Supplier ramp-up, recovery from UAW strike could be rocky

Parts makers fearing the worst-case supply chain scenarios from the Detroit 3 strike have been relieved by the tentative agreements the UAW reached with the three automakers.

But the financial ripple effects of the strike are likely to last for a while. And for some suppliers, the coming weeks and months could prove particularly difficult as they ramp production back up and grapple with reduced revenue and cash flow, experts said.

"The longer-term implication for suppliers is that this unfortunately is probably going to mean some suppliers probably aren't going to make it through," said Laurie Harbour, an industry analyst and CEO of Harbour Results Inc., during an Oct. 31 webinar. "Even though we ended the strike, there is tremendous vulnerability in the supply chain."

While fears that a strike would shut down every UAW-represented assembly plant or drag on for months did not come to pass, the strike still significantly affected the supply base.

The Motor and Equipment Manufacturers Association, which represents original equipment and aftermarket automotive parts suppliers in the U.S., found that about 40 percent of suppliers surveyed were forced to lay off some workers during the strike.

Harbour Results, meanwhile, estimated that about 11,000 automaker and supplier workers were laid off, beyond the 45,600 workers who went on strike. And the Anderson Economic Group said the strike had cost the economy about $3.3 billion in lost supplier wages and earnings as of Nov. 1.

In an Oct. 31 statement, MEMA warned that "financial concerns over the smaller and lower-tiered" companies in the supply chain will continue to be a "significant issue" for the industry even as struck assembly plants ramp back up. Many smaller suppliers have found themselves in a precarious financial state since the onset of the pandemic, with higher costs, supply shortages and reduced new-vehicle production taking a large bite out of their bottom lines.

"Some of these companies, especially those that have lower revenues, were already very pessimistic before the threat of the strike," said Gabriel Rodrigues, a partner at consulting firm Falconi.

Suppliers in financial stress also are less likely to receive help from their banks given higher interest rates, Julie Fream, CEO of MEMA Original Equipment Suppliers, told Automotive News.

A recent survey by Harbour Results concluded that about 29 percent of manufacturers throughout the supply chain were "questionably bankable" based on their 2022 finances, meaning those companies had an unhealthy debt-to-earnings ratio. Another 21 percent were deemed "somewhat bankable."

"About 300 manufacturers gave us their balance sheet data from 2022, so what we're looking at is about 100 manufacturers are questionably bankable, in a situation where they might be getting phone calls from their bank or might not be able to secure additional funding," said Cara Walton, the director of market intelligence at Harbour Results. "There are a lot of concerns when it comes to the ability to run their business."

In the short term, suppliers affected by the strike are looking to ramp production back up as quickly as possible, though that could be easier said than done.

"Many of them indicated they'll need one or two weeks to call people back and make sure they have the full contingent of workers and that they have the materials they need, whether it's raw materials or subcomponents, in order to be able to produce their parts," Fream said.

Getting workers back will be crucial. Many suppliers tried to limit the number of employees they laid off during the strike, fearing workers would find other jobs in a tight labor market and not return when production resumed. Some suppliers shifted workers to other programs or initiated training programs to keep them on the job, while others had employees perform plant maintenance.

Aptiv CEO Kevin Clark said the supplier was working with suppliers and automakers to "minimize" disruptions and accelerate the post-strike ramp-up.

"There remains some uncertainty on vehicle build schedules as OEMs work to finalize their plans to ramp up production during the balance of the fourth quarter," Clark said on a Nov. 2 call with analysts.

Third-quarter earnings reports from publicly traded suppliers have provided a glimpse into the strike's impact on larger suppliers with significant Detroit 3 business.

Lear Corp. said it was losing $60 million per week because of the strike before the tentative agreements were reached. Dana Inc. said sales declined $65 million in the third quarter because of the strike and anticipated a $185 million dropoff in October, though that estimate came before the UAW settled with General Motors and Stellantis. Aptiv, meanwhile, said it expected the strike to reduce annual sales by about $180 million

Still, in a sign of the supply chain's resilience, many suppliers reported larger profits than a year earlier. Lear's adjusted net income rose 21 percent to $170 million, and the company increased its full-year financial guidance. Dana reported net income of $19 million on revenue of $2.7 billion, up 5 percent from the third quarter of 2022.

Aptiv maintained its full-year guidance, citing supply chain constraints easing and production schedules becoming more predictable.

"We're well-positioned for continued strong revenue growth and margin expansion despite the macro headwinds," Clark said.