Auto-parts industry avoids its predicted collapse

There have been and will continue to be shutdowns, but aid has stemmed tide

By: JournalNow Staff | THE ASSOCIATED PRESS
Published: June 16, 2009

DETROIT

Government aid and timely payments by General Motors, Ford and Chrysler have held off the predicted collapse of the nation's auto-parts supply base, but industry officials say that more bankruptcies are coming as the effects of Detroit's temporary factory closures continue to ripple through the economy.

Hundreds of companies large and small across the country make everything from bolts to axles to transmissions, shipping them to Detroit factories as well as those of foreign automakers with U.S. plants.

Some supply parts to others that make larger components, creating a chain of companies that many thought would snap if payments were interrupted to firms already under extreme financial stress because of the U.S. auto sales slump. Although there have been about 20 supplier bankruptcies so far this year, most suppliers have managed to hang on despite Chrysler Group LLC and General Motors Corp. entering bankruptcy protection and shuttering their factories for weeks to keep inventory under control.

"There was not the Armageddon that could have been there," said Chip McClure, chairman and CEO of supplier ArvinMeritor Inc., which makes parts for cars and heavy trucks.

Suppliers already were hurting when the U.S. auto market went into a funk starting last year, dropping to an annual selling rate of about 9 million after peaking at 17 million in mid-decade.

Many thought that the system would collapse because the automakers would be unable to keep making payments, but government cash infusions and payment guarantees for GM and Chrysler kept most suppliers afloat, said Dave Andrea, vice president of industry analysis and economics for the Original Equipment Suppliers Association.

Before filing for bankruptcy, GM made payments to suppliers early, which also helped cash-strapped companies avoid trouble, Andrea said.

Now, though, many are at risk of trouble again with GM and Chrysler temporarily shutting down some factories for as long as three months because of growing inventories. If the factories aren't running, suppliers have no income, and there's a 45-day lag between when they ship parts and when they are paid again.

"It isn't over yet," said Bob McKenna, president of the Motor Equipment Manufacturers Association, another industry trade group.

Large suppliers Visteon Corp., once a unit of Ford Motor Co. and that company's biggest supplier, and Metaldyne Corp. already have filed for Chapter 11. Barclays analyst Brian Johnson said in a note to investors yesterday that Lear Corp., which already has missed interest payments, is vulnerable for a bankruptcy protection filing by June 30.

Supplier trade groups are lobbying for $8 billion to $ 10 billion more in loan guarantees to suppliers to help them raise money to buy raw materials and pay employees as Chrysler and GM resume production. Without aid, they say, many cash-strapped suppliers won't make it.

Their groups met with members of the Obama administration's auto task force and lawmakers last week. Obama's task force created a $5 billion financing-support program in April to keep parts flowing for GM and Chrysler. It also provided government guarantees for financing parts that were already shipped to automakers but had not been paid for.

Lawmakers said last week that the administration had been assessing the $5 billion supplier-support program but were continuing to evaluate the industry after the GM bankruptcy. Sen. Debbie Stabenow, D-Mich., told reporters that some lawmakers were urging the administration to give more aid to the suppliers or offer help to smaller suppliers through the Small Business Administration.

"Suppliers are in a very tenuous situation right now," Stabenow said. "We have a very big stake in doing everything we can to support the suppliers."

McClure said that the total collapse of the supply chain, which employed more than 500,000 people nationwide last year, is not likely now, although more bankruptcies are coming, especially for companies that are more heavily dependent on GM and Chrysler. Chrysler reopened a Detroit factory on Monday and plans to restart more by the end of June.

"I do see more risk of that throughout the summer," he said. "I see something in between that is going to certainly stress it, but it is my clear hope that it's not a complete collapse."