A New Supplicant: The Auto Parts Suppliers

It looks like Washington is going to be forced to add to its automobile portfolio. The industry’s suppliers have approached authorities trying to arrange some sort of emergency bailout.

The immediate problem is a liquidity crunch. The suppliers are caught between a contraction of available bank credit and drastically reduced payments from the auto companies. The virtual shutdown of auto production at the end of 2008 and the past month may result in a $2 billion to $3 billion decline in incoming cash according to projections furnished to the government by the suppliers.

The industry has suggested three alternative plans to cope with the problem. Taken together they would entail about $25 billion of government support.

Current payment terms from the automakers can range up to 60 days. To improve cash flow, the industry has proposed the idea of using government assistance to allow automakers to expedite payment to 10-day terms. 

Suppliers have also proposed using a government guarantee to cover their receivables with GM, Chrysler and Ford Motor Co, or using the Troubled Asset Relief Program to make direct loans to key companies in the sector.

While there is probably some merit in the argument that the suppliers were caught in a vise that no one could have foreseen, the fact of the matter is that there are simply too many of them. They’re facing the same conundrum that the manufacturers have to come to grips with. A market that simply has too much capacity for likely future sales. No matter how you slice it, the industry has to get smaller and some companies are not going to make it.

Possibly you’re sitting there asking why this wasn’t considered at the time the auto bailout was stitched together. I think the answer is that it probably was and the architects of that unholy plan knew that they couldn’t lay these cards on the table at that time. But, “in for a penny in for a pound” is an old strategy among politicians. Count on the next round of rationalization to include the term comprehensive solution.

Among many dangers here is the very real one that the industry is going to be propped up at unrealistic capacity levels. It will be well nigh impossible for Congress to step to the plate and make the draconian cuts that the market would exact. That’s why Chapter 11 was always the proper solution. That option no longer exists.

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