Will 500 Auto Suppliers Fail Before Summer?

A recent Grant Thornton study that I came across is painting more doom and gloom for the US automotive landscape. According to a press release discussing the highlights of the study, we should all be paying closer attention to the health of lower tier suppliers rather than just GM or Chrysler. To wit, "the most immediate and pervasive risk to the economy is a wholesale collapse of the automotive supply base ... some 500 suppliers may be at high risk due to the cascading effect of reduced volumes and uncertainty around government support in the near term". You read that correctly. That's 500 suppliers who are at immediate risk for failure. And don't think for a minute the ramifications of supplier failure will limit themselves to the automotive sector. Many of these suppliers also sell to manufacturers in other market segments besides automotive.

The further down the manufacturing supply chain you go, typically the greater supply base overlap between industries. Which is why we should all take a closer look at proactively managing supply risk, not to mention encouraging government to have the the right policy response. Last November, I suggested that "the better path here to rebuilding Detroit is most certainly to let suppliers with viable business models tap into some type of government aid to see themselves through the transition period when GM, Ford and/or Chrysler file for court protection from creditors". Or we could make a bailout truly demand driven and encourage automotive spending through smart tax breaks. Regardless of which path the government takes, time is running out.

Postscript: After I initially wrote this post, the government has agreed to a package to support automotive suppliers. Will it be too little too late? Only the number of bankruptcy filings in the next few months will tell us.

Jason Busch

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