Ever since the United Auto Workers union called a strike at General Motors (NYSE:GM) following the expiration of their four-year contract in mid-September, pundits and analysts have been trying to estimate how much the strike would hurt GM. High inventory gave the automaker some ability to absorb a production shutdown, but it wasn't clear how much slack there was before inventory constraints would start to hurt sales.
Based on the third-quarter sales results that GM reported on Wednesday, the strike hasn't started to pinch the General's sales in a meaningful way. Nevertheless, if General Motors and the UAW can't reach an agreement soon, the cost of the strike could start to escalate rapidly.
General Motors returns to sales growth
In the first half of 2019, GM's total domestic deliveries slipped 4.2% year over year. The discontinuation of several unprofitable car models represented the biggest driver of this decline. Low inventory of GM's full-size pickups -- due to the changeover to all-new versions of the Chevy Silverado and GMC Sierra light-duty trucks -- also weighed on sales.
However, General Motors returned to strong sales growth in the U.S. last quarter. GM and its dealers delivered 738,638 vehicles in the domestic market, up 6% year over year.
Domestic deliveries of full-size trucks jumped 20%, reversing the sharp declines that GM logged in the first two quarters of the year. Moreover, the company's crossover sales surged. Deliveries of Chevy's four main crossover models -- in order of size, Trax, Equinox, Blazer, and Traverse -- surged a combined 36% to 178,634 units. That more than made up for the lost sales from car models that the General is phasing out.
It was a similar story for GM's upmarket brands. Buick's domestic crossover deliveries rose 17% last quarter, driving a double-digit sales gain for the brand overall. Meanwhile, Cadillac's crossover sales skyrocketed 67%, as the brand broadened its crossover portfolio from one model as of mid-2018 to three models today. This contributed to a 6.7% increase in the luxury brand's total domestic deliveries. Cars are down to 10% of the sales mix at Cadillac, and even less at Buick.
There's still a reasonable amount of inventory
GM's domestic factories were idled for the last two weeks of the third quarter due to the UAW strike. The General had to pause production at most of its other plants in North America soon after the strike began, due to the linkages in its supply chain between domestic production facilities and those in Canada and Mexico.
However, prior to the strike, GM and its dealers were carrying more inventory than usual, which was probably a deliberate risk-reduction move. As a result, the company ended last quarter with 759,633 units of inventory in the U.S, down a modest 5% year over year.
For comparison, General Motors reported 785,229 domestic deliveries for the fourth quarter of 2018. Thus, GM and its dealers still have nearly three months of inventory. That suggests that if the company can finalize a new labor agreement and get production restarted within the next few weeks, it may be able to avoid a serious inventory crunch that would torpedo sales. GM's short-term financial results would still suffer, as the automaker books revenue when it delivers vehicles to dealers. But within a quarter or two, it would be able to recapture that revenue and profit by replenishing dealers' inventories.
Weak SUV sales are a warning sign
That said, while General Motors has a reasonable amount of inventory overall, that doesn't mean the automaker has plentiful inventory of every model. Around the time the strike began, GM had less than 60 days supply for the lucrative Chevy Tahoe and Chevy Suburban full-size SUV models, compared to 77 days supply overall.
When inventory drops below 60-day's supply, customers may start to have difficulty finding vehicles with the color schemes and option packages they want. Low inventory of the Tahoe and Suburban at least partially explains why deliveries of those two models fell 13% last quarter. (By contrast, GM had ample inventory of the Cadillac Escalade full-size SUV, and that model logged an 8% sales increase for the full quarter.)
Losing sales of the Chevy Tahoe and Chevy Suburban will be painful because, while the overall volumes are fairly small, those models are extremely lucrative. The pain will escalate as shortages spread to GM's full-size pickup lineup, which drives the bulk of the automaker's profit.
General Motors needs to reach an acceptable compromise with the UAW soon if it's to avoid massive losses that would never be recovered. Unfortunately, while there has been some progress in the negotiations over the past few weeks, there's no sign that the two sides are about to reach a deal. Thus, investors will need to brace for the possibility of two weak quarterly reports from GM to close out 2019.