Auto suppliers getting $5 billion in assistance
By deciding to give as much as $5 billion to struggling auto parts suppliers, the government could help keep afloat dozens of the companies that provide the seats, pistons and thousands of other components needed to assemble a car.
But Thursday’s announcement also sent a strong signal that the Obama administration would pony up even more bailout money to General Motors Corp. and Chrysler.
The Treasury Department’s Supplier Support Program will allow parts makers to be paid more rapidly, stabilizing their books and making it easier for them to seek outside financing.
Though the aid package is less than one-third of the $18.5 billion that suppliers requested last month, it comes as welcome relief for suppliers who have complained of delayed or halted payments from automakers, raising concerns that some could go bankrupt as a result. In turn it would bolster smaller companies, lower in the automotive food chain, that sell materials to larger parts makers.
All told, the initiative aims to protect the more than 500,000 workers employed in the supplier industry.
But in structuring the program to funnel the money through U.S. automakers -- effectively giving GM and Chrysler the power to decide which suppliers will receive aid -- the government seems to be telegraphing its intention to keep those carmakers solvent, analysts said.
“If they weren’t going to step up and do something for Chrysler and GM, why would they do something for their suppliers?” said Shelly Lombard, auto industry analyst at debt research firm Gimme Credit. “I think this is a sign that they’ll continue to support these guys.”
Last month, the two Detroit companies requested $21.6 billion in addition to the $17.4 billion in bailout loans they have already received, saying that without help they would be forced to file for bankruptcy protection.
Less than two weeks remain before the government-imposed March 31 deadline to decide whether GM and Chrysler will continue to receive support. An auto bailout task force reporting to President Obama has been meeting regularly with auto officials, including suppliers, but has not tipped its hand on what it plans.
As conditions of their original government loans, GM and Chrysler were instructed to reduce their unsecured debt and renegotiate billions of dollars in cash obligations to a retiree healthcare fund managed by the United Auto Workers union. Neither has worked out any deals. The government has reserved the right to call back the loans, which would trigger a bankruptcy filing, should it be unsatisfied with progress.
But with the economy continuing to struggle, the political costs of forcing either or both of the automakers into bankruptcy could be huge, even with the public increasingly impatient with bailouts.
Conversely, if critical suppliers failed, the automakers would be unable to produce more vehicles.
“The administration is clearly saying that there’s more than a little interest in the future of the industry,” said Jim Hall, principal of industry consultant 2953 Analytics. “They know that if you take any one of the Big Three into bankruptcy, you’d bring down the entire industry.”
Hundreds of thousands, if not millions, of jobs would go with it, experts contend.
Ford Motor Co., which has not requested any federal loans, said Thursday that it would not participate in the Supplier Support Program, maintaining that it has enough liquidity to pay its suppliers.
But with total industry sales in the U.S. down 40% through February compared with last year, and sales by domestic carmakers falling 49% in that time, revenue is declining too fast for GM and Chrysler.
Both have substantially altered the way they pay their suppliers in recent months as their own cash positions have declined, delaying full payment for up to 140 days after delivery, according to some vendors.
With payments coming in late, or in some cases not at all, suppliers find they cannot borrow money from lenders, and in turn are delaying payment to the companies that provide materials and other components to them.
As a result, more than 40 suppliers declared bankruptcy in 2008, and dozens more face the same fate. In recent weeks, several of the largest suppliers, including Lear Corp., which specializes in seats, have received notice from their accountants that they are not expected to be able to continue as a “going concern.”
“This program comes at a very critical time and will help suppliers as they struggle to continue operations,” said Neil De Koker, president of the Original Equipment Suppliers Assn.
In sending the parts makers aid through GM and Chrysler, the government is allowing the automakers to prop up the suppliers that are most critical to their operations, and most likely to weather the down economy. That prevents the government from playing favorites while leaving open the door for consolidation.
“There’s no way that $5 billion props up the entire supplier base,” said William Diehl, chief executive at BBK, a consulting firm that specializes in auto industry restructuring. “The carmakers will have to pick which suppliers they most need to survive and which ones they want to survive.”
Like all carmakers, GM and Chrysler lean more heavily on some suppliers than others, and vice versa. GM, for example, accounts for more than three-quarters of the shipments from American Axle, and a strike at that supplier last year severely impaired the carmakers’ ability to produce vehicles for over a month.
Sen. Carl Levin (D-Mich.), who has been working for months to try to secure funding for the suppliers, said the Treasury Department’s move was important for the entire auto industry.
“The administration’s action today will begin to restore needed stability to suppliers and component manufacturers,” Levin said. “A strong supplier base is critical to maintaining our domestic auto industry which, in turn, is a critical component of our economic recovery.”
But Sens. Bob Corker (R-Tenn.) and Judd Gregg (R-N.H.) complained in a statement that the establishment of the supplier aid program broke a Treasury promise to allocate restructuring money only to GM and Chrysler.
“With so many sectors of our economy hurting, I seriously question why auto part suppliers deserve billions of dollars, especially when the automakers still haven’t yet made all of the reforms necessary to be sustainable over the long term,” they said.