On Sept. 15, 2023, the United Auto Workers (UAW) outlined plans for strikes targeting individual U.S. auto plants, its first-ever simultaneous strike against Ford Motor Co., General Motors Co., and Stellantis N.V. after rejecting counteroffers from the automakers mostly because of a lack of an agreement over wages, benefits, job security, and paid time off. The strike will lead to stoppage of production for several profitable, high-demand vehicles including the Ford Bronco, Jeep Wrangler, and Chevrolet Colorado. If the strike persists for more than a week and expands to more plants, it will result in material reductions in earnings and liquidity relative to our base case for 2023. After a strong start to 2023, we expect the industry momentum to brake modestly in the second half and forecast a flattish volume environment in 2024. We answer key questions about how the strike and its likely resolution through an eventual ratified agreement could impact ratings for major automakers and suppliers.
Frequently Asked Questions
What is our base case for the strike, and how does the production disruption impact ratings cushion for automakers?
We have limited visibility on the likely duration of an extended strike. Given the nature of issues that are unresolved, we believe a quick resolution, as was the case in the 2007 strike, appears unlikely. Hence our base case for ratings incorporates the impact of a wide set of scenarios ranging from two to eight weeks, reducing North American production in the range of 200,000-750,000 units during the fourth quarter of 2023 (roughly 1%-5% of our estimate for 2023 U.S. light vehicle sales of 15.1 million units), assuming it impacts a majority of plants eventually. A potential disruption to the supply chain related to automakers' powertrain and related component plants in Mexico and Canada is an additional downside risk. To the extent the strike appears likely to extend beyond four weeks with a larger-than-expected potential disruption to the supply chain, earnings, and cash flow, we will revisit our assumptions.
Given the possibility of the strike lasting several weeks and the limited ability of the companies to prevent a multibillion cash burn in that scenario, we incorporate the potential for a material deterioration in earnings and liquidity entering 2024.
However, we expect automaker ratings to remain steady as we incorporate a meaningful cushion for industry volatility in our financial risk assessments. Moreover, once production eventually resumes, we expect a reasonably quick recovery in liquidity over their minimum operating levels, albeit with permanently lost earnings due to lost production.
For now, we believe the Detroit 3 automakers have modest cushion in terms of inventory (see Table 1) relative to the industry average and may even support short-term tailwinds from pricing, which we believe will subside over the next two years. As of Sept. 1, 2023, we believe GM and Ford had adequate vehicle inventories to avoid any material permanent earnings or share loss, and we believe Stellantis may have proactively overstocked some high-volume models. This additional inventory is most prominent in the pick-up truck segment, a segment that is significantly more profitable than others. GM also appears somewhat exposed to about two weeks short on inventories in the sport utility vehicle (SUV) segment relative to the industry average.
|GM, Ford, And Stellantis U.S. Inventory Relative To Industry Levels|
|General Motors Co.||Ford Motor Co.||Stellantis||Overall U.S. Industry|
|Vehicle Segment||Share of Volume (%)||Vehicle days’ supply as of Sept. 1, 2023||Share of Volume (%)||Vehicle days’ supply as of Sept. 1, 2023||Share of Volume (%)||Vehicle days’ supply as of Sept. 1, 2023||Share of Volume (%)||Vehicle days’ supply as of Sept. 1, 2023|
|Total Light Vehicles||1,732,947||51||1,296,044||62||1,054,753||75||10,277,986||39|
|Source: S&P Global Ratings, WardsAuto InfoBank. * Year to date through August 2023|
What is the likely ratings impact from the range of outcomes of these labor negotiations on the earnings cushion for GM and Ford?
In anticipation of tough labor negotiations, our current base case for EBITDA margins in 2024 and beyond already incorporates wage increases that would impact margins on average for GM and Ford by roughly 20 basis points (bps)-40 bps annually. If the automakers concede to the UAW demands, including a 36% wage increase without restoring cost-of-living adjustments, we do not expect any material change to our base case, and hence is unlikely to impact ratings or outlook on both issuers. This is also because the companies have strong liquidity and can potentially rely on their captive finance operations for a cash injection if required, in addition to delayed subventions and other mitigating actions.
In our margin and cash flow assumptions, we also do not incorporate any material changes in benefits or cost of living adjustments. We do not incorporate any positive contribution from mitigating cost actions by automakers to combat potential adverse outcomes from the new contract over the next four years. To the extent there are material changes post contract finalization, we will reassess the impact on future earnings, cost flexibility, and ultimately on the rating outlook.
Below is the summary of our base-case ratings implications for each automaker:
Ford Motor Co.: We have not made any meaningful changes to our base case, which incorporates worsening macroeconomic conditions through 2024, ongoing cash restructuring charges, and costs associated with the UAW negotiations. The positive outlook reflects at least one-in-three chance we will upgrade Ford later in 2023 if it demonstrates sufficient pricing power and cost control to sustain EBITDA margins approaching 8% in 2023, and well above 8% thereafter, while maintaining FOCF to sales of sustainably above 2%. With higher labor costs looming, it will heighten our focus on Ford's cost management to sustain margin and cash flows in line with our upside triggers. Specifically, key credit factors for a potential upgrade will depend on more clarity and confidence around the sustainability of the company's cost improvements, which will be critical in a slow growth environment in 2024 and beyond, when mix and pricing headwinds will intensify. The eventual cushion relative to our margin and cash flow triggers, stemming from lower contribution costs (warranty, supplier stability, and parts cost) and lower structural costs (complexity reduction, parts elimination, plant level efficiencies) will be a key determinant of the rating trajectory.
