Auto