Unwinding of the US Automotive Supply Base and Direct Government Aid

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March 22, 2009

The Original Equipment Suppliers Association, trade association representing automotive parts suppliers had requested $18.5 – $20.5 billion last month in federal loans to help cover a cash crunch as US auto production was cut on average over 35% since the first of the year.  The bulk of the production cuts were at GM, Ford and Chrysler which sharply reduced production by and 68%, 52% and 60% respectively, in North America as of March 16th.  The supply base, which generally receives payment 45 days after parts have been shipped, is now experiencing cash flow problems with much of the industry on the brink of failure.  Projections of estimated payments to the industry are likely to decline to $2 billion to $3 billion in March because of the severe production cuts by the vehicle manufacturers.  Normally payments to suppliers range between $8 billion and $9 billion per month. (See January 2009 Global Auto Sales Continue to Be Depressing).

The state of the supply base looks grim according to independent assessments of the industry.  A partner with Grant Thornton LLP, a corporate advisory and restructuring firm, recently estimated about 500 U.S. auto parts suppliers face failure because of plunging auto production.   Furthermore, about 30% to 40% of all suppliers are at risk as the industry sales fall from an average of 16.4 million this decade to under a seasonally adjusted sales average of 10 million sales.

The consulting firm A.J. Kearney released a study concluding that half of the nation’s Tier 1 automotive suppliers could file for bankruptcy in 2009 because of the economic conditions.   It is estimated that 1 million jobs and $9 million in tax revenue could be lost.  The study further indicates that Tier 2 and Tier 3 suppliers are becoming “increasingly fragile”. A summary of the survey is presented in Figure 1.

Figure 1: Key Findings from A.J. Kearney Survey

The recent news coming out from the supply base over the past few weeks is further illustrating how dire the situation has become and suggests that collapse may be imminent baring drastic action by the government.

GM Action to Support Small Suppliers

To help its own supply chain, GM offered direct payments to 150 smaller parts maker that produce component for and get paid by its Tier 1 suppliers. Under normal circumstances GM would pay its own Tier 1 suppliers 45 days after receiving shipment.  It is expected that Tier 1 suppliers would then pay their suppliers on a similar schedule.  As a result of the lag time in payment, GM is expediting payments to its own Tier 2 suppliers to prevent a liquidity crisis.

GM’s rationale according to an Automotive News article interview with GM’s purchasing chief Bo Andersson:

• Some Tier 1 suppliers could face bankruptcy, which would tie up payments to subsuppliers.
• Some distressed Tier 1s are delaying payments to subsuppliers.
• If a subsupplier were to demand cash on delivery from a Tier 1 supplier, that could push the Tier 1 into bankruptcy.
GM is offering the payment option to 150 Tier 2 suppliers that make parts GM has directed its Tier 1 suppliers to use. Under the program, the subsupplier will continue to ship the parts to the Tier 1 supplier, but payment will come directly from GM rather than through the Tier 1.

Chrysler’s Suppliers

Purchasing executives at Chrysler also say a number of its suppliers are teetering on the brink of collapse and the company is working with those suppliers to negotiate acceptable payment terms and to avoid a disruption as liquidity becomes a serious problem.

Chrysler's chief procurement officer, Scott Garberding  said:

"We've been having multiple instances arise each week for the last few weeks where we've had suppliers let us know they were out of cash."

Approximately 23% of Chrysler suppliers are at risk.  Chrysler’s supplier relations executive, Sig Huber said:

"The number of suppliers ranked high-risk has tripled since the end of December… We have roughly 45 suppliers in the high-risk category."

Furthermore the lack of liquidity at the suppliers is beginning to disrupt operations.

Huber goes on to say:

"We're starting to see some sporadic disruptions intermittently further down the supply chain. That would be suppliers refusing to ship to other suppliers because they're worried about getting paid. As a result, confidence is starting to erode from the entire system."

Chrysler also faces an immediate production disruption in North America related to a dispute with a former supplier, Aradco who provided motor mounts to the company.  Workers at the former supplier are preventing Chrysler from picking up parts and tooling as Chrysler is in the process of re-sourcing the business.  Chrysler is also alleged to owe Aradco $2 million and Chrysler contends Aradco owes it money for raw material.

