Following its bankruptcy and government bailout in 2009,
is under intense pressure to show it can cruise through the next downturn without too much damage. Only then can the largest U.S. auto maker expect a better stock-market valuation. This uncomfortable truth is the backdrop to the United Automobile Workers strike at GM, which entered its third day Wednesday. Many of the UAW demands seem reasonable, particularly for temporary and other workers who don’t enjoy the same perks as Old Timers. But that is no basis for an agreement. GM’s credibility with investors depends on it maintaining as flexible a cost base as possible.
One problem is that the union contract under negotiation is due to last four years. The industry has every reason to expect not just more difficult economic conditions within that time frame, but also substantial technological disruption. These four-year deals magnify the industry’s cyclicality, rewarding manufacturers disproportionately on the way up and punishing them on the way down. The last time the UAW picketed GM was 2007, at the end of the last economic cycle. In 2011, the financial crisis was too fresh for unions to have any bargaining power, while in 2015 the car makers were buoyed by a half-decade of sales growth. Fast forward to 2019 and the two sides are wide apart. Unions naturally want to share in the spoils of the strong U.S. market, which buoyed GM’s North American margins to 10.7% in the second quarter. GM, meanwhile, can point to slipping U.S. sales and stagnant profits—not to mention the vast cost and uncertain viability of electric vehicles, self-driving tech and mobility ventures—as evidence that a storm is brewing. Both have a strong case—the union based on the recent past, the company on an all too plausible future. This isn’t an easy basis for negotiation. Another reason for the strike is the dramatic $4.5 billion package of cutbacks GM announced last November, including a decision not to allocate product to five plants—seemingly a prelude to closure. The UAW saw this last move as a contravention of a 2015 agreement not to shutter factories and has filed lawsuits against the company this year. GM may have played hardball in November to leave itself room to compromise now. Its offer to the union involves giving new projects—its electric pickup truck and, intriguingly, battery cell production—to two of the affected plants. This may hint at a path to a deal. However, the company can’t afford to stray far down this path. GM has more spare manufacturing capacity than either Ford or Fiat Chrysler, with four plants in addition to the “unallocated” ones that are poorly used, according to LMC Automotive data. “GM really didn’t need the factories,” says LMC analyst
The current dispute has all the hallmarks of a drawn-out battle. GM has more interest in keeping its fixed expenses under control than in containing one time strike costs. It will want to avoid losing market share to its competitors, but a recent buildup of inventories gives it some protection: It currently has 77 days’ worth of supply, compared with an industry average of 61. Mary Barra is popular on Wall Street, in particular for well-timed decisions to quit Europe and raise $7.25 billion of frothy tech capital for GM’s driverless project. Even so, GM stock fetches just under six times earnings. To cement her reputation, Ms. Barra needs to drive the company successfully through tougher times. Investors can expect her to fight hard for GM’s flexibility. Corrections & Amplifications GM stock fetches just under six times earnings. An earlier version of this article incorrectly stated that GM stock fetches just 5.5 times earnings. (Sept. 18) Write to Stephen Wilmot at email@example.com
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