Auto Parts Makers Get $5 Billion Lifeline
Friday, March 20, 2009
The Obama administration announced yesterday that it will provide $5 billion in financial aid to auto parts manufacturers, signaling the government's continued interest in propping up the domestic car industry and raising hopes that it will soon provide even more money.
As auto sales have plunged, the companies that make parts for makers have shown increasing signs of weakness. While most of the bailout attention has focused on the carmakers, most of the hundreds of thousands of jobs in the U.S. auto industry are created by suppliers.
"The failure of a few key suppliers could have brought the entire industry to its knees," said Neil De Koker, president of the Original Equipment Suppliers Association, where a third of the membership reported that it would face severe financial distress in the first quarter.
The $5 billion in federal assistance will come out of the $750 billion Troubled Asset Relief Program, the financial rescue effort passed by Congress in October. The United States has extended $17.4 billion in loans from that program to General Motors and Chrysler, and those companies have asked for as much as $21.6 billion more.
Wall Street greeted the announcement of help for parts makers as a sign that the administration is likely to continue to aid the automakers. General Motors shares rose more than 8 percent yesterday, and Ford shares gained almost 2 percent.
But the Treasury's move was criticized by some Republican senators, who said the assistance wrongly extends the scope of the rescue package.
"Regardless of the merits, Treasury's decision to provide up to $5 billion to auto parts suppliers flies in the face of what they told us they would do in January -- provide aid to GM and Chrysler and only for comprehensive restructuring," said Sen. Bob Corker (R-Tenn.), a member of the Senate Banking Committee. "The administration needs to work with Congress instead of running the country by executive fiat without checks and balances on the use of taxpayer money."
Administration officials responded that the aid does not represent a new program but merely an extension of earlier efforts to aid auto companies because it provides support to them by propping up their supply base.
Automakers usually pay suppliers for parts 45 to 60 days after they're shipped. During that time, suppliers borrow against these billings, or receivables, to continue to pay their workers and fund operations.
The economic crisis has cut into such short-term financing, however, because banks have been reluctant to accept those receivables as collateral, given the weakened condition of so many companies.
In an effort to relieve that situation, the government said it would guarantee the auto company payments, making it easier for the parts makers to borrow against those amounts. The government also said it would give suppliers the option of exchanging their receivables for cash.
Participating suppliers must pay a small fee for the aid -- 2 percent of the receivable for a guarantee and 1 percent more to get cash.