Workers at General Motors (NYSE:GM) have taken to the picket lines this week, as negotiations between the top U.S. automaker and the United Automobile Workers union did not lead to a new agreement before the previous labor contract expired on Sept. 15. This is the first strike in the U.S. auto industry in more than a decade.

Estimates of the cost of the strike for GM have varied widely. Analyses cited by The Wall Street Journal put the hit to GM's earnings at anywhere from $50 million up to $100 million per day. In fact, the range of possible values could be even wider, depending on how long the strike continues.

Calculating the short-term cost

Last year, General Motors earned an adjusted operating profit of $10.8 billion in North America. That works out to nearly $30 million per calendar day. Assuming a five-day workweek and a few weeks of idled production each year, the cost would be closer to $45 million per workday.

The UAW strike will cause a complete halt to GM's production in North America pretty quickly. While the company has several major factories in Canada and Mexico, they rely on powertrains produced in the U.S. Moreover, the Teamsters union is supporting the UAW strike by refusing to haul GM vehicles to dealers. Given that GM books revenue when it delivers vehicles to dealers, the company's daily revenue in North America will fall to zero before long.

A red Chevy Blazer parked on a beach

The UAW strike will quickly halt GM's production throughout North America. Image source: General Motors.

The amount of lost profit per day would far exceed $30 million, because the General would still be incurring overhead costs. Nevertheless, $100 million seems like an exaggerated estimate of the daily cost of the strike.

High inventory could dull the impact of a short strike

GM dealers recently had about 77 days' supply of vehicles in inventory, compared to the industry average of 61 days. As a result, dealers won't start to experience shortages for most vehicles for at least a few weeks. GM could potentially dial back its incentive spending in the short term, boosting profit per vehicle at the expense of volume, enabling dealers to stretch their inventory even further.

General Motors' profit would still suffer in the short term: As noted above, it books revenue when vehicles are delivered to dealers, not when the dealers sell them to customers. However, if the strike ends within a few weeks, GM could probably make up most of the lost production volume during the fourth quarter. In that case, it would incur only modest incremental costs and very little lost sales volume.

It's certainly possible that the GM strike will be resolved within that period. While some union officials have stated that the two sides remain far apart, UAW Vice President Terry Dittes indicated that a strike might have been avoidable if GM had presented its final offer earlier. That offer addressed some of the union's concerns. For example, it would create or retain 5,400 jobs, find new work for two plants that had been slated to close, and implement an improved profit-sharing formula.

But a long strike could be extremely painful

While the negotiations are finally making progress, there's no guarantee of a quick resolution. The UAW and General Motors still have big disagreements about the use of temporary workers and GM's large manufacturing footprint in Mexico.

If the UAW strike were to drag on for two months -- which happened in 1970 -- it would have a severe negative impact on GM. Dealers would start missing out on sales due to a lack of inventory, and General Motors wouldn't be able to recapture all of that lost volume by increasing production after the strike ends.

Furthermore, GM had more than $50 billion of accounts payable and accrued liabilities as of June 30, compared to just $22 billion of accounts receivable and inventory. That reflects its negative working capital cycle: On average, the automaker gets paid for its vehicles before it pays suppliers and workers for the production inputs. A production halt could quickly burn through GM's cash reserves as the company's bills come due.

Thus, while it's no big deal if GM and the UAW take another week or two to hammer out a fair deal, a longer work stoppage could destabilize the company. It would be hard to put a price tag on the cost to General Motors in that scenario. Hopefully, cooler heads will prevail on both sides in the days ahead.

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