Automakers are facing an uphill battle as inventory piles up and workers threaten to go on strike

• After a few years of smooth-sailing, Detroit automakers are coming up against several challenges.
• A possible UAW strike, supply chain hurdles, and inventory building up threaten carmakers' peace.

The peace that Detroit automakers have had over the past several months is getting interrupted — and car buyers and investors should brace themselves.

When the pandemic began, carmakers faced a rocky road. Supply chain constraints, especially with regard to computer chips, limited their ability to produce enough vehicles to keep up with demand.

But as COVID went on, companies realized buyers were willing to pay premiums for new and used vehicles. The lack of inventory was challenging, but their businesses did well; despite sales being down, the industry booked massive profits. Dealers had it great, barely holding onto vehicles on their lots and charging well above MSRP. Plus, the chip shortage, while it remains a concern, lessened.

Once that all happened, carmakers had it relatively smooth-sailing. But it didn't last long.

Car companies, particularly the Detroit ones, are now facing a barrage of challenges as we look toward the fall.

Between dealer tensions, a potential United Auto Workers strike, and parts makers struggling, automakers face a rough time ahead.

First, inventory is stacking up on some dealership lots

While the national average for days' supply of inventory hovered around 53 at the end of June, many of the Detroit 3 brands had more, according to data from Cox Automotive. Ford was sitting on 75 days, Stellantis brands Chrysler and Dodge had 97 and 95, respectively, and GM brands GMC and Buick had 62 and 102.

And with interest rates as high as they are, dealers aren't happy about paying more to hold onto those cars through floor plan expenses. Dealers got used to charging above sticker price and not offering incentives, but that's starting to no longer be the case. Prices are just starting to stabilize, too.

The inventory piece is especially true for EVs. The more automakers require massive EV investments out of their dealers, the more tension builds — particularly if dealers don't see a quick return on investment in the form of EV purchases.

Having to spend $1 million dollars or more on EV charging infrastructure investments, even with inventory building up and no remedy in sight, is leaving a bad taste in many dealers' mouths. About 27 EV models have average inventories of 1,000 or more on a given day thus far this quarter — up substantially from the two to six EVs that saw that same high inventory between Q3 2021 and Q3 2022, according to data firm CloudTheory. It's a function of bolstered production combined with flat demand.

In this case, car buyers might stand to benefit.

Second, Detroit 3 union workers are gearing up for a strike

A strike could threaten those companies' success in the latter half of the year.

"The union could really derail things for Ford and GM," Martin French, managing director at consultancy Berylls, told Insider last month.

A strike could impact earnings by $400 million to $500 million per week of production for each automaker, for a total of $1.4 billion per week, Deutsche Bank estimated in a note to clients. If the work stoppage lasts eight weeks — not unlikely, given UAW demands, the analysts said — the Detroit 3 are looking at $11.2 billion in lost profits.

Investors should beware.

"US autos stocks could come under further pressure over the next month, as investors worry about the eventual cost of the labor agreement for the automakers, and the impact from potential labor strike on [automakers] and suppliers alike," the note said.

Car buyers, too, could be negatively impacted. If automakers are trying to stockpile vehicles ahead of a possible stoppage, they may be less incentivized to offer deals on them now, Kelley Blue Book suggests — and when the time comes for a strike, a supply-and-demand crunch is likely to hit again.

Third, automakers' parts suppliers are going through it

Not only would a labor strike trickle down to impact these parts companies, but many are already struggling with the shift to electrification.

It's challenging for suppliers to gauge where exactly to allocate their resources — whether the gas-powered business, EVs, or both.

Meanwhile, they're having to take on other workforce constraints, inflationary costs, and debt piling on, largely due to fixed contracts with automaker customers, giving suppliers the short end of the stick.

"Suppliers are walking a tightrope," Peter Maithel, auto industry principal analyst at Infor, said in July. As EV adoption is still only creeping up, he said, "I think everyone is sort of watching with caution."