impact, reaching that $1.4 billion-a-week estimate, Rosner said.
“In a bad-case scenario with 8 weeks of strike against all 3 automakers, which would bring the UAW strike fund to very low levels, this could cause $11.2 billion in lost profits for the [Detroit 3],” Rosner said. “While this is considerable, it would still be considerably less than the impact from the lifetime of the 4-year contract,” which would create “a permanent raise in the OEMs’ cost,” he said.
The analyst also quantified the cost of UAW’s demands, focusing on the union’s “higher-probability asks” such as converting temporary employees into full-time workers, the elimination of a tiered-wage system, and about 40% base wage increase over the four years of the life of the contract. He left out “unlikely” to be met demands around pensions and post-retirement healthcare benefits.
“Our analysis suggests accommodating these demands would likely constitute a large but not destructive headwind to OEMs’ earnings in year 1, with incremental costs stepping up even further in subsequent years,” Rosner said in the note.
If these demands are granted with cost-of-living raises on top, Rosner estimated costs to all three automakers around $3.6 billion in the first year of the contract, amounting to $23 billion in total for the four years, “with highest hit to Stellantis, followed by GM and then Ford.”
“Specifically, we estimate that the conversion of temporary employees to full-time workers would cost D3 a total of $1.4 billion, not yet factoring in wage increases, with the highest impact to Stellantis given the higher [percentage] of temporary employees used currently relative” to GM and Ford, the analyst said.