It wasn’t so much Chrysler’s Chapter 11 bankruptcy filing that stunned suppliers last week, it was the news that beginning May 4 Chrysler is suspending production at all of its United States and Canadian plants while the company is in “surgical” bankruptcy. SupplierBusiness reports.

For suppliers, that means at least 60 days without income from either Chrysler or General Motors, which plans to shut down for nine weeks this summer instead of the usual two week model changeover.

The impact will be cataclysmic for companies unless the U.S. government takes extraordinary measures — well beyond the US$5 billion it has already allocated for supplier aid.

Standard & Poor’s Ratings Services immediately placed six suppliers on CreditWatch with negative implications. The companies are: Harman International Industries Inc., Johnson Controls Inc., Magna International Inc., Shiloh Industries Inc., Stoneridge Inc. and TRW Automotive Inc.

S&P said Chrysler filing will “result in lower vehicle production in the near term, even compared to what we believe have been very low levels thus far in 2009.”

But the S&P Six may be on the beginning. Chrysler purchasing chief Scott Garberding, said: “Without a clear timeline for when the [bankruptcy] situation will end and production will resume, I believe we will see massive supplier bankruptcies that will stop Chrysler from resuming production,”

According to Standard & Poor’s: “In our opinion, a number of smaller, Tier II suppliers could fail because of the Chrysler bankruptcy filing or the extended assembly plant shutdowns being planned by GM for the next several months, even if GM avoids a bankruptcy filing. This could pose a problem for suppliers that purchase parts from these smaller suppliers, or even indirectly force automakers to temporarily idle some plants.”

On May 4, the New York bankruptcy court is scheduled to hear a Chrysler motion that would permit some suppliers to be deemed “essential” and thus eligible for immediate payment of Chrysler receivables. As unsecured creditors, or non-essential suppliers, suppliers would be paid only a fraction of what they are owed.

Chrysler has also requested that some recent shipments be handled as administrative claims, allowing the suppliers to get paid quickly.

After Chrysler’s filing several Tier 1 suppliers halted immediately shipments to Chrysler.

Chrysler expects suppliers to be paid from the U.S. Treasury’s US$5 billion Supplier Support Program. But supplier executives say the amount will not be nearly enough.

What’s needed, they say, is a huge additional outlay for suppliers without the conditions put on the US$5 billion — and without going through the complicated process of identifying which suppliers are critical for support and which are not.

Under the current government program, suppliers can get a guarantee of the funds owed if they pay 2 percent of the amount they are owed by the vehicle manufacturer, enabling them to get bank funding. By paying a 3 percent fee, the supplier can get the money directly from the US$5 billion fund.

Suppliers may be forced to seek special help from other customers to survive. Many are already seeking assistance from Ford.

Already, other automakers are stockpiling parts to guard against supply chain interruptions caused by supplier failures. Others have found duplicate sources for critical components. And all have master plans to stick with the survivors even as weaker companies fail.

But Standard & Poor’s cited “systemic risks” from “the interconnectedness of the North American supply base.”

GM’s plan to shut down for nine weeks this summer had already begun to trigger demands by lenders for immediate repayment of their loans to hundreds of suppliers. The Chrysler and GM shutdowns come on the heels of the Detroit Three’s closure of factories in December, January and February. Hundreds of suppliers are already pushed to the breaking point.

This article was supplied to just-auto by SupplierBusiness.