Tight credit, sales slump threaten auto suppliers
Automobile sales may be rebounding, but 2010 will be another tough year for American automotive suppliers.
The supply base collapse that many feared last fall may have been averted, but there is still too much capacity to meet the dramatically reduced demand for cars and trucks. And while production is expected to increase as the economy rebounds, many suppliers still are having a hard time securing the credit they need to keep their factories running.
I don't think we're out of the woods," said Tony Brown, Ford Motor Co.'s global head of purchasing. "We'll continue to see failures. There's still too much capacity. I am still concerned."
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Earlier this year, Ford and the other domestic automakers braced for what many feared could be a cascading collapse of their supply base as General Motors Co. and Chrysler Group LLC resumed production after an unprecedented shutdown of many of their North American factories.
While that should have been good news for suppliers, many had run out of money during the downtime. With credit markets still frozen, industry observers wondered how they would come up with the cash necessary to get their lines running again.
The crisis was largely averted when GM and Chrysler got permission from the federal government to accelerate payments to key suppliers and use money they had received from American taxpayers to do so. At the same time, Ford, which did not file for bankruptcy, also accelerated payments to some of its suppliers using its own money.
Even with that aid, many suppliers still failed.
According to the Original Equipment Suppliers Association, almost 60 sought bankruptcy protection this year, while as many as 200 simply turned of the lights and closed. But these failures did not stop the assembly lines at Ford, GM or Chrysler.
OESA President Neil De Koker said that the Obama administration has made it clear that such losses are not only acceptable, but part of a broader strategy to consolidate the U.S. supply base.
"Ron Bloom told us the government will not step in unless supplier failures threaten to disrupt production at one of the automakers," he said, referring to the president's car czar. "Bloom told us industry consolidation needs to happen. They think capacity needs to be reduced by 30 percent."
Washington rejected the OESA's request for $8.5 billion in loan guarantees earlier this year.
Like Brown, he thinks more suppliers will fail next year, but he doubts production at GM, Ford and Chrysler will increase fast enough to trigger a cascading collapse. Rather, De Koker sees another year filled with slow and painful deaths.
The OESA maintains an internal list of troubled suppliers, and De Koker said it is longer than ever.
"Suppliers are right on the edge financially," he said. "We will see more bankruptcies next year."
Credit remains the problem.
While banks have begun lending money again, most of that money is going to the largest suppliers. Some bankrupt suppliers also are getting financing from their debtors. For example, Ford agreed to provide at least $125 million in debtor-in-possession financing to Visteon Corp. after its former parts subsidiary filed for bankruptcy in May.
"The rest are still not getting access to working capital at the level they need," Brown said.
And De Koker said those that have secured financing are being charged higher interest rates.
"Lenders consider this whole industry to be high-risk," he said. "When money is tight, to pay more for it is horrible."
De Koker compared these suppliers to a cash-strapped worker who starts taking out high-interest payroll advance loans from a check-cashing store: They are never able to catch up and just sink deeper and deeper into debt.
But the tighter lending requirements are at least partly due to new rules imposed on banks by federal regulators in the wake of the Lehman Bros. collapse, said Brad Coulter, director at O'Keefe & Associates, a Bloomfield Hills-based turnaround firm that works with struggling suppliers.
"A lot of it is out of the control of the supply chain," he said.
That so many suppliers have survived 2009 is due largely to the tough austerity measures many have made, Coulter said. Some parts manufacturers have cut wages by as much as 30 percent. But he said many of those companies will be tested again over the next few months.
The automakers' annual holiday shutdowns make cash flows tight in January and February even in good years. This year, it is bound to make an already bad situation worse.
Meanwhile, some automakers are planning to boost production in anticipation of a modest recovery in U.S. car and truck sales. Ford is planning to more than double its factory output in the first quarter of 2010. GM is expected to increase production by more than 61 percent, while Chrysler's output is projected to be more than 58 percent ahead of the same period in 2009, according to Ward's Automotive Reports.
"It's still to be determined over the next year if companies bidding on new work can fund the work once they land it," Coulter said. "We will see a squeeze, but it won't be a dramatic collapse."
Still, a recovery can only be good news for the supply base -- and there are signs of improvement.
In November, GM announced that it would not need $140 million of the $290 million in federal aid earmarked for its suppliers.
"We didn't see as much of a need for it," said GM spokesman Alan Adler, noting that the number of distressed suppliers seeking aid from GM already has dropped from 375 to just 75, though he said that is partly because GM's government-approved restructuring plan calls for it to use far fewer suppliers.
Ford has been consolidating its own supply base since 2005 -- a strategy Brown said will help insulate the company from future disruption, which he considers all but inevitable.
"In my opinion, the can is just being kicked down the road," Brown said. "If there's ever another shock to the system, it won't take long for us to find ourselves right back where we were."
