The United Auto Workers strike against General Motors (GM) could prove costly for the automaker.
Nearly 50,000 UAW members walked off the job Monday, idling 55 factories and parts warehouses across the country. Auto workers joined the walkout over pay, job security and health benefits.
Garrett Nelson, senior equity research analyst at CFRA says the strike could cost GM $100 million a day in lost operating income. (Other estimates have pegged the loss at $50 million in earnings a day from lost production in North America). For stockholders, that would translate into a loss of 3-cents a day for the share price. Shares of GM initially fell following news of the strike, but bounced back Tuesday to rally nearly 2% by the afternoon.
“It seems that the two sides are still very far apart and there are still so many issues at play here that they have to discuss. We think it could last several days, perhaps weeks,” Nelson told Yahoo Finance’s “The First Trade.” (A couple of the main issues in the negotiations include health care costs and the use of temporary workers, which the UAW wants to limit.)
The most recent GM strike in 2007 lasted 3 days. By contrast, in 1970 the union stayed off the job for a record 69 days.
Impact on the economy
“GM is not feeling the pressure just yet because we’re in a soft patch in the auto market and their sales have been down so far this year,” said Nelson.
But a lengthy walkout could soon hurt auto parts suppliers and, eventually, the greater economy.
In 1998, 9,200 workers at two parts plants in Flint, Mich., walked out for 54 days. Economists estimate that strike shaved about half a percentage point off second quarter GDP.
Today, however, GM’s market share of 17% is about half what it was in 1998, which means a protracted strike would most likely have a smaller impact on overall economic growth.
“Currently the dealers are sitting on about 11 weeks of inventory, which is a reason why we think this strike could go on for an extended period of time,” Nelson said.
Junk bond status
If the strike lasts more than a week or two, General Motors’ credit rating could be downgraded to junk bond status, according to Moody’s Investors Service. That would make it more difficult and expensive for GM to borrow money.
Nelson said he wouldn’t be surprised by the credit downgrade.
“General Motors has been in a very difficult situation. In North America, their vehicle sales are down about 5% year-to-date,” he said. “They just don’t have much product momentum. And they’re so levered to China; four out of every 10 vehicles they sell are in China.”
Currently, GM’s debt rating is just a notch above junk grade.
Last week, Moody’s downgraded Ford’s (F) credit rating to junk status on concern over its costly and lengthy restructuring plan.
Does Mary Barra survive?
Experts say this strike is a big test for CEO Mary Barra. It’s the first work stoppage at the automaker since she took the helm in 2014, but Nelson said it’s too early to know if Barra will survive the walkout.
“She’s under a lot of pressure politically. She met with President Trump recently and obviously there will be more tweeting and a lot more pressure if this continues for an extended period of time,” he said.
Alexis Christoforous is co-anchor of Yahoo Finance’s “The First Trade.” Follow her on Twitter @AlexisTVNews.
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