GM’s Broken Axle is American Axle & Manufacturing, which it spun off in 1994. Now labor’s on strike there, and GM is finding that its monopsony on axles does not compare to their monopoly:
GM relies heavily on parts from American Axle, buying about $2.6 billion of them, including axles and key components in most of its trucks and some passenger cars. Currently, 28 GM plants are either idled completely or have cut production thanks to the strike, which started on Feb. 26. At least one more — a factory building the Cadillac DTS and Buick Lucerne sedans, just outside Detroit’s city limits — will go down next week.As of last week, GM lost 80,000 vehicles’ worth of production as a result of the strike, says one company insider. Because carmakers book revenue as soon as a vehicle leaves the assembly line and heads to a dealership, the strike is hitting GM’s top line. At least one analyst has dropped his first-quarter profit expectations as a result. Deutsche Bank (DB) analyst Rod Lache issued a report earlier this week boosting his forecast for GM’s quarterly loss from about $600 million to almost $1.4 billion.
“Richard Dauch [American Axle's chairman and CEO] isn’t just locking out the UAW,” says Sean McAlinden, chief economist at the Center for Automotive Research in Ann Arbor, Mich. “He’s locking out GM.”
Lache says the strike is costing GM about $890 million a month. The only mitigating factor is that the truck production being lost probably would have been cut anyway, because sales are falling. So Lache didn’t cut his earnings expectations for the year. But a two-month strike will start to have more permanent effects, he says.
Note two key points:
- Because carmakers book revenue as soon as a vehicle leaves the assembly line and heads to a dealership, the strike is hitting GM’s top line.
- The only mitigating factor is that the truck production being lost probably would have been cut anyway, because sales are falling. So Lache didn’t cut his earnings expectations for the year.
Goldratt (of Theory of Constraints fame) would have a field day with this. The makers mistake shipping a car with selling a car. The dealer does not assume the risk of selling or not selling the car — the maker does — so all those cars on the lot are just thinly disguised finished-goods inventory. They’re not true throughput.
On a lighter note, the strike probably isn’t hurting throughput, because axles are not a meaningful constraint on sales right now — demand is — and GM needed to cut production anyway.