The Real Crisis In The Auto Industry
Remember when the country was fixated on whether or not Uncle Sam should bailout GM and Chrysler? Remember how there was compelling evidence that allowing those auto makers to collapse could bring down the entire auto industry? Remember
how it felt as if the Big 3 CEOs appearance on Capitol Hill was the climax of the liquidity crisis for the auto industry?
Forget all of that.
The real crisis brewing in the industry swirls around the auto parts suppliers.
No wonder the suppliers are now talking with the Treasury Department about getting $20.5 Billion in federal aid. These guys are hurting, close to collapsing, and on the verge of blowing a hole through the auto industry. Sound serious? You bet. In fact, if you ask most people in the auto business what scares them the most right now, and they'll tell you it's the chance of cascading bankruptcies among auto parts suppliers.
Why is this storm firing up right now?
Blame it on the weak economy forcing auto makers to stop or dramatically slow down their assembly lines. That in turn means the Big 3 (and other auto makers in the U.S.) will spend less money with suppliers. As a result, suppliers already struggling are now reeling. They call it the January effect, because every February the parts suppliers have to adjust to lower receivables because their customers shut down assembly lines in late December and early January. Typically, they can ride out the January effect because the drop in revenue is not huge and suppliers also have credit lines they can draw on to get through this slow period. Not anymore.
Due to extended plant shut downs at the start of this year, the Big 3 are expected to spend just $5-7 Billion a month in February and March on auto parts, compared to $15 billion per month in past years. As if that's not bad enough, many suppliers are now unable to borrow the money needed to pay their bills because they've already violated the covenants of their loans. The real concern is not with the large suppliers like Borg Warner and Magna. Those large suppliers have the means and access to financing to ride out this storm. The real concern is with the smaller tier 2 and tier 3 suppliers who do not have the credit lines that can save them.
If those smaller suppliers start to go under, there's a concern it could trigger cascading bankruptcies with other suppliers and eventually cause parts shortages that slow down the assembly lines for auto makers. Sure, some of you will read this and scoff at these concerns. Sure, some of you will see the parts suppliers asking for a $20 Billion bailout and simply see a group of companies looking for a handout. Those opinions will make it tougher for the suppliers to get Federal aid.
But the suppliers will eventually get money from the Treasury Department because few in Washington will want to see what happens if this crisis grows in the auto industry.
- Auto Suppliers Request $20.5 Billion Bailout: Report
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