Industry keeps an eye out for UAW strike's impact on small suppliers

DETROIT — Suppliers are closely watching the UAW's strike against the Detroit 3 and bracing themselves for financial fallout deep into the supply chain if it persists longer than a few weeks.

"There are a lot of small companies out there that are so crucial for the supply chain for the automotive industry that we should not underestimate the risks," Mahle CEO Arnd Franz said in an interview this week on the sidelines of the Detroit auto show. "The negotiating teams at the collective bargaining process have to keep in mind that if we stop making cars, there could be quite a tremendous outfall on the smaller companies in the supply chain."

The automotive supply chain is already in a fragile state after more than three years of pandemic-related impacts on manufacturing and logistics, rising material costs, shortages of key components including microchips and reduced vehicle production volumes. Suppliers, particularly smaller ones and those at the Tier 2 and Tier 3 levels, have seen profits shrink or disappear entirely, even as automakers recorded some of their highest quarterly profits ever over the past few years.

Now, the UAW's strike against General Motors, Ford and Stellantis, if it expands and persists, could threaten the survival of many of those smaller suppliers that are critical to supplying the parts needed for new-vehicle production, industry executives and experts said. Even one missing component, no matter how small, could shut down an entire assembly plant.

"The smaller the entity is, the more at risk it is," said Laura You, a member of Michigan law firm Warner Norcross + Judd's automotive and supply chain industry groups. "So if the [automakers] and Tier 1 suppliers are not willing to work with smaller Tier 2 and Tier 3 suppliers, the reality is they might not have that supplier anymore when the strike is over."

The UAW's initial actions against the Detroit 3 are likely to keep the immediate impact of the strike somewhat limited. Workers so far have walked out at only three plants — one at each of Detroit's automakers.

For suppliers, the initial impact might not feel all that different from the impacts of the microchip shortage, which over the past three years has forced automakers to shut down assembly plants for recurring periods. Nonetheless, suppliers such as ZF Group, North America's second-largest supplier by sales volume to automakers, have already been forced to reduce production.

"We are in a very dynamic situation," ZF spokesman Tony Sapienza said in an email to Automotive News. "I can confirm that some production capacity reductions are already in place to adjust to our customers' needs, and if the strike broadens, there is no doubt that we'll need to take further action."

A source for another major Tier 1 supplier to the North American auto industry said seven of its locations in the U.S. and Mexico already have been impacted by the strike, though it has not forced any of them to close entirely. The source asked not to be identified given the fluid nature of the situation.

But the union plans to expand the work stoppage at yet-to-be-determined intervals to ratchet up pressure on the automakers, a novel tactic that UAW President Shawn Fain has branded a "stand-up strike" to mirror the sit-down strikes of the UAW's early years.

"Frankly, it's a better solution than all of us anticipated," the Tier 1 supplier source said. "Sadly, we're all pretty good at flexing this out based on the last three years and the chip shortage."

But if the strike lasts for weeks and expands in scope to include a large chunk of North American new-vehicle production, the consequences for smaller suppliers could become dire, industry sources said.

"The potential damage to the supply chain can't be understated," ZF's Sapienza said. "In terms of impact, we have significant concern about our Tier 2 and Tier 3 suppliers. If the situation worsens, it will be a crisis for the entire supply chain and we would have serious concerns about the industry's ability to restart quickly."

For years, suppliers have been warning automakers of their fragile state. Many, including major, publicly traded parts makers, have gone to their customers looking to renegotiate contracts to account for higher material costs and uneven production schedules.

But automakers have often been unwilling to make those concessions. Major suppliers have had mixed results in getting concessions in recent months, with smaller companies and those in lower tiers having generally even less success than the larger ones.

"We do a lot of firefighting," Mahle's Franz said. "We're performing to protect our customers and their production. This is a big part of the cost increases that we have incurred, and in many cases were deteriorating our margins.

"There has to be a spirit of partnership in times that are economically and technologically very dynamic," he said.

The Biden administration is reportedly considering financial aid for smaller suppliers impacted by the strike — but it's unclear if such aid will arrive or what form it might take. Talks about aid for suppliers are "premature and fluid," a source with knowledge of the matter told Reuters on Thursday.

The worry is that "Tier 1 suppliers will still be able to weather the storm financially," but it's the ones down the line that can't withstand the "impact beyond six to eight weeks," the Reuters source said.

A source from a major Tier 1 supplier in North America who asked not to be identified said the company is "very anxious" to learn more about what the White House is considering.

"We're already making calls," the source said. "It sounds like it might be Tier 2, Tier 3-focused out of the gate, but it's still critical to us because when we come back up, we need them to be there. We know from COVID and previous strikes and the recession that that's a tender area of the business that can cause a lot of difficulties for us as we come back up."

A prolonged strike could have other ramifications on the supply chain including on the logistics and transportation companies that the industry relies on to ship parts between factories worldwide. Some trucking companies, for example, might be forced to lay off drivers if their business relies heavily on domestic auto production, while others might divert transportation capacity to other industries.

"We're getting close to the peak shipping season for the holidays, and if they're running tight on inventory for consumer goods, conceivably they could repurpose that space," Thomas Goldsby, a professor at the University of Tennessee's Global Supply Chain Institute, recently told Automotive News. Suppliers are also hoping to avoid laying off workers for an extended period in a tight labor market, fearing they might find jobs elsewhere while plants remain closed or slowed down.

"If you were to not have jobs for your people for an extended period of time, they're going to find a job somewhere else," Vitesco Technologies North America CEO Sandy Stojkovski said Thursday at the Detroit auto show. "Then when it's time to turn things back on, they won't be there. That's definitely a factor in how we evaluate this situation."

In a statement to Automotive News, Magna International, North America's largest parts supplier, said it is "closely monitoring the situation" but that it is "premature to comment on any specific impact" to its operations.

"However, we have focused considerable attention on contingency planning to proactively address any temporary business disruptions to our operations," Magna spokesperson Tracy Fuerst said in an email. "If that time comes, we are prepared in terms of temporarily scaling back production on affected programs as efficiently as possible, while being equally prepared to ramp-up quickly when ready."

A spokesperson for Robert Bosch, the world's largest auto supplier, declined to discuss any specific potential impacts on the company's business.

"Bosch manufacturing operations are correlated to customer orders, and we monitor this data as part of standard operating processes," Bosch spokesperson Tim Wieland said in an email. "We have and will continue to work with our customers to plan for potential manufacturing disruptions and strive to minimize the potential impact for our associates."

A spokesperson for Denso, the world's second-largest parts supplier, said the company's operations are running as normal.

"We are closely monitoring the situation and working with our internal teams, customers and supply chain to prepare for a variety of potential developments," Denso spokesperson Andrew Rickerman said in an email. "Our focus is meeting our customers' shifting needs by engaging our teams through stable work schedules."

Mary Arraf, a spokesperson for Continental AG, said in a statement that the company is "continuing operations as usual, without disruption, for all our customers," adding that the potential impact on its business "is hard to measure at this time."

In an email to Automotive News, Martinrea International Executive Chairman Rob Wildeboer said the strike has thus far had "limited impact" on the Canadian supplier. The key moving forward will be the "length and scope" of further strike actions, he said.

"I believe no one has a clear line of sight on that," Wildeboer added.

Michael Martinez and Reuters contributed to this report.