Tool and Die Makers

Tool, die and mold makers are the life-blood of the automotive industry as they make the basic components for production machines used by suppliers to make automotive parts.  The industry recently met with the Obama Administration’s automotive taskforce which is overseeing the restructuring of GM and Chrysler.   A representative from the industry informed the taskforce that 39% of tool and die companies have gone out of business in the past three years. The several thousand that remain are mostly small and medium-sized businesses that employ about 35,000 people. They make components for the machines that produce auto parts.

The industry wants more timely payment for their work from the auto companies and supply chain if they are to survive.   The attrition in the industry was directly attributed to automakers delaying payments for tools, dies and molds for as long as 18 months after delivery.  Tools are generally shipped directly to Tier 1 suppliers and owned by the manufacturer.  The industry representative said vehicles on the road likely include parts that were made with tools and dies that have not yet been paid for. As a result tool, die and mold makers want 90% of their payments upfront.

According to the industry representative, it is estimated that GM's outstanding obligations to tool and die companies represent another $4 billion debt that does not appear on its books.

American Axle

American Axle & Manufacturing Holdings, a former GM unit and a supplier of drivetrain components, has issued a “going concern” warning in an SEC filing.

In light of current market and industry conditions, including the uncertainties regarding our customers’ ability to continue as going concerns, and other factors described in the accompanying audit report of our independent registered public accounting firm, there is a risk that disputes, claims or other demands may arise beyond what is ordinarily incidental to our business.  This includes disputes that may arise with lenders related to our continued compliance with the covenants in the Revolving Credit Facility and Term Loan agreements…

A violation of any of these covenants or agreements could result in a default under these facilities, which could permit the lenders to accelerate the repayment of any borrowings outstanding at that time and levy on the collateral package granted in connection with the Amended and Restated Revolving Credit Facility and the Term Loan Facility. A default or acceleration under the Amended and Restated Credit Facility or the Term Loan Facility may result in increased capital costs and defaults under our other debt agreements and may adversely affect our ability to operate our business, our subsidiaries and guarantors’ ability to operate their business and our results of operations and financial condition. 

With the possibility of GM and Chrysler facing bankruptcy, such a situation could also force the supplier to break debt terms with its lenders.   The supplier needs to obtain waivers from its lenders and bondholders if debt covenants are broken.  American Axle, generates about 75% of its sales from GM.  In the 4th Quarter, American Axle reported a net loss of $112.1 million.


With its US operations in Chapter 11, bankruptcy since 2005, Delphi Corp. has stayed in business because of overseas profits and support from former parent GM.  As the global automotive industry sales collapsed Delphi much like GM can no long rely on global revenue to restructure its US operations.  Furthermore, Delphi's is not likely to emerge from Chapter 11 any time soon and is likely to face Chapter 7 liquidation and this puts GM ‘s future in jeopardy beyond their own financial problems.

Delphi continues to be GM's biggest supplier, providing $5.57 billion in parts globally in 2008. That was 31% of Delphi's $18.06 billion in 2008 global sales.  For 2008, Delphi reported a $1.48 billion operating loss.  The company says it needs to raise $3.75 billion capital infusion to emerge from Chapter 11 reorganization. According to Automotive News estimates Delphi's overseas operations, which are not bankrupt, had operating profit of about $429 million on revenue of about $6.02 billion.  Delphi international operation lost $309 million in the 4th Quarter after posting a small profit in the prior quarter.

To keep its own operations going, GM agreed to purchase Delphi’s global steering business and other struggling US factories. GM also advanced Delphi $150 million in addition to a previous $300 million to keep Delphi operating through May.

Also this week it was reported that the Chinese automaker Beijing Automotive Industry is seeking to buy Delphi’s non-core assets. The assets, include brake system and suspension businesses.  Details of the deal were not reported and Delphi declined to comment.  Delphi had indicated its intention to offload some non-core assets.


Visteon the former unit of Ford said this past week that it will not be able to file its annual report on time because of the uncertainty about its ability to keep operating in the current economic climate.

Visteon stated in an SEC filing that it that it would not be filing its Annual Report on Form 10-K for the year ended December 31, 2008 on the due date of March 16, 2009.

