Auto Parts Makers In Danger

by Chris Sturr | May 01, 2009

Chrysler’s bankruptcy and temporary shutdown could spell doom for a number of autoparts suppliers, reports the Wall Street Journal.

DETROIT — Troubled U.S. auto-parts suppliers were dealt a new blow Thursday when Chrysler LLC said it will temporarily idle most of its manufacturing during the bankruptcy process starting Monday.

The move, which appeared to take the supply industry by surprise, intensifies pressure on parts makers already reeling from General Motors Corp.’s announcement last week that it also would idle most assembly plans this summer.

Along with lost production, suppliers are at risk of having their payments from Chrysler disrupted as the auto maker’s finances are managed in bankruptcy court.

Two suppliers on Thursday refused to ship parts to Chrysler, forcing the auto maker to close a Warren, Mich., factory ahead of the planned shutdown, Vice Chairman Tom LaSorda said in a conference call with reporters.

Both auto makers’ factories could be down for up to nine weeks, an unprecedented slowdown for the U.S. auto industry.

Chrysler’s move threatens to push many suppliers closer to bankruptcy, and could ultimately lead to disruption in the flow of parts to healthier auto makers, such as Ford Motor Co., which plans to continue operating through the summer, said Dave Andrea, vice president of industry analysis and economics for the Original Equipment Suppliers Association.

“With a tremendous amount of effort and cost, the system has been able to hold together,” Mr. Andrea said. “But with every piece of news like this, that becomes more difficult. This is where we could see disruptions at Ford and other auto makers that are still running.”

Ford spokesman Todd Nissen said the auto maker doesn’t anticipate a production disruption, but is monitoring the situation.

The Chrysler shutdown will likely lower U.S. auto production to eight million cars and trucks for 2009, Mr. Andrea said, which would be less than half what it was in 2000. He said about half of U.S. suppliers will likely be in “significant distress’ as a result of the cuts, up from 35% to 40% at the end of the first quarter.

GM’s summer shutdowns will cut output by 190,000 vehicles, or 25%.

Around 400, or about one-fifth, of top-tier parts makers have enrolled in a U.S. Treasury program launched this month to guarantee receivables in case of an auto maker bankruptcy, said Craig Fitzgerald, an auto analyst with Plante & Moran in Southfield, Mich.

“That assistance took a little bit of the sting out of a bankruptcy,” he said. “But it doesn’t solve the problem” of production cuts.

Mr. Fitzgerald said more government aid will likely be required to avoid a “cascading and devastating ” effect on the U.S. auto industry.

Suppliers’ ability to survive the shutdown will largely depend on the willingness of banks to continue financing the companies through the impending revenue shortage, OESA’s Mr. Andrea said.

“The most significant indicator as to whether a supplier will see the other side of this is if they have a banking relationship that is willing to stick with them,” he said.

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