GM and Chrysler have been stretching payables, which means that many auto parts suppliers are in dire cash flow straits. And if auto parts makers fail, it doesn’t hurt just the Detroit car makers, but the foreign transplants as well.
From the New York Times:
With Congress failing to agree on a bailout for Detroit, the odds that General Motors and Chrysler will be insolvent by year’s end are growing rapidly…
As a result, the hypotheticals about the domino effect of the companies’ troubles through the vast network of auto supplier firms — which employ more than twice as many workers as the carmakers — are becoming real.
General Motors and Chrysler, for example, owe their suppliers a total of roughly $10 billion for parts that have been delivered. G.M. has held off paying them for weeks, and Chrysler is paying in small increments. But the cash shortages at G.M. and Chrysler are getting more severe, according to their top executives and other officials….
Many of their suppliers are teetering on the verge of bankruptcy themselves, and do not have the luxury of extending credit much longer.
“I don’t think that suppliers will be able to get through the month without continued payments on their receivables,” said Neil De Koker, chief executive of the Original Equipment Suppliers Association in Troy, Mich., a trade group.
When suppliers big and small start failing, the flow of parts to every automaker in the country will be disrupted because as suppliers typically sell their products to both American and foreign brands with plants in the United States.
“There’s no question it will hit Toyota, Honda and Nissan too,” said John Casesa, principal in the auto consulting firm Casesa Shapiro Group.
“Many of the small suppliers will simply liquidate because they don’t have the resources to go reorganize in Chapter 11 bankruptcy,” Mr. Casesa said. “They’ll just go away.”
It is the dire scene laid out at the first set of Congressional hearings on an auto bailout in mid-November by Ford’s chief executive, Alan R. Mulally.
“Should one of our domestic competitors declare bankruptcy, the effect on Ford’s production operations would be felt within days, if not hours,” Mr. Mulally said….
In years past, suppliers have often been able to assist a troubled automaker by extending payment periods to get through tough times.
But by Mr. De Koker’s estimation, hundreds of suppliers no longer have that flexibility. They cannot borrow money in a frozen credit market, and they cannot buy raw materials without first being paid for parts they already shipped.
The Big Three, along with their foreign competitors, are what most people think make up the entire auto industry. But the car manufacturers are just the top of the pyramid.
While G.M., Ford and Chrysler employ 239,000 people in the United States, the country’s 3,000 or so auto suppliers have more than 600,000 workers…
Like the Big Three, most of the bigger suppliers have been restructuring their operations drastically to match the shrinking demand for new vehicles…
“Most of the suppliers are not highly waged; they have no big pensions,” Mr. Timothy] Leuliette [CEO of Dura Automotive] said. “People affected by all this are just the average Joes. Washington has a myopic view of the auto industry. They just think of the Big Three and don’t think of us.”
Suppliers make most of the 15,000 parts that go into a single car. More than 70 percent of a car’s value — from the seats to the chassis, from the electronics to the bumpers — are sold to the automakers by suppliers.
Since 2004, the supplier workforce has fallen by 23 percent from 783,000, according to the Original Equipment Suppliers Association.