Suppliers are more vulnerable to a UAW strike now than in 2019

New UAW President Shawn Fain has vowed a more aggressive approach to labor negotiations with the Detroit 3 later in the year, raising the prospects of a work stoppage if talks reach an impasse.

For many parts companies, that's likely to bring up painful memories of how hard the union's 40-day strike against General Motors in 2019 hit their pocketbooks and caused thousands of layoffs as assembly plants shut down.

Indeed, for many suppliers, the financial struggles of the past several years began not with COVID-19, but with the 2019 strike.

Should a strike occur this year, it will come at a sensitive moment for the supply chain.

After three years of supply chain woes, rising materials costs, higher interest rates and a tight labor market, many suppliers are more vulnerable to a work stoppage this year than they were in 2019.

"The situation of the last four years has not set the supplier community up very well," said Michael Robinet, executive director of automotive advisory services at S&P Global Mobility.

The current mood is one of uncertainty, and the key players are mostly unfamiliar.

Other than GM CEO Mary Barra, the top faces for the Detroit automakers and the UAW have changed from four years ago.

The UAW's Fain is the newest face following his narrow victory in the union's election last month.

Further adding to the uncertainty is that for the first time in decades, the UAW and its Canadian counterpart Unifor will be negotiating at the same time.

Fain has said he is "not married to any philosophy when it comes to bargaining" and is willing to use any tools at the union's disposal, including a strike, during the negotiations to achieve its goals, which are likely to include job commitments and higher compensation.

"We're here to come together to ready ourselves for the war against the one and only true enemy: multibillion dollar corporations and employers who refuse to give our members their fair share," Fain told UAW members last month. "It's a new day in the UAW."

If history is any guide, a strike of any significant length in 2023 would be particularly painful for suppliers that count GM, Ford and Stellantis as their major customers.

The 2019 GM strike took a large bite out of earnings for many suppliers and resulted in thousands of their workers being laid off for the duration of the strike.

Lear Corp., for example, reported a 41 percent decline in its fourth-quarter net income in 2019, or about $86 million, which it pinned in large part on the strike against GM, its largest customer. American Axle, meanwhile, estimated that it lost $243 million in sales in 2019 as a result of the strike, while Aptiv said it lost about $200 million in revenue.

But the 2019 strike occurred in a much different economic environment than today. While the new-vehicle market at that time was cooling off from all-time highs earlier in the decade, business was significantly better then than what the industry has been used to lately, as microchip shortages and other supply chain woes cut vehicle production.

The big volumes leading up to the 2019 strike meant many suppliers were in a position to absorb some of their strike-related losses, and they were confident about recouping those lost sales in the following months.

But the immediately ensuing pandemic in early 2020 foiled that plan.

"Fundamentally, the suppliers were in much better shape before the pandemic than they are now, especially as it relates to cash on hand," said Carla Bailo, an industry consultant and a member of the SAE International Board of Directors.

That's unlikely to be the case in late 2023, she said.

While many suppliers have finally returned to pre-pandemic revenue levels, profits have generally lagged. Suppliers that operate on a just-in-time delivery system have dealt with a lingering financial squeeze over the past several years as high material costs and less predictable vehicle assembly schedules eroded profit margins.

Suppliers' finances are delicate at the moment, Robinet said, and companies can ill afford another shock to the system.

"Suppliers make money when they can turn the machine on and run it for five or six days a week at full rate," Robinet said. "When you keep turning that production knob backward and forward, it's very difficult to run a business that way."

Many of the same suppliers that were affected by the 2019 strike because of their reliance on Detroit 3 business would likely be impacted again in 2023.

Lear's annual regulatory filing said GM accounted for 20 percent of its sales in 2022, with Ford making up about 14 percent and Stellantis making up 10 percent.

At Cooper Standard, the Detroit 3 made up a combined 58 percent of 2022 sales, and at American Axle, the Detroit automakers accounted for 70 percent of its 2022 sales.

The UAW's contracts with the Detroit 3 expire Sept. 14. In the meantime, Robinet said, suppliers might start preparing for a potential strike by building up inventory. But there is little they can do to limit the impact of a strike.

"Our industry is such a tightly wound clock that there's just no slack to be found," he said. "You can say, 'I've got inventory.' But when your final customer doesn't need the part, they just don't need it. It wouldn't help you much to build ahead, especially with just-in-time delivery."

While suppliers navigate the short-term risks like the potential for a strike, they'll also need to keep an eye on long-term opportunities in electrification and automation, Bailo said.

They should also take a close look at their finances and find ways to become more lean while diversifying their customer bases, she said.

"The light at the end of the tunnel," Bailo said, "is going to come from trying to reduce your costs and improve your efficiencies."