Struggling Auto Parts Suppliers Prepare to Seek Federal Aid

By Kendra Marr
Washington Post Staff Writer
Tuesday, January 27, 2009

Bruised by plummeting car sales and production cuts, automotive parts suppliers are gearing up to lobby for federal aid in the coming weeks.

Industry members have been discussing several options with the Treasury Department and lawmakers, weighing whether to seek funds from the financial rescue package, the stimulus plan or other sources, according to Ann Wilson, senior vice president of government affairs for the Motor & Equipment Manufacturers Association.

Suppliers hope to present a request by March 1 to avert a string of bankruptcies in their sector, said Wilson, who yesterday met with more than a dozen chief executives and chief financial officers to discuss their options.

"We're working hard with the congressional delegation folks to see what is possible," she said.

The avenue most favored by suppliers is for the government to loan automakers additional funds so they can pay back the suppliers faster, said Neil de Koker, president of the Original Equipment Suppliers Association.

Automakers and suppliers typically rely on a trade credit system, in which suppliers provide parts to the automakers under an agreement that they'll be paid later. Suppliers then put those billings, or receivables, up as collateral for working capital loans.

When General Motors and Chrysler said last year that they were in danger of bankruptcy if they didn't receive government loans, many suppliers had trouble using those receivables as collateral with banks. And the situation hasn't improved.

Detroit's automakers currently owe suppliers about $13 billion to $15 billion a month for parts delivered in the previous 45 days. The delay gives automakers time to sell vehicles and use the proceeds to pay back their debts.

Suppliers, which are in desperate need of fast cash, want that lag reduced from 45 days to 10 days.

A second option would be to create federal backing for 80 percent of that monthly billing, or more than $10 billion in aid, to strengthen suppliers' standing for bank loans.

The auto industry has already used the Treasury Department's Troubled Asset Relief Program a number of times. Auto loan giant GMAC recently received $6 billion, and Chrysler Financial was granted $1.5 billion in funds. Last month, the Bush administration threw GM and Chrysler a $17.4 billion lifeline.

Yet this has done little to aid the struggling supply sector, which has been hit hard by the worst sales numbers in 16 years. So many vehicles remain unsold that many factories closed over the holidays in late December and January.

As a result, suppliers sold fewer parts. Six suppliers have filed for Chapter 11 bankruptcy protection this year.

"The industry has been very reliant on the Detroit Three," said Mike Wall, an auto analyst with CSM Worldwide. "A few suppliers have been making in-roads on diversifying with the Hondas and Toyotas of the world. But others haven't had as much success."

Many analysts predict a bigger shakeout for small subcontractors, businesses that often don't get paid after supplier bankruptcies.

"We're the stepchild of the industry," said D. Craig Wiggins, president of Tooling & Equipment Capital Solutions, a boutique investment bank that focuses on auto tooling and equipment. "We're not big. We don't have a voice like OESA. We're small mom-and-pop companies."

Suppliers, or so-called tier-one businesses, often don't pay their subcontractors for six months or more. The financial crisis has only lengthened that payment lag.

"When tier ones are cash-strapped, they're diverting the funds and we aren't getting the trickle down," Wiggins said.

Earlier this month, the American Mold Builders Association sent letters to lawmakers asking them to direct GM and Chrysler to accelerate their payments as a requirement of the $17.4 billion loan. The tool, die and mold sector is negotiating with the Canadian government for the same terms in the Canadian auto bailout, Wiggins said.

"We are not asking for charity nor one additional dollar of bailout money," said Melissa Millhuff, executive director of the association.

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