Autos

Shelly Banjo is a Bloomberg Gadfly columnist covering industrial companies and conglomerates. She previously was a reporter at Quartz and the Wall Street Journal.

There's no doubt the unprecedented recall of 100 million defective air bags made by Takata Corp., linked to more than a dozen deaths, punctured the reputations of Toyota Motor Corp. and other carmakers.

It also forced some of these companies to cough up $553 million to resolve loss claims, so far. 

For all that, these frenemies have a vested interest in keeping Takata alive.

Abrupt Stop
Takata shares were suspended on the Tokyo stock exchange pending an expected bankruptcy
Source: Bloomberg

Carmakers want to sustain Takata for the same reason clothing manufacturers and mall owners have kept American department store Sears Holdings Corp. on life support years after it stopped booking profits, and why governments have spent billions to bail out banks deemed too big to fail.

Like those companies, Takata is an important cog in an interdependent global supply chain: It's the second-largest producer of air bags around the world, not to mention the seat belts, steering wheels and other parts that account for two-thirds of its $6 billion in annual revenue.

Wiping Takata off the map could seriously disrupt the intricate, just-in-time operations of global automakers (it's not as easy as you might think to quickly switch suppliers). That would also drive further consolidation among car parts makers, which could lead to higher prices for vehicle manufacturers and ultimately, consumers. 

Taking the Air Out
Takata was the second-largest air-bag maker by global market share in 2016
Source: IHS Markit

To avoid that, Takata's customers, the carmakers, are going to have to pony up even more money to bail out the parts supplier.

Takata has agreed to pay U.S. regulators, consumers and car manufacturers $1 billion in penalties. Plus, it will have to cover the costs of replacing more than 100 million air bags. Estimates for how much that will cost vary wildly, running from $3.5 billion to $24 billion. For some perspective, the company has only $700 million in cash and cash equivalents. Total assets were $3.9 billion as of March 31.

Not in the Bag
Takata doesn't have nearly enough cash to cover all the recall costs related to its gigantic airbag recall
Source: Bloomberg

Takata has been trying to stave off bankruptcy for months because if the process gets messy, which it probably will, it could interfere with the most important thing sustaining the company's asset value: its production lines. Yet on Friday, Bloomberg News reported that Takata could file for bankruptcy as early as next week.

The bulk of the company is expected to end up in the hands of Key Safety Systems Inc., the U.S. auto parts supplier owned by China's Ningbo Joyson Electronic Corp., which could pay $1.8 billion for parts of Takata's operations. 

Ningbo Joyson is owned by Chinese billionaire Wang Jianfeng and has been on an acquisition spree of parts suppliers around the world. Buying Takata, despite the headaches and the potential of overpaying for a hurting enterprise, could vault Key Safety into the second-largest supplier of air bags in the world, benefiting Wang's wider auto parts empire.

Still, even with certain liabilities canceled out in bankruptcy, and a cash infusion from Key Safety, it's unclear how Takata reaches that eye-popping $24 billion number for which it might be on the hook. It's going to need a little bit more help from its friends. Er, frenemies.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Shelly Banjo in Hong Kong at sbanjo@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net