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American Axle Strike Costing GM Billions of Dollars in Lost Production—Report
26 Mar 08
Global Insight's estimate of the impact of the strike at American Axle on General Motors' truck production makes for sobering reading, and no end is in sight.
Global Insight Perspective | | Significance | Global Insight's top North American production analyst, Haig Stoddard, has stated that if the strike at supplier American Axle Manufacturing continues through until the end of this month, General Motors will have lost 80,000 units of production volume across several product lines. | Implications | If the strike were to continue throughout April, this figure would rise another 109,000 units to around 189,000 trucks for the two months. The problem with the lost production is General Motors' accounting system—revenue is booked as vehicles are completed, not when they are sold. | Outlook | GM’s first-quarter revenues are likely to suffer a significant hit in North America as a result of the lost production, but with inventory also being drawn down and demand for large trucks irreparably sliding according to Global Insight’s long-term forecasts, such a reduction may have been inevitable. |
The United Auto Workers (UAW) union’s strike at American Axle Manufacturing (AAM) has now entered its fourth full week, and nearly 50% of General Motors’ (GM) production has been effectively shuttered because of a lack of drivetrain parts from the affected supplier. Haig Stoddard, manager of North American production forecasting at Global Insight, has put together an estimate of the amount of production lost by GM in March, vehicles that the company simply did not make as plant after plant began to shut down in response to the strike at AAM that began on 26 February. According to Stoddard, GM will lose 80,000 units of production in total for the month of March, if the current plant shutdowns remain in place for the rest of the month. Such a scenario seems to be more likely than not, with both sides in the talks stating that they are no closer to an accord; the union is demanding product and job security guarantees, while American Axle is demanding wage and benefit cuts to match its competitors’ offers. Stoddard's estimate of the production losses for March is broken down as follows: - 57,000 units of Silverado/Sierra full-size pick-ups lost at the Oshawa, Ontario (Canada); Pontiac, Michigan; Fort Wayne, Indiana; and Flint, Michigan plants.
- 11,200 mid-size TrailBlazer/Envoy/9-7x sport utility vehicles (SUVs) lost at the Moraine, Ohio plant.
- 7,000 full-size Express/Savana vans lost at the Wentzville, Missouri plant.
- 4,000 full-size Yukon/Tahoe SUVs lost at the Janesville, Wisconsin plant.
- 800 full-size Hummer H2 SUVs lost at the Mishawaka, Wisconsin plant.
In a worst-case scenario, Stoddard also calculated the potential impact on the company's production in April, during which there are 22 working days, should the strike keep GM's plants idled for another month. Stoddard estimates that daily production losses would come in at just under 5,000 units a day, giving a monthly total of 109,000 units. The total losses would be broken down as follows: - 69,000 full-size Silverado/Sierra pick-ups.
- 18,800 mid-size TrailBlazer/Envoy/9-7x SUVs.
- 13,200 full-size Express/Savana vans.
- 6,800 full-size Yukon/Tahoe SUVs.
- 1,200 full-size Hummer H2 SUVs.
Outlook and Implications GM's forecast for first-quarter production was unchanged at the end of February, planning output of 965,000 units during the period. This included 608,000 trucks, but did not take into account any of the impact from the shutdowns generated by the strike at American Axle. To date, over 30 GM plants have either had production slowed or have been shuttered, including several production facilities, with the notable exception of the Arlington, Texas (United States) and Silao (Mexico) plants. According to GM spokesperson Dan Flores, both plants are up and running, still producing full-size SUVs on schedule. Both are being supplied by American Axle's Mexican production facility, and have not experienced production issues. This changes the picture somewhat, as it would now appear that really only the pick-up trucks, cargo vans, and the big Hummer SUV are facing any kind of production crunch. Thus far, GM's sales have not been affected by the strike, as the inventory of trucks already built, although reduced throughout March, will still last at least two months before a squeeze occurs. "People are going from full-sized SUVs into crossovers and into more passenger cars", said GM President and Chief Operating Officer (COO) Fritz Henderson earlier in the month. "Not buying large vehicles is not the primary driver of lower sales. It has had some impact, but it's the overall weakness in the market that has affected sales." Henderson added that the ongoing strike by the UAW has not hurt company sales. "We'd like to see a settlement in the strike, but we still have ample inventories", he said. "It's not costing us any retail sales. As long as that doesn't happen, we're okay", he added. However, although sales may not be affected demonstrably by the ongoing strike, one area almost certainly will be: first-quarter revenue. GM uses an accounting system that books revenue as each vehicle is produced and rolls off the assembly line. Therefore, the loss of 80,000 units of some of the company's most expensive products could deal a significant blow to its first-quarter results, and this may have been a reason why the company boosted production slightly in January and February. Conservatively estimating an average price per vehicle of US$25,000, GM could conceivably see a US$2.0-billion hit to its first-quarter revenue, at least. Combined with sales that have been lower than last year as the market continues to struggle under the weight of several serious economic headwinds, GM's results for the first quarter are likely to be disappointing. If the strike continues into April, its second-quarter results are also likely to be affected, a situation that GM frankly does not need, but has evidently chosen to endure in order to stay out of the dispute between the union and American Axle.
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