GM and Chrysler Bankruptcies threaten Auto Supply Base

The GM and Chrysler bankruptcies are likely to further threaten the automotive supply base. The automotive suppliers are the thousands of companies that supply parts to the the domestic big three auto suppliers to keep production running on a daily basis. While everyone is concerned with the reorganization of GM and Chrysler under government and bankruptcy court supervision, who is concerned with the auto suppliers? The auto suppliers, as a group, employ more people than the big three. The government has set aside $5 billion to help prop up the suppliers but this is unlikely to be enough money to cover the wave of bankruptcies that are starting to happen.



As the big three have lost sales over the last few years, the impact has been felt by auto suppliers who have steadily decreased payrolls. The closure of plants by Chrysler, after it filed for bankruptcy, has caused further layoffs and bankruptcies in the supply base since suppliers only get paid when parts are shipped to plants to meet daily production requirements. This process will accelerate with GM filing for bankruptcy on Monday, 6/1/09.



Some auto suppliers are trying to diversify into other fields in order to increase their sales. However there are two issues that they need to deal with:

1. In order to remain as viable suppliers to the big three a minimum plant capacity and tooling is required to profitably manufacture parts. This means that the auto suppliers must maintain an investment in their plants to be considered to existing and future business.

2. Breaking into a new business requires upfront investment in tooling and plants. In the current investment environment, suppliers will find it difficult to obtain the required capital. The best bet in being to diversify, will be to related industries that do not require whole scale production line changeovers.



Unfortunately, while GM and Chrysler have received the financial support of the taxpayer, this is not the case with the auto suppliers who have no such safety net. The supply base is now so interconnected that one supplier frequently supplies all the big three. This means that even though Ford may be increasing production, the production fall off at Chrysler and GM will impact suppliers. The concern is that suppliers that file chapter 11 must not disrupt daily operations at Ford, which has so far taken no government handouts.



Ford's management has stated they are watching the supply base to ensure that they can head off any supplier bankruptcy. However, with the GM bankruptcy this week the number suppliers failing will increase. With a limited safety net for the supply base, it remains to be seen if Ford can emerge through this situation unscathed.