General Motors (GM) and Ford face challenges in pursuing their ambitious electric vehicle (EV) development plans while ensuring returns for investors. The profitable sales of combustion trucks and SUVs fund these initiatives. However, analysts warn that the mounting costs resulting from the ongoing United Auto Workers (UAW) strikes and subsequent contract settlements pose a risk to these plans.
Analysts, such as Morgan Stanley's Adam Jonas, suggest that a 'portfolio cliff' could be imminent due to the financial impact of the ongoing strikes. While GM is set to report its third-quarter results on October 24, Ford will release theirs on October 26. GM has already projected a $200 million decline in third-quarter profits due to strike-related costs.
According to JP Morgan analyst Ryan Brinkman, the strikes have incurred more than $500 million in costs for both GM and Ford. On a daily basis, Ford is losing $44 million, while GM is losing $21 million. One of Ford's most globally profitable operations, the Kentucky Truck assembly plant, has been significantly affected by the UAW walkout ordered by UAW President Shawn Fain on October 11. This plant generates roughly $25 billion in revenue annually, amounting to $48,000 per minute.
While Ford spent $3.8 billion on dividends in the first half of this year, with plans to distribute 40% to 50% of free cash flow to investors annually, Fain argues that the automakers can afford to increase UAW wages. Fain highlights a 1,500% rise in the money spent on share buybacks by the Detroit Three in the past four years, emphasizing that the companies have the financial means for substantial wage increases.
Both GM and Ford have already scaled back their anticipated investments in EV and battery plants. In July, GM reduced its planned EV and battery plant spending for this year to between $11 billion and $12 billion, indicating a decrease from the previous estimate of $13 billion. Additionally, GM raised its cost-cutting target for the coming year by $1 billion.
Ford also reacted to the challenges posed by the UAW strikes by canceling a planned $3.5 billion battery plant in Marshall, Mich. Ford's President, Farley, suggested that further cuts to future product investments may occur if an unfavorable agreement is reached with the UAW.
Consequently, GM and Ford shares have experienced significant declines since July, reflecting the intensifying standoff with the UAW. Despite this, some investors, like Tim Piechowski of ACR Alpine Capital Research, remain optimistic that dividends and share buybacks can persist. However, concerns arise regarding the potential suspension of dividends or limitations on share buybacks if there is a full work stoppage.
To mitigate the impact of an expanded UAW strike, GM has established a new $6 billion credit line as a precautionary measure. Though investments in EVs are expected to continue, the challenge lies in avoiding the need to deplete cash reserves in the event of a prolonged work stoppage.