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Auto Woes Caught in Chain Reaction
Detroit Rescue Gets Tougher as Carmakers' Pain Weakens Suppliers, Too

By Peter Whoriskey
Washington Post Staff Writer
Thursday, March 19, 2009

WARREN, Mich. -- The assembly line at the factory where Kenta Kennedy works isn't operated by the Detroit Three. But it starts and stops on their whim.

Every time a new Buick Lucerne or Dodge Dakota starts down the assembly line at one of the automakers, Kennedy and his co-workers get an order to put together another dashboard -- a steering column, a speedometer, a radio and so forth. Within five hours, their piece of the finished car must be delivered to parallel assembly lines at General Motors or Chrysler.

"When they move, we move, and when they stop, we stop," said Kennedy, 32, a father of three. "So unfortunately, whatever happens to them, is going to happen to us, too."

Although government aid to the auto industry has focused so far on GM and Chrysler, the vast majority of the jobs and revenue in the U.S. industry are not with the automakers but their web of suppliers, such as the company that Kennedy works for.

About 673,000 people worked in parts supplier plants in 2007, according to the Bureau of Labor Statistics. By contrast, the Detroit Three employed about 239,000 at that time.

Now, as the plunge in vehicle sales begins to affect the thousands of suppliers, the task of propping up the U.S. auto industry has become much more complex for the Obama administration.

Over the past year, the stock prices of major suppliers such as American Axle, Lear and Visteon have dropped precipitously. Others such as Getrag Transmission, Cadence, Contech and Key Plastics are in bankruptcy proceedings. And according to a report last week from Grant Thornton, a company that works with troubled suppliers, as many as 500 of approximately 1,700 direct suppliers to the auto companies are at "high risk."

Those companies are seeking help from the Obama administration auto task force, too.

"If you want to save the auto industry, you can't just save the carmakers," said Thomas Klier, a Fed economist who has written a book about the industry's suppliers. "Think about it like an iceberg. What's above the waterline is the automakers -- that's what we see. But what's below the waterline is the suppliers, and it's much, much bigger."

Until the late 20th century, according to Klier, U.S. carmakers produced most of their parts. But the automakers chose to focus their energy on designing and engineering cars, and now the task of making parts falls to the thousands of independently owned suppliers. These days, most suppliers are in the Midwest, with some in the South -- in Alabama, Georgia, Kentucky, Tennessee and the Carolinas.

Those suppliers provide approximately 70 percent of the value in a car, according to the U.S. Economic Census.

So saving the U.S. auto industry means keeping alive the suppliers as well, industry experts said, and it won't be a simple matter.

By most accounts, some suppliers should be shut down -- there are simply too many, given the shrunken size of the U.S. auto industry. But suppliers and carmakers are so intricately connected that the loss of even one makes production difficult.

"It's not like a restaurant where if your pickle supplier goes out of business, you just find another pickle supplier," said Sig Huber, Chrysler's director of supplier relations. "The auto industry doesn't work that way."

Before a car can be produced, extensive coordination occurs throughout the supply chain. The carmakers send their molds and other machinery to the parts suppliers. Dimensions are checked and rechecked. Many parts must undergo weeks of stress analysis, and others must get crash-tested.

Because so much rides on the operations of their suppliers, carmakers and other large companies closely monitor the finances of their parts makers, watching for signs of distress.

If one company appears to be on the verge of failure, the larger companies often step in with assistance until the work can be shifted to another supplier. The intervention can be costly, but it prevents a supplier's woes from provoking a broader work stoppage.

Those emergency rescue operations have become more common in recent weeks, and many fear the industry could be overwhelmed if more are allowed to fail.

For example, in the past two weeks, the company that Kenta Kennedy works for, International Automotive Components, has stepped in to transfer to more financially stable operations the equipment of seven vendors that were either closing their doors or that appeared ready to do so -- all to prevent any interruption in IAC's own production.

"For those outside of the industry, it is difficult to truly grasp the interconnectivity of the automotive industry," said James Kamsickas, IAC's chief executive and president. "The failure of one or more key suppliers can shut down entire supply chains."

Consider a troubled auto supplier such as FormTech, which forges axle and transmission parts. Its sales have dropped 50 percent. In February 2008, it had $21.6 million in sales; a year later, it had sales of $10.7 million. Chief executive Mike Ryan says he's nearly out of cash and unable to pay for new steel.

"We're fighting for our lives here, trying to keep the thing running," he said.

Because FormTech's parts are crucial, the company's four largest customers have already agreed to buy steel for it, essentially covering FormTech's costs.

"They did that to save [us] because we were at the edge of a cliff," he said. "If we went down for economic reasons, we would shut down the Big Three."

But the larger trouble, Ryan said, is that the big companies can only save so many of the wobbly firms in their supply chains.

"Right now, they can manage one of their suppliers going out. But if it were to happen to 400 suppliers, that's chaos."

Supplier representatives began meeting with the Obama administration auto task force last month and talks continued this week. Last week, the Precision Metalforming Association met with the task force. And on Thursday, some tool and die makers met with task force members.

One of their key requests is for the government to guarantee payments owed them by the Big Three; another is for the government to backstop their loans.

The Detroit Three have supported the supplier requests, and so has Toyota.

"The biggest challenge that we face is really on the supplier side of the business," said Jim Lentz, president of Toyota's U.S. sales, who met with the task force on Wednesday.

Whatever the outcome of those negotiations, it is likely that tens of thousands of jobs -- at the suppliers and the carmakers -- rest on the results.

"When I watch the news at night and I see one of those news alerts coming across the screen, my heart just goes off," Kennedy said last week during a break. "They'll say this plant is closing, or that plant is losing a shift. And I know if they go down, I go, too. That's just how it is."

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