The current four-year labor contracts covering unionized workers at General Motors (NYSE:GM), Ford Motor (NYSE:F), and Fiat Chrysler (NYSE:FCAU) are set to expire on Sept. 15. With auto sales slowing in the U.S. -- but profits remaining buoyant in North America for the Detroit Three -- the current round of negotiations could be the most contentious in over a decade.

As expected, the United Auto Workers union recently announced that it had selected GM as its target as it looks to hammer out a new four-year pattern contract. The terms of the GM contract would serve as a blueprint for subsequent deals with Ford and Fiat Chrysler. With the clock winding down, there is a high risk that negotiations between the UAW and General Motors will break down, leading to a strike at GM -- which could potentially extend to Ford and Fiat Chrysler, too.

Why GM was the most likely target

General Motors made itself the obvious target company for this year's round of labor negotiations with its late-2018 decision to idle several of its U.S. plants and discontinue various underperforming models. These plants have been underutilized in recent years, because of weak demand for the products they build. Closing them would unlock substantial cost savings for GM.

However, this move raised the ire of the UAW and GM's factory workers, because of the company's high profitability -- and its big manufacturing footprint in Mexico. Indeed, General Motors now has fewer UAW-represented workers than either Ford or Fiat Chrysler, despite being the No. 1 automaker in the U.S. Meanwhile, it built more vehicles in Mexico than any other automaker last year.

A white Chevy Silverado pickup driving on a rural road

GM built more vehicles in Mexico than any other automaker in 2018. Image source: General Motors.

General Motors counters that it has had a substantial presence in Mexico for decades and hasn't added capacity there in 10 years. The General has also invested far more money in the U.S. than in Mexico in recent years. From management's perspective, the U.S. plants it is idling were just unlucky in that they were building products that have fallen out of favor, mainly sedans.

GM is also offering transfers to other facilities for all of the workers at the U.S. plants it wants to close, other than retirement-eligible employees. However, that hasn't placated the union. Relocating to a new plant hundreds of miles away is disruptive at best, and some workers simply can't move that far because of family obligations.

Strikes authorized at all three automakers

Earlier this week, UAW-represented employees at GM, Ford, and Fiat Chrysler voted by overwhelming margins to authorize their union leaders to call strikes. Generally, strike authorization votes are symbolic in nature: They are just a bargaining tool and don't guarantee that the union will call a strike.

However, the risk of a strike is elevated in this round of negotiations, particularly at GM. The company might be willing to save at least one of the factories being idled this year by allocating new products that would enter production in the future. But given that U.S. auto demand has peaked and General Motors is still struggling with overcapacity, there's no chance that management will agree to keep all four plants open.

An ongoing kickback scandal at the UAW also raises the risk of a strike. Many auto workers are now rightly suspicious about whether union leaders have their best interests at heart. As a result, if the UAW makes concessions on certain points -- which would presumably be necessary to reach deals with GM, Ford, and Fiat Chrysler -- union members may vote against the resulting tentative agreements.

A strike might not hurt too much -- as long as it is relatively brief

The good news for GM and its peers is that they are well positioned to endure a strike, as long as it doesn't drag on for months. Automakers and dealers have been struggling with bloated inventory in the U.S. this year, particularly for older models. That excess inventory could come in handy if strikes cause production losses.

GM's substantial truck and SUV production in Mexico could also mitigate the impact of a strike on its profitability. That said, a UAW strike could bring output in Mexico crashing to a halt before long, because of various models' reliance on components built by unionized GM workers in the United States. Moreover, a strike would interrupt the launch of key new and upgraded models, such as the next-generation Chevy Silverado HD.

Thus, while a strike lasting a few weeks probably wouldn't have a huge impact on GM's profitability, a strike that continued for multiple months could be very painful. The best outcome for both sides would be to reach a compromise that balances efficiency for the company with job security for its employees, without a strike.

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