Source: Tight credit, sales slump threaten auto suppliers
The supply base collapse that many feared last fall may have been averted, but there is still too much capacity to meet the dramatically reduced demand for cars and trucks. And while production is expected to increase as the economy rebounds, many suppliers still are having a hard time securing the credit they need to keep their factories running.
I don't think we're out of the woods," said Tony Brown, Ford Motor Co.'s global head of purchasing. "We'll continue to see failures. There's still too much capacity. I am still concerned."
Advertisement
Earlier this year, Ford and the other domestic automakers braced for what many feared could be a cascading collapse of their supply base as General Motors Co. and Chrysler Group LLC resumed production after an unprecedented shutdown of many of their North American factories.
While that should have been good news for suppliers, many had run out of money during the downtime. With credit markets still frozen, industry observers wondered how they would come up with the cash necessary to get their lines running again.
The crisis was largely averted when GM and Chrysler got permission from the federal government to accelerate payments to key suppliers and use money they had received from American taxpayers to do so. At the same time, Ford, which did not file for bankruptcy, also accelerated payments to some of its suppliers using its own money.
Even with that aid, many suppliers still failed.
According to the Original Equipment Suppliers Association, almost 60 sought bankruptcy protection this year, while as many as 200 simply turned of the lights and closed. But these failures did not stop the assembly lines at Ford, GM or Chrysler.
OESA President Neil De Koker said that the Obama administration has made it clear that such losses are not only acceptable, but part of a broader strategy to consolidate the U.S. supply base.
"Ron Bloom told us the government will not step in unless supplier failures threaten to disrupt production at one of the automakers," he said, referring to the president's car czar. "Bloom told us industry consolidation needs to happen. They think capacity needs to be reduced by 30 percent."
Washington rejected the OESA's request for $8.5 billion in loan guarantees earlier this year.
Like Brown, he thinks more suppliers will fail next year, but he doubts production at GM, Ford and Chrysler will increase fast enough to trigger a cascading collapse. Rather, De Koker sees another year filled with slow and painful deaths.
The OESA maintains an internal list of troubled suppliers, and De Koker said it is longer than ever.
"Suppliers are right on the edge financially," he said. "We will see more bankruptcies next year."
Credit remains the problem.
While banks have begun lending money again, most of that money is going to the largest suppliers. Some bankrupt suppliers also are getting financing from their debtors. For example, Ford agreed to provide at least $125 million in debtor-in-possession financing to Visteon Corp. after its former parts subsidiary filed for bankruptcy in May.
"The rest are still not getting access to working capital at the level they need," Brown said.
And De Koker said those that have secured financing are being charged higher interest rates.
"Lenders consider this whole industry to be high-risk," he said. "When money is tight, to pay more for it is horrible."
De Koker compared these suppliers to a cash-strapped worker who starts taking out high-interest payroll advance loans from a check-cashing store: They are never able to catch up and just sink deeper and deeper into debt.
But the tighter lending requirements are at least partly due to new rules imposed on banks by federal regulators in the wake of the Lehman Bros. collapse, said Brad Coulter, director at O'Keefe & Associates, a Bloomfield Hills-based turnaround firm that works with struggling suppliers.
"A lot of it is out of the control of the supply chain," he said.
That so many suppliers have survived 2009 is due largely to the tough austerity measures many have made, Coulter said. Some parts manufacturers have cut wages by as much as 30 percent. But he said many of those companies will be tested again over the next few months.
The automakers' annual holiday shutdowns make cash flows tight in January and February even in good years. This year, it is bound to make an already bad situation worse.
Meanwhile, some automakers are planning to boost production in anticipation of a modest recovery in U.S. car and truck sales. Ford is planning to more than double its factory output in the first quarter of 2010. GM is expected to increase production by more than 61 percent, while Chrysler's output is projected to be more than 58 percent ahead of the same period in 2009, according to Ward's Automotive Reports.
"It's still to be determined over the next year if companies bidding on new work can fund the work once they land it," Coulter said. "We will see a squeeze, but it won't be a dramatic collapse."
Still, a recovery can only be good news for the supply base -- and there are signs of improvement.
In November, GM announced that it would not need $140 million of the $290 million in federal aid earmarked for its suppliers.
"We didn't see as much of a need for it," said GM spokesman Alan Adler, noting that the number of distressed suppliers seeking aid from GM already has dropped from 375 to just 75, though he said that is partly because GM's government-approved restructuring plan calls for it to use far fewer suppliers.
Ford has been consolidating its own supply base since 2005 -- a strategy Brown said will help insulate the company from future disruption, which he considers all but inevitable.
"In my opinion, the can is just being kicked down the road," Brown said. "If there's ever another shock to the system, it won't take long for us to find ourselves right back where we were."
Source: Tight credit, sales slump threaten auto suppliers