Though any adverse outcome (beyond our base case) to its cost structure will reduce this cushion somewhat, we will review the company's plan to mitigate cost headwinds and do not anticipate any material downside to its current ratings trajectory. We believe the company maintains sufficient liquidity buffer for the current rating to absorb potential short-term production disruption. For more details, please refer to our Tear Sheet on the company, published May 04, 2023.
General Motors: We expect limited downside risk to ratings or outlook on GM given its track record in demonstrating solid operational momentum with market share gains, strong profitability, and inventory discipline leading up to the second half of 2023. After incorporating headwinds to its cost structure from the union negotiations, we continue to expect above-average EBITDA margins of about 10% through 2025. The company's production discipline and upcoming product launches will likely minimize the need for significant sales incentives and could limit pricing pressure over the next two years. The company also appears on track to benefit from lower fixed costs due to management actions primarily related to voluntary separations and reduced sales and marketing expenses. With automotive cash, cash equivalents, and marketable debt securities of $25.3 billion as of June 30, 2023, we believe the company maintains an adequate buffer for the current rating to absorb potential short-term production disruption around the upcoming union negotiations.
As a backdrop, our 'BBB' rating on GM remained unchanged through the 40-day UAW strike in 2019, when due to lost vehicle production volumes and parts sales, the company incurred a pre-tax impact of approximately $3.6 billion on earnings and a pre-tax impact of $5.4 billion to cash flow in the year ended December 31, 2019, due to a loss of an estimated 300,000 units.
The company targets long-term total auto liquidity (cash and credit facility availability) of more than $30 billion, which reflects its prudent financial risk management. For more details, please refer to our Tear Sheet on the company, published July 28, 2023.
What is the likely impact of the strike on rated auto suppliers?
The impact of a strike on the majority of suppliers will not be significant from a ratings view. While credit metrics will temporarily suffer marginally, our ratings are forward-looking, and we expect the lost volumes would recover quickly and the impact to liquidity would be manageable for most suppliers. Larger suppliers like Aptiv PLC, BorgWarner Inc., Lear Corp., and Adient PLC have a customer base that is both diversified and global, limiting the impact to performance. These companies also generate strong free cash flow, have abundant liquidity sources, and have ample cushion for their credit metrics.
We expect a larger credit impact for suppliers with high customer concentration with Ford, GM, and Stellantis customer volumes in North America. These include American Axle & Manufacturing Holdings Inc., Autokiniton US Holdings Inc., Dana Inc., Cooper-Standard Holdings Inc., and IXS Holdings Inc. It is unclear at this stage if any of these will be eligible for potential emergency aid from the government.
American Axle and Autokiniton: We expect the impact to be significant for a quarter but manageable given both companies have high EBITDA margins (low-to-mid teens), generate positive free cash flows, and have a good track record of running their plants very efficiently, including managing high production volatility over the last few years. During the fourth quarter of 2019, both Axle and Autokiniton continued to generate positive free cash flow despite the GM strike reducing volumes. Furthermore, Axle has ample cushion in its credit metrics at the current rating.
IXS Holdings: The company has quite low liquidity, but the current rating of 'CCC+' with a negative outlook reflects this risk. We also expect that the company could take actions to preserve liquidity through working capital unwinds if the strike were to persist for a prolonged period.
Cooper-Standard: The company could be negatively impacted given its exposure to GM, Ford, and Stellantis is quite high. While we expect Cooper will generate slightly negative cash flows this year, liquidity appears sufficient given roughly$230 million of cash and asset-based lending (ABL) revolver at June 30, 2023. We currently rate the company 'CCC+' with a negative outlook, reflecting downside risk.
Finally, while we expect companies like Dana and Tenneco Inc. will have weaker cash flows in 2023, we think both companies have ample liquidity to manage through a strike of one to two months, and cashflows are expected to improve in 2024. Tenneco in particular is already expected to have quite weak cash flows given large one-time restructuring costs and an increase of working capital this year, but the company recently increased liquidity with a $1.2 billion ABL replacing its previous $600 million revolving facility.
Do we expect any material impact on the credit trajectory for rated dealers?
The strike could temporarily increase the new vehicle gross profits for dealers, but we still expect gross profit per unit (GPU) for new vehicles to fall over the next year to more normalized levels as production continues to improve. As we did not upgrade dealers when they generated unsustainably high margins during the supply chain disruptions of 2021 and 2022, we would not expect any positive rating actions due to a temporary increase to margins from the strike. If the strike were to persist beyond 8 weeks, the impact could be moderately negative as the dealers could start to run out of parts for their highly lucrative parts and service businesses, but the impact would be only for the 3 domestic OEM cars which represent a minority of total repairs at rated dealers.
- Credit FAQ: U.S. Auto Dealers Navigate New Roads, July 20, 2023
- Industry Top Trends Update North America: Autos, July 18, 2023
- Despite Higher Volumes, U.S. Auto Sector Ratings Upside Remains Limited Due To Macro Uncertainty, Pricing Pressure, And High Interest Rates, April 24, 2023
This report does not constitute a rating action.
|Primary Credit Analysts:||Nishit K Madlani, New York + 1 (212) 438 4070;|
|David Binns, CFA, New York + 1 (212) 438 3604;|
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