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.
More than 40 major suppliers filed for Chapter 11 restructuring in 2008 and a number have fallen into bankruptcy this year, according to the motor and equipment association.
In its bailout plan, the association laid out three possible courses of action: One, the government would guarantee receivables so banks will continue to lend to suppliers. Two, it would create a "quick pay" program, in which the Treasury gives GM and Chrysler additional loans so that the automakers cut the pay lag to 10 days from 45. Three, the Treasury would guarantee commercial loans or lines of credit for suppliers with commercial banks.
Though GM has also advocated that the Treasury guarantee receivables, it is not so keen on the quick-pay proposal.
"We're not enthusiastic about this idea that some massive amount of money be channeled through to us for us to figure out how to use it," GM Chief Operating Officer Frederick A. Henderson said in a conference call with analysts last week. "We've got our hands full trying to get General Motors turned around."
Meanwhile, the auto task force is also reviewing the automakers' viability plans and request for aid in addition to the $17.4 billion in loans the automakers received in December. Yesterday members met with Chrysler's chief executive Robert L. Nardelli, Vice Chairman Tom LaSorda and Chief Financial Officer Ron Kolka, said people familiar with the talks. Today they plan to meet Henderson and GM's chief executive G. Richard Wagoner Jr..
Though Ford is not requesting government loans, it is making cuts. Ford will extend another round of voluntary retirement offers to blue-collar workers, said a person familiar with the matter. Ford's chief executive Alan R. Mulally and chairman William Ford Jr. will also take 30 percent pay cuts over the next two years.
Staff writer Brady Dennis contributed to this report.