The Auto Industry's Other Crisis
When it comes to the auto industry's woes, most of the focus has been on the survival of General Motors (GM) and Chrysler. But many of the nation's auto-parts firms are on equally precarious ground.
A leading industry consultancy on Mar. 12 rang alarm bells when it said that unless the White House helps prop up auto supplier companies there will be a cascade of failures and bankruptcies in the next 90 days. A slew of failures like that could take down the automakers, including Ford (F), which has not borrowed government money yet.
Grant Thornton International warned that more than 500 auto suppliers across the U.S. are on the brink of failure. The liquidity crunch and the sharp downturn in auto sales have put them in a bind. "We have a crisis forming that is more immediate than a Chapter 11 filing of either GM or Chrysler," said Grant Thornton partner Laura Marcero.
The firm declined to name the most vulnerable parts firms.
Dozens of mostly small suppliers with revenues of less than $250 million a year have already shut their doors since the start of the year, Marcero said. Grant Thornton is one of the firms that had been tapped for advice by President Barack Obama's auto industry task force on the fragile state of the parts makers.
The firm is advocating that the automakers, supplier companies, and the White House start to hash out a managed consolidation of auto suppliers to prevent a "calamitous domino" effect of failures that could result in shutdowns of auto plants, worsening the already perilous state of the industry.
Parts Makers' Credit Lines Cut Back
Marcero says the nearest-term remedy is for the U.S. Treasury Dept. to provide $10 billion in near-term liquidity, and then to backstop banks that have cut back credit lines extended to the companies. In many cases banks are providing less than 50% of their receivables and inventory in short-term credit lines. Government guarantees could raise that to 90% and head off hundreds of failures.
"Right now the companies are headed into a brick wall at 90 mph," said Marcero, who made her remarks in Detroit at the Automotive Press Assn.
Grant Thornton has also advised the White House that it should do more to stimulate new car sales, including the tax deductibility of sales tax and auto loan interest. Auto industry sales are now tracking at around 9 million for 2009, which is below the rate at which old cars and trucks are scrapped. Marcero says that industry sales need to return to 11 million a year as soon as possible to avert too many corporate failures.
Suppliers have already been talking to the Treasury Dept. about some assistance programs. The Motor & Equipment Manufacturers Assn. on Feb. 2 submitted a request to Treasury for some help.
The suppliers group estimated that payments from Detroit's Big Three automakers to the parts firms fell to $2.4 billion this month, from a monthly average of $8.4 billion in the fourth quarter of 2008.
$18.5 Billion Requested for Auto Suppliers
In fact, the Original Equipment Suppliers Assn., another trade group representing parts makers, continues to talk to the Treasury Dept., says Neil De Koker, president and CEO of the group. The joint groups representing parts makers have met with Ron Bloom of the President's auto task force and members of the National Economic Council in recent weeks, says a source close to the talks. They have asked for $18.5 billion for the parts makers. The group also estimates that GM and Chrysler would need access to $7 billion to be able to pay suppliers on a 10-day basis instead of 45 days or more. The faster payments would help them pay their bills on time. Meanwhile, GM said it didn't need $2 billion in credit from the Treasury this month since cost cuts have helped conserve cash. But the company still wants access to as much as $30 billion in loans that it has requested from the Treasury Dept.
In their proposal made last month, the suppliers asked that the government help guarantee loans to suppliers to get banks to lend again.
The parts firms also pointed out that about 60% of the suppliers to the Big Three also sell parts to the North American plants operated by Asian carmakers. That puts the Obama Administration in a tough spot. Americans are growing weary of bailouts, especially for Detroit. But failure to help the parts business could send hundreds of thousands of more workers to the unemployment line.
Waste of an Automakers' Bailout?
Grant Thornton is also calling for the White House, automakers, and the CEOs of supplier companies to come together and organize a "rapid and orderly" consolidation of auto suppliers. "They need to come together and figure out some winners and losers," said Marcero.
Still, there is growing concern that the loans already made to GM and Chrysler, as well as the billions more being requested, could be wasted if the auto suppliers aren't helped now. Indeed, Ford officials, according to sources, have told the White House task force that a series of failures among auto suppliers could not only hasten the failures of GM and Chrysler, but also take Ford down, as well.
That is because many auto suppliers can't get adequate funding to pursue Chapter 11 bankruptcy, which would allow them to keep operating. Dozens of lower-level suppliers, mostly doing under $250 million a year in sales, have closed their doors with little warning in the last few months. A mass liquidation of auto suppliers would disrupt with little warning the production of the cars and trucks that are still selling to U.S. customers, and push the already fragile revenue stream at GM, Chrysler, and Ford down to levels that could push all three into failure.