By Timothy Aeppel

Jeffrey Aznavorian has already cut output about 6% at his small auto parts factory outside Detroit due to the United Auto Workers strike. But he is bracing for it to get worse.

Much worse.

The union, which initiated strikes at three plants last week, one of each owned by Ford, General Motors, and Chrysler parent Stellantis, on Friday announced it would expand the action to 38 parts distribution facilities in 20 states owned by GM and Stellantis. The union said it was not expanding its action against Ford, because the parties had made progress in talks.

The first week of the strike was costly. Michigan economic consulting firm Anderson Economic Group LLC estimates total economic losses have totaled over $1.6 billion so far, largely concentrated in the handful of areas where strike actions or layoffs have already occurred.

The expanded strike will ricochet through the industry's vast supplier networks.

It comes at a time when the U.S. job market has cooled but remains robust. The number of Americans filing new claims for unemployment benefits dropped to an eight-month low last week. But a rebound in jobless claims is expected in coming weeks as the strike forces auto manufacturers and their suppliers to temporarily lay off workers.

Some producers are already doing it. Auto parts maker CIE Newcor, a subsidiary of Spain’s CIE Automotive, notified workers last week that it would temporarily lay off 300 workers at four Michigan plants, starting Oct. 2, due to the strike.

The supply base for the Detroit Three, as they’re called, reaches deep into the economy, especially in the upper Midwest, and touches everything from chemical and metal producers to electronics.

U.S. Steel on Tuesday said it would idle its only operating blast furnace at a plant in Illinois due to an anticipated drop in demand from the auto industry during the strike. In a statement, the Pittsburgh steelmaker said it was “executing our risk mitigation plan” - but declined to say how many workers would be affected.

RISKS AHEAD

Industry analysts and smaller producers interviewed by Reuters said an expanded or prolonged strike could do permanent damage to the industry’s network of 5,600 mostly small or mid-size suppliers, which employ an estimated 660,000 workers.

"A lot of these companies were just starting to get their legs underneath them again" after COVID and semiconductor chip shortages, said Laurie Harbour, CEO of Harbour Results Inc., a manufacturing advisory firm in Southfield, Michigan.

If the strike expands, it would only be a matter of weeks before some smaller suppliers faltered, said Marick Masters, a professor of business at Wayne State University.

"Many of them would find it very difficult to survive that," he said. "Certainly, they would have to lay off workers - it’s just a question of how long they could go without revenue." He estimates 30% of smaller suppliers carry too much debt to survive a long strike.

Other measures also point to a supply base that was strained even before the strike. James Gellert, executive chairman of RapidRatings, a financial analytics firm, said the automakers and their largest suppliers are relatively healthy. But moving deeper into the supply chain, "we find smaller, mostly private companies that rely on limited sources of capital."

Gellert noted that many of these firms depleted their cash reserves during the pandemic. And now, with higher interest rates and tougher borrowing conditions from banks, many of them are vulnerable.

RapidRatings calculates "core health scores" for privately owned auto parts companies - based on a 100-point scale - which looks at their returns, cost structures, and capital structure. That gauge deteriorated 10.7%, from 39.7 to 35.4, over the past year.

Back at Aznavorian’s company, Clips & Clamps Industries in Plymouth, Michigan, it’s "still business as usual," he said. However, he added, he is ready to start "sleeping at the factory" if that is what it takes to minimize disruptions and keep production going whatever the fallout from the strike.

(Reporting by Timothy Aeppel; Editing by Andrea Ricci)