The company also expects (SEC Filing):

Due to the impact of adverse economic and industry conditions on Visteon Corporation’s (the “Company”) current liquidity outlook, management anticipates that the report of the Company’s independent registered public accounting firm on the Company’s 2008 consolidated financial statements likely will contain an explanatory paragraph indicating substantial doubt about the Company’s ability to continue as a going concern. The inclusion of such a paragraph in such report would result in defaults under certain indebtedness of the Company, which defaults, if not cured or waived prior to the expiration of the applicable grace period, would result in an event of default under the Company’s principal U.S. senior secured credit facilities. Such events of default, if they occur, provide the lenders the right to demand all amounts due under the respective agreements immediately due and payable, which may result in a cross-default under other indebtedness of the Company.

Visteon reported earlier in the year that it lost $633 million in 2008.


Lear Corp. (an interior supplier) said this past week that a Chapter 11 bankruptcy is a possibility if it cannot restructure its debt with lenders.  The company seeks to alter the terms of its main line of credit, bonds and common stock, however, it may not be possible outside of the courts according to an SEC filing.  If its debt cannot be restructured by May 16, the company will default on a line of credit.  In 2008, the company posted a net loss of $689.9 million compared to $241.5 million the previous year.  Revenue dropped 15% in 2008 to $13.6 billion, compared to $16 billion in 2007.


Magna International Inc. announced it will close a gear assembly plant in Syracuse, N.Y.  Workers represented by the United Auto Workers rejected a modified labor agreement the company claimed was necessary to make the facility competitive.  About 1,400 people will be affected.  The plant lost $117 million in 2007 and since that time, the company had worked with the union to make the plant profitable.


It was reported this week, Noble International a supplier of body structure components needs short-term funding from the Detroit 3 automakers to survive. In an SEC filing, the company entered into a 30-day memoranda of understanding with GM, Ford and Chrysler agreeing to expedite payments to Noble. The company had defaulted on a debt payment on March 1.


Johnson Controls (JCI) a supplier of automotive interiors and batteries raised $852.5 million through a sale of equity and convertible notes to repay some short-term debt used to finance its operations.  In the last quarter, JCI posted (presentation) revenue declined 23% to $7.3 billion, resulting in a net loss of $82 million.

The Bailout

Early last month the supplier’s trade association requested up to $20.5 billion in federal assistance to prevent turmoil in the supply chain and offset the lack of cash flow as vehicle manufacturers cut production.  The members of Original Equipment Suppliers Association specifically request $10 billion in direct loans from the US Treasury.

Last week the US Treasury (press release) decided to provide up to $5 billion in financing to the industry (Figure 2).  The aid is anticipated to cover the money the Detroit auto manufacturers owe the sector.  Suppliers will be able to use their receivables as collateral to receive loans from the Treasury. The progam is intended to provide the suppliers with bridge loans until regular production begins at the vehicle manufacturers and cash flow improves.

Figure 2: US Treasury’s Supplier Support Program

The total estimated government money allocated to the US auto industry to date is outline in the Table 1.  This excludes the money the finance arms of GM, Ford and Chrysler have received from banking sector TARP funds and unique lending facilities established by the Federal Reserve to ease the global liquidity crisis.  It is likely the total aid is approaching $100 billion once Energy Independence and Security Act of 2007 funds for fuel efficient vehicles is released by the government and the future of GM and Chrysler is resolved.

 Supplier Support
 $18.5 billion
 $5 billion
 Direct Loans To GM and Chrysler
 $30 billion
  $21.6 billion
 Energy Security Act (CAFE) $25 billil
Total excluding TARP
$73.5 billion
$26.6 billion

 Table 1: US Government Assistance to Auto Industry


The condition of the supply chain has been suspect for a long time with the current financial crisis only exacerbating its already weak state.  This article compiled a couple weeks worth of news headlines to document how quickly the cash flow situation evaporated at the suppliers as vehicle production was slashed.

This site has been warning for some time the whole supply chain is at risk.  More pressing is the warnings from the tool and die industry as it can be argued they are the foundation of the entire industry because they provide the essential expertise behind vehicle manufacturing.  The Treasury action is only a band-aid to prevent immediate collapse of the supply chain. However, with the state of the entire industry in limbo, the situation still looks bleak.

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