Even as the strike called by United Auto Workers union and participated by around 50,000 workers against General Motors (NYSE: GM) enters the third day, investors have mostly remained indifferent. Analysts also seem to have taken the incidents lightly, though each day of the strike is expected to result in a revenue loss of $50 million to $100 million.
This is primarily because Wall Street feels the automaker has enough inventory and cash liquidity to avoid any material impact from the strikes, that is, if it lasts up to a week. But if it goes beyond, things could be different.
While ending the strike will be of immediate priority to the automaker, there are some other long-term headwinds that the management should be prepared to take on. Let’s take a quick look at these headwinds.
Stagnant sales growth
From 2016 to present, sales have mostly stagnated for General Motors, driven by the changing landscape in the automobile industry. This has led to a deterioration of worldwide market share to 8.3% at the end of the second quarter, compared to 10.2% two years ago.
Most of GM’s profits are driven by its SUVs and trucks, and therefore the company has recently been seen focusing on these two segments. In fact, two-third of GM’s newly launched models have been SUVs, and the sales are going strong. However, despite new launches, truck sales are yet to pick up to last year’s level, in all key markets.
Weakness in China
China accounted for more than half of the total vehicle sales in the Asia/Pacific, Middle East and Africa region at the end of the most recent quarter. Hence a weakness in China should be a major concern to the automaker, given the tumultuous nature of the industry in the home market.
Though GM’s Chinese unit is set to launch a slew of new vehicles in the second half of this year, unit sales are expected to be down with low industry deliveries.
With the auto industry evolving at a robust pace, companies are forced to flush out capital into the newest technologies such as electric-powered and autonomous vehicles. Not only does the automaker has to grapple with the higher expenses, but it also has to deal with the rising competition from established players as well as new entrants. Autonomous vehicles could be the key to sustained profits and GM had inked a partnership with Japanese rival Honda Motor Co (NYSE: HMC) to build shared autonomous vehicles. Yet this has not yet been a very productive partnership, as it has consistently trailed other rival partnerships – including Uber-Toyota and Alphabet-Lyft.
Possibility of a recession
The alarm bells of a recession have been ringing loud recently. Though we still don’t have a clear picture, the auto industry is one that gets hit really hard when the economy is down. People tend to delay the purchase of new cars, which dampens the industry as a whole.
A decent cash chest compared to rivals is a matter of relief to GM investors. But a recession would dent efforts going into innovation, which could have a butterfly effect when the market is back to strength. The management will need to have a clear contingency plan to take on a recession if such a scenario indeed happens.
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