With both GM and Chrysler back on recovery track after a quick restructuring under Chapter 11, will the US automotive taskforce turn its focus on the struggling suppliers? SupplierBusiness reports
Although the two automakers are freshly out from the bankruptcy, how they fare in coming months depends much of the overall health of their supply base. Interruption of operations at any major supplier could severely disrupt the supply chain, bringing their assembly operations to a grinding halt. At the same time, the fragile financial health of tier-2 and tier-3 suppliers could affect tier-1 suppliers’ business.
In past the domestic supplier industry has not received similar attention as “Detroit Three”. The US$139bn supplier industry employs 600,000 people, more than all the automakers in the US put together. In fact, there are five jobs at suppliers for every single job at an automaker’s assembly line. However, the federal government rejected an additional bailout demand of US$8–10bn last month.
Although in March 2009 The Treasury Department passed a US$5bn Supplier Support Program, this was far below the industry’s requested figure of US$18.5bn. In addition, The fund, which is being channeled through GM and Chrysler, has made very little impact with very few suppliers receiving payments. Only US$1.4bn of that fund has been utilised so far.
Among other things, the program suffers from complications. Only suppliers handpicked by the two automakers will be eligible for assistance. While 320 suppliers of GM benefited from the program, in case of Chrysler the number of beneficiaries have totaled just 50. In addition, it only guaranteed money owed for the parts that have already been shipped. A more simplified direct funding would have been more beneficial to suppliers. Higher user charges of 2–3% also make this an expensive affair. Some lawmakers are urging the government to reduce the fee so that more suppliers can get aid.
The temporary closures of facilities by GM and Chrysler have further worsened the conditions at the suppliers, severely impacting their receivables and cash flows. Now as most of these OEM’s facilities resume operations, the suppliers face an unprecedented crunch of working capital, needed to buy raw material and to hire back workers.
Some major suppliers in the US have failed to make interest payments and sought waiver extensions. Cooper-Standard Automotive’s 30 days grace period on interest payment on the Senior Notes and Senior Subordinate Notes ended last week. Although the company managed to receive another extension for few more weeks to continue discussions with its lenders to improve capital structure, it reflects how difficult the situation has become. Standard & Poor’s, which downgraded the company’s rating following the deferment of payment, doubts the company’s ability to renegotiate with its lenders and fears that it may pursue a distressed exchange or file for bankruptcy under Chapter 11.
American Axle, which generated 84% of 2008 sales from GM and Chrysler, received waiver and extension from lenders until the end of July 2009, the second time in eight months. Some analysts predict that American Axle will be the next major company to file for Chapter 11 after car interior and seating supplier Lear filed for bankruptcy at the beginning of this month. Other major suppliers, including TRW, Tenneco and Cooper Tire, are also believed to be on a sinking ship. Since last year 21 major suppliers have sought bankruptcy protection.
In March 2009, A.T. Kearney cautioned that as many as half of the tier-1 suppliers in the U.S. may be forced to seek bankruptcy protection, leading to one million additional job losses and an estimated US$9bn shortfall in income tax revenue if market conditions do not improve. What the industry fears the most is Chapter 7 bankruptcy which results in liquidation, unlike Chapter 11 which allows the concerned company to continue operations and restructuring.
The government is of the opinion that relatively healthy US automakers will be in a position to take care of suppliers once production starts and suppliers receive timely payment for components shipped. The government does not seem to be concerned about suppliers going bankrupt, but wants to avoid only any uncontrolled supply chain interruption. The US government has made it clear that it cannot save every company and favours the inevitable consolidation instead. In addition, if a supplier is critical to the supply chain of an OEM, the latter will ensure that former continues to remain in business. GM has assisted its several key suppliers in the past, including Delphi and American Axle. GM is also working on smooth sales of Delphi’s global business.
The government also believes that private capital, which is on recovery path, is working its way back to the system. Lenders are coming forward to help suppliers if they believe that a company is worth more as a going concern than liquidating its assets. The government’s confidence received a boost when Lear successfully arranged a debtor-in-possession (DIP) financing of US$500m from JP Morgan and Citigroup even before filing Chapter 11.
Meanwhile, some states in the US have come forward and started pressurising the federal government for aid to the supplier chain. The Michigan Economic Development Corporation (MEDC) has requested the federal government allow it to use about US$2bn from the Trouble Asset Relief Program (TARP) to augment US$32m in state funding to help suppliers obtain loans. The MEDC has come out with a plan that will partly fund those small suppliers who fail to receive sufficient loan from the banks.
Last week, Steven Rattner stepped down as the head of the automotive taskforce after swiftly completing the restructuring at GM and Chrysler. He has been replaced by Ron Bloom, who earlier turned down the industry request for additional aid. With most of the work done, there is also report that the taskforce will be dissolved in next six weeks. But before that, it will have to reconsider its stance and provide any aid to this struggling industry.
This article was supplied to just-auto by SupplierBusiness, an IHS Global Insight company.