Trouble on the Assembly Line

Transmission parts at FormTech in Michigan, which employs 440 people and is struggling to stay alive.
Transmission parts at FormTech in Michigan, which employs 440 people and is struggling to stay alive. (By Paul Sancya -- Associated Press)
By Kendra Marr
Washington Post Staff Writer
Thursday, February 26, 2009

For months Washington has focused on saving Detroit's automakers. But now the auto industry says it could face a bottom-up collapse if the suppliers supporting these automakers don't receive federal aid starting next week.

"We're on the cusp of what could be cataclysmic," said Aaron Bragman, an auto analyst with IHS Global Insight.

What now looks like a house of cards was built with a complicated trade credit system. Automakers pay their suppliers 45 to 60 days after the car parts are delivered. And these suppliers delay payments to their subcontractors for up to a year.

This system worked until credit markets froze and consumer confidence took a nosedive last fall. When people stopped buying cars, the automakers nearly halted vehicle production in December and January. As a result, not only are auto parts suppliers losing work from the carmakers, which include foreign and domestic companies, they will be receiving much smaller paychecks starting March 1.

This month cash-strapped suppliers have been struggling to replenish their raw material inventories and meet operating expenses. In the past, suppliers have been able to put their billings, or receivables, up as collateral for loans. But, with bankruptcy still a strong possibility for General Motors and Chrysler, many suppliers have not been able to use those receivables as collateral.

It's unclear now whether the Treasury Department will help the suppliers.

To better understand the problem, the Obama administration's auto task force met with top procurement executives from GM, Ford and Chrysler on Monday, said people familiar with the meeting who spoke on condition of anonymity because the talks are private. The group has also met with the Motor & Equipment Manufacturers Association, which submitted a proposal for its own federal rescue on Feb. 13.

Unable to gain an audience with the task force, a group of subcontractors -- mom-and-pop shops that support the larger companies like Delphi and get paid even later -- have been making the rounds on Capitol Hill this week, pleading their case to lawmakers.

"Our biggest issue as small business is being able to get a seat at the adults' table," said D. Craig Wiggins, president of Tooling & Equipment Capital Solutions, a boutique investment bank that focuses on auto equipment. Wiggins is trying to get the Treasury to change the terms of GM and Chrysler's government loans so that they are required to pay small suppliers sooner.

The Treasury's meetings mark a sharp reversal from its previous stance that all stakeholders, suppliers included, should make deep cuts as a part of Detroit's restructuring.

"To expect them to come to the table with price concessions is a tall order, if not fantasy, given the distress they're facing," said Mike Wall, an auto analyst with CSM Worldwide.

Yesterday Ford's main supplier, Visteon, announced that it would cut 1,000 jobs by the end of March after posting a large fourth-quarter loss. Like automakers, suppliers are restructuring to adjust to lower vehicle production.

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