October 10, 1996
The General Motors Strike in Canada seems pretty consequential, in that it could cause losses for GM on the order of $1 billion (worst-case scenario). Here's news from the front, tied to an interview with A.G. Edwards' auto analyst, Michael Braig.
Nature of this strike
There has been a win-win nature to recent settlements for auto strikes. Therefore, it isn't likely that we'll have another 17-day strike -- like the one this past spring -- in this environment, but one never knows when personalities are factored in. As with all negotiations, particularly true with these, it's extremely important that both parties can celebrate the deal publicly.
The issues with this strike primarily surround job protection and concerns about the outsourcing of non-union labor. With rapid improvement in the 1990s in manufacturing processes, in the use of proper equipment, the cost-cutting in the industry has come on the non-labor side. But the questions about staffing of the new equipment has become the issue. GM needs flex and wiggle room when it comes to staffing to compete globally; they need to be able to bring in new equipment and to staff it properly -- not to overstaff it, in other words.
On the other hand, the Canadian Auto Workers union (CAW) and the United Auto Workers union (UAW) need to protect their members from getting squeezed out on the new-technology side AND on the outsourcing of manufacturing at lower costs. The latter is probably the greater concern, since everyone recognizes the need to improve the technologically to compete. However, not everyone likes the idea of competition internally (outsourced manufacturing).
Finally, GM may now have to play hardball now with the CAW because they're facing negotiations with the much larger, much more significant UAW in the months head.
It's not wise to make projections about sales and earnings shorfalls, because even if your analysis of the business environment proves right, the comingling of the personalities makes accurate estimation of the length and cost of these sorts of strikes impossible.
That said, there is some recent precedent. The 17-day Candaian strike by the CAW this past spring cost GM $900 million. On average, that's $52 million per day. Of course, the costs go up significantly as the company loses flexibility, so it's more like $10 million lost on the first day and $200 million lost on the 16th.
All told, the total losses during the spring strike amounted to $1.20 per share of after-tax profits for GM. Again, most of that was lost in the final seven days of the strike. Thus, if the strike is short, there may be no measurable effect. Consequently, there is a greater short-term financial impetus for GM to settle, but again, we have a company with a revenue base of $167 billion, and 3.5% margins, or $5.8 billion in profits per year. GM has more to protect long-term than it stands to gain short-term. Again, however, there is a real win-win mentality in the industry right now, and it looks like this will be settled quickly.
AG Edwards Perspective
Music to the ears of the Foolish Four investor, A.G. Edwards has a "sale" rating on the entire auto industry. The firm is concerned about a decline in sales potential for the group. While autumn sales numbers were better than expected, Braig remains skeptical about the continuation of that growth. The real skeptics out there wonder if the recently released September auto-sales numbers won't be adjusted downward.
It is this concern with sales growth that is causing A.G. Edwards to treat negotiations with both the CAW and UAW as non-events. In other words, their "sale rating" on the industry is not tied to the strike.
GM is going through record levels of start-ups for new vehicles. Record levels. Predicting how the combination of all new models will do is difficult.
Longer-term investors in GM have certainly been stung. The stock was at $63 in March, 1994. It's at $49 today. This during a very strong market. Ooof. :) We Foolish Four investors have stepped in here with a cost-basis of $52 a share. It'll be interesting to see how this one plays out.
Tom Gardner, Fool