Auto suppliers might be the biggest losers in UAW strike

Despite having no say in contract negotiations between the United Auto Workers and the Detroit 3 automakers, suppliers could be hit hardest by the strikes and their aftermath.

Tier one and sub-tier suppliers have laid off thousands of workers in Michigan and around the country to mitigate financial impact, but it's going to get a lot worse as the strike drags on and even after it's settled. The automotive industry has a labor problem — and it isn't just the UAW. When auto factories go down, suppliers have two choices:

• They can keep workers on the payroll, bleeding money while production lines are idled.
• They can implement layoffs, which might come at a much higher cost as employees who are shown the door temporarily might never come back through it.

"It is absolutely a concern," said Ann Marie Uetz, partner at Foley and Lardner PC whose practice centers on automotive supply chain and bankruptcy. "We talk about the Amazon effect of employees who are laid off and going to work for similar or in some cases better wages in other industries."

Ford Motor Co. and the UAW reached a tentative agreement on Oct. 25 and began restarting operations, but that agreement still must be approved by members.

Suppliers, whose blue-collar wages are substantially lower than automakers, have struggled with labor for years. At the same time, their margins are also much thinner and have not returned to pre-pandemic health. The labor exodus from manufacturing jobs to industries with better balance and more stability has been among the biggest pain-points for suppliers over the past couple of years.

Another major disruption like the strike will lead even more workers to pursue a living away from the factory floor, Uetz said.

The first month of autoworker walkouts have been a dull financial headache for parts producers, as most third-quarter earnings reports this week are likely to reflect. That changes with more big-ticket shutdowns, such as the Stellantis Sterling Heights Assembly plant on Monday and General Motors' Arlington Assembly plant in Texas on Oct. 24. Many suppliers have built their businesses around high volume, high content pickup trucks and SUVs coming out of those factories.

Suppliers alone have lost nearly $3 billion in wages and earnings through week five of the strike, according to an analysis by Anderson Economic Group. Financially beat down and virtually powerless to help themselves — it's familiar territory for the supply base.

In the past couple of years, rapidly rising inflation and sporadic production brought many parts manufacturers to the brink, with no choice but to ask their OEM customers for help. The same will happen coming out of the strike, Uetz said, especially when it comes to labor.

The moment all of the strikes are over, automakers will rush to make up for lost production. While they return to full strength on the labor side immediately, suppliers will have to scramble to bring workers back and fill out extra lines and overtime. That will likely mean bumping up wages and offering bonuses, as they did during the labor shortage.

Suppliers might not be in the room when it comes to UAW labor talks, but they are still at the negotiation table with automakers, haggling over price concessions. When the labor dispute is settled, automakers won't be the only ones saddled with higher labor costs.

"Who's going to pay for the signing bonuses? Who's going to pay for the increased wages?" Uetz said. "It's going to be that all over again but with the added pressure that these hourly employees from the automotive suppliers are going to look and see what the UAW achieved in terms of wages, and they're going to ask for it."

Count Chris Hayes among them. The 54-year-old Detroiter works for $23.85 per hour building seats at Lear Corp.'s Conner Avenue plant in Detroit, which supplies GM's Factory Zero. He expects financial gains made by union autoworkers to trickle down to his plant, where production workers are represented by UAW Local 155.

"I mean, it is kinda hard living check to check," Hayes said Tuesday before clocking in for the second shift. "We're building stuff that we can't even afford. Ya'll got houses all over the world, boats, cars, get to fly anytime, private jets and all that old crap. I barely can put gas in my car or I gotta catch the bus. I mean, make it make sense."

While many auto supplier employees are organized by the UAW, they are covered by individual plants and not a master agreement like autoworkers. There is no strike pay for supplier employees laid off as a result of walkouts, and deals between the UAW and automakers don't have any direct impact on suppliers and their employees.

"There's only 20 weeks of unemployment pay. Most of our plants have been laid off sporadically through the year and probably have lost maybe even 10 of those weeks," Waymon Halty, vice president at UAW Local 155, told Crain's Detroit Business last month. "That is one concern that people have, you know, parts suppliers, we're only going to get $362 (in unemployment per week), and who can live off of that?"

Craig Carrel, president at Albion-based Team 1 Plastics, said he can't afford to make any layoffs given how tight the labor market continues to be. The tier two supplier, whose largest programs are on Ford trucks, said sales in October are already 15 percent-20 percent below normal. The company's push to diversify away from the Detroit 3 over the past couple of years has helped it win business to stay afloat through the strike.

"As long as we're not losing a ton of money, we're maintaining our staff," Carrel said. Starting pay at the plastic parts supplier is $15 an hour, but Carrel said he is prepared to raise it if need be. "It's difficult because people can go down the road for a buck more an hour," he said.

Executives at several tier one suppliers told Crain's that they have instituted furloughs and temporary pay cuts among white collar employees. Many have laid off factory workers, including Ford Bronco seating supplier LM Manufacturing, Magna, Flex-N-Gate, Detroit Manufacturing Systems, Detroit Chassis LLC, Sodecia Automotive, Eagle Industries, Faith Plastics and CIE Newcorp.

Dana Williams, chief strategy officer for Detroit at Work, said the agency has helped about 800 people who have been laid off over the past month. She said they generally haven't had trouble filling manufacturers' labor needs, but in some cases, impacted employees are ready to move on from the city's signature industry.

"I anticipate that there will be some folks who kind of naturally see this as a career transition, who might say, 'I always really wanted to be a nurse, I'm out, I'm going to nursing school,'" Williams said.

LM Manufacturing brought some laid-off employees back to work recently, Williams said, though it is unclear how many or what work is being done at the plant. Magna, a joint owner of the company, declined to provide details.

"We have focused considerable attention on contingency planning to proactively address any temporary business disruptions to our operations," Magna spokesman Dave Niemiec said in an email. "We've been prepared in terms of temporarily scaling back production on affected programs as efficiently as possible, and just as importantly we are equally prepared to ramp-up quickly when ready."

Uetz said some of her clients have tasked skilled labor employees with general maintenance work just to keep them on the clock while production is down. Many companies are anticipating employee demands for higher wages. "There will definitely be negotiations between the supplier and the customers for cost recovery on labor after this strike," she said.

Carrel said his labor costs depend on what his customers are willing to absorb. Automakers were generally willing to share some of the pain of the supply base these past couple of years, but that was a time of record profits for OEMs. They will emerge from the strike with dramatically higher labor costs and rising pressure to decrease costs elsewhere — such as parts purchasing — before foisting higher prices on the consumer.

"We were able to get some price concessions with our customers, but it was really tough to get some of that through. I'm not sure we could do it in another six months," Carrel said. "Obviously, you can't give what you don't have, from a profit standpoint. You gotta be careful that way."