The Supplier Impact: Chrysler Files Bankruptcy, Idles Manufacturing

Even though many parts and component suppliers have already been driven to the edge thanks to declining volumes and onerous business terms (e.g., no price increases even when raw material prices climb) from Chrysler, there's a big difference between a slowdown and a complete shutdown in volume that is sure to follow the latest news regarding how Chrysler plans to idle all of its facilities. The move, covered extensively in the above-linked Wall Street Journal article, "appeared to take the supply industry by surprise [and] intensifies pressure on parts makers already reeling from General Motors Corp.'s announcement last week that it also would idle most assembly plants this summer." But this time, Chrysler suppliers face the double whammy of "having their payments from Chrysler disrupted as the auto maker's finances are managed in bankruptcy court."

Suppliers aren't just standing still and taking it on their back, however. Last week, The Journal story suggests that Chrysler was forced to close a plant ahead of the planned shutdown when "two suppliers refused to ship parts" following the announcement. The challenge for other automotive companies and other manufacturers -- on the tier two and lower tier levels, there is significant supply overlap between automotive and industrial manufacturing and aerospace and defense, among other industries -- is that the Chrysler move could drive a whole range of suppliers into bankruptcy and/or liquidation.

A supplier research and interests group quoted in the article suggests that "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." Some suppliers aren't taking chances. Around 20% of the supply base, the article suggests, have enrolled in a Treasury program to provide receivables insurance in the case of customer bankruptcies.

But the government alone cannot save suppliers. The most telling factor and indicator for survival with many suppliers, the articles suggest, will be whether suppliers can obtain financing from the private sector (i.e., banks). But given how costly capital has become lately -- despite a Federal funds rate which is about as close to zero as you can get -- such funding will come with a price tag, no doubt. Those who are lucky enough to get it could very well be left with a Faustian bargain as banks and the debt markets profit handsomely from putting their risk capital to work.

Jason Busch

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