By Kendra Marr and Peter Whoriskey
Washington Post Staff Writers
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.
The assistance, however, flows at the discretion of the automakers, who must agree to participate in the program. The program is not open to foreign automakers. Participating U.S. firms must contribute 5 percent of the money allocated in the program.
GM and Chrysler have agreed to participate.
Ford, which has not sought government loans, has not.
"We remain viable and expect no issue with continued payments to our suppliers," Ford said in a statement.
GM said the "U.S. Treasury program recognizes how critical the domestic supply chain is in keeping America's auto industry running. GM appreciates the Treasury and President's Task Force on Autos taking quick action that will improve suppliers ability to access much needed liquidity during these very difficult economic times."
Suppliers yesterday besieged automakers with questions about who would receive support and who wouldn't.
In a letter to its suppliers, Chrysler warned that the "government loan associated with this program is not large enough to permit all of Chrysler's U.S. based suppliers to participate."
"The news was good and bad," said Mike Ryan, the chief executive of FormTech, a suburban Detroit company that forges parts for the automakers. "Now we've got to rely on the decision from GM and Chrysler."
The program is the first official action of President Obama's auto task force. Members have spent the past few weeks assessing the viability of GM and Chrysler as they consider whether to grant their request for additional government loans.
"We will have more to say about the industry in the coming days," said a member of the administration's auto task force regarding the supplier program, who gave reporters a background briefing on the condition of anonymity.
Suppliers had originally sought far more money. Last month, for instance, they requested about $18.5 billion in aid. The smaller $5 billion program aims to support the suppliers most in need and keep the critical parts makers functioning, the task force member said.
"We have to allocate capital in a prudent manner," he said. "We can't help every company in every industry."
Major suppliers such as American Axle have recently issued warnings about their viability. On Tuesday, Lear received waivers from its banks so that its lenders would not force the company into default.
Many analysts predict that with or without the program, the ranks of auto parts manufacturers were destined to be trimmed -- there are simply too many car models and not enough sales.
"It won't be a cure-all to what ails the supply chain, but what it will help some of the firms that are on the brink and teetering from a cash flow prospective," said Mike Wall, an auto analyst with CSM Worldwide.