Auto Suppliers Feel Carmakers' Pain

Auto Suppliers Feel Carmakers’ Pain

Automotive supplier Collins & Aikman filed for bankruptcy-court protection Tuesday, evidence that financial troubles at the automakers are having a rapid and dramatic effect on the companies that make car parts. A May 5 decision by Standard & Poor's to downgrade General Motors and Ford Motor to junk bond status had little near-term impact on the carmakers, but automotive suppliers are suddenly facing a cash crunch that could put their very existence at risk.

From USA TODAY

DETROIT — Automotive supplier Collins & Aikman filed for bankruptcy-court protection Tuesday, evidence that financial troubles at the automakers are having a rapid and dramatic effect on the companies that make car parts.

A May 5 decision by Standard & Poor’s to downgrade General Motors and Ford Motor to junk bond status had little near-term impact on the carmakers, but automotive suppliers are suddenly facing a cash crunch that could put their very existence at risk.

Collins & Aikman, for one, said last week that the move trimmed its available credit line by $70 million. By seeking bankruptcy court protection, the supplier was able to secure a $300 million debtor-in-possession loan from J.P. Morgan.

“We believe that this is the best course of action for our customers, employees, suppliers and other business partners,” acting CEO Charles Becker said in a statement. “The protections afforded by the Chapter 11 process allow Collins & Aikman to gain immediate liquidity, continue operations … and focus on maximizing the value of the business.”

Automotive suppliers have seen their access to credit drastically cut the past week because their loans are tied to the payments they expect to receive from their customers, the automakers. Most credit agreements say the suppliers can’t use payments from non-investment-grade companies as collateral, which means the suppliers can no longer rely on their business with Ford and GM to bolster their credit lines.

“This has always been a tough industry to make money in,” says Shelly Lombard, an analyst with Gimme Credit. “Now, it’s a disaster.”

Delphi, the largest U.S. auto supplier, says its credit line was cut by $40 million. Visteon, which announced last week that it is delaying the release of its quarterly financial statement because of an investigation into its finances, did not reveal changes in its credit line but said it could default on payments in the third quarter.

Bad news seems never-ending with the auto suppliers. Already, the companies have been crunched by: rising raw material prices, especially for steel and resin; automakers that demand constant price reductions; and a drop-off in production.

“We tell our customers to make sure you have a diversified customer base,” said Jim Gillette, an analyst at CSM Worldwide. “We still have a number of suppliers that mainly supply to Ford or mainly supply to GM. That’s a key differential.”

About 75 percent of Collins & Aikman’s 2004 sales of $3.9 billion were to GM, Ford and Chrysler Group. It makes flooring, fabric and instrument panels for vehicles.

Delphi has been attempting to wean itself from its former parent company, GM. Delphi earned 49 percent of its revenue from GM last quarter, the company said Friday. Not only does GM’s junk bond status affect the supplier’s debt, but declining production at the automaker accounted for much of the $408 million loss Delphi posted for the first quarter. CEO J.T. Battenberg said Delphi expects GM production will be 6 percent to 8 percent lower than projected, which will take a $900 million to $1.1 billion bite out of Delphi’s earnings for the year.

Tuesday, S&P lowered Delphi’s credit rating further into junk status, from BB to B-. The move could further damage other auto suppliers’ credit, because many of them sell parts to Delphi.

“These are tough times, one of the toughest I’ve seen in my career,” Battenberg, who is retiring later this year after 47 years in the industry, said Friday during a conference call. “Our No. 1 challenge is managing the decline in GM productivity.”

Delphi has set aside $100 million this year to help ensure that its own suppliers are financially healthy enough to continue selling it parts it needs. In a court filing last year, Delphi spelled out what could happen if its supply stream were interrupted: It could force the shutdown of auto plants in less than 24 hours. That’s because the automakers, attempting to have lean operations, work on a just-in-time schedule. That means parts arrive on the assembly plant floor hours or minutes before they’re needed.

Few in the industry think anything that extreme will happen right away. Like Collins & Aikman, other suppliers facing cash crunches could file for bankruptcy-court protection but continue making parts. Gillette said there is a big pool of lenders willing to enter the high-risk automotive market, and companies in bankruptcy can be more desirable because loans to those companies are protected by the court.

But that doesn’t keep job worries from permeating the auto supplier workforce. Rich Tracey, a five-year veteran at a Visteon plant in Ypsilanti, Mich., said he’s taking steps to get his finances in order in case his job is cut or the plant is closed.

He does landscaping jobs on weekends and has begun dabbling in real estate, buying foreclosed homes and rehabilitating them.

“I knew the bubble was going to burst, and I’ve been trying to plan for it,” he said. “I’ve saved up a lot of money and am trying to do side jobs, just in case.”

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