A summer of automotive supply chain bankruptcies is possible

The bankruptcies of Chrysler and, now, General Motors will trigger a major restructuring and reduction in force of an already fragile supply base, according to an auto parts industry procurement chief who is working to ensure his suppliers stay afloat during the transition.

“The bankruptcies have created an enormous distrust among the supply base as companies try to determine if they will remain suppliers to the two bankrupt automakers or have the financial wherewithal to stay in business in a smaller motor vehicle marketplace,” says the chief procurement officer, who declined to be identified.

Noting that while his firm doesn’t supply either of the bankrupt firms, he has initiated a major risk management study of his supply base to ensure a continue flow of parts and components. “There’s only room for so many ‘key suppliers’ to the auto industry and the decimation of the GM and Chrysler purchasing organizations means that a lot of suppliers will be gone by the end of this summer,” he says in a telephone interview .

An analysis of the supply base by IHS Global Insight economists notes that Visteon, Hayes-Lemmerz and Metaldyne already have filed for bankruptcy in the past two weeks and Delphi has teetered on the brink of liquidation. So, “production blackout by Chrysler during its bankruptcy and a nine-week shutdown at GM this summer means fractional revenues for the North American supply base until late July at the earliest.” So, with North American vehicle production being dramatically reduced, more U.S. suppliers--from die casters to metals service centers, from stamping plants to components manufacturers, from injection molders to systems fabricators--will shut their doors, says the CPO.

Noboby doubts that this summer will be traumatic for suppliers. The U.S. government's $5 billion bailout program for the supply base has done little to bring relief – in part because of the extreme complexity of the payout system. The situation is critical, even if Chrysler and GM Chapter 11 filings turn out to be quick and clean. “There'll be a series of supplier bankruptcies,” according to a series of comments by Kirk Ludtke, an investment adviser with CRT Capital Group in Stamford, Conn.

However, many suppliers aren’t declaring bankruptcy yet, according to the Global Insight report, precisely because carmakers aren’t producing. “When GM and Chrysler assembly plants resume output, and the parts makers require working capital, banks will resist, industry insiders predict, and that’s when the dominoes will begin to fall.”

The CPO agrees with the analysis that whenever demand increases, suppliers will need cash to accelerate and maintain their operations. Altogether, parts makers will need cash injections of up to $33.5 billion over the next four years to avoid a rush of bankruptcies, according to an A.T. Kearney Inc. study. The study projects that U.S. suppliers as a group will lose $23.7 billion in 2009 and won't be profitable as until 2011.

In the interview, the parts company CPO says this means that “there will have to be a lot of CFO to CFO, COPO to CPO and manufacturing executive to manufacturing executive communication to keep the auto industry’s supply base from collapsing.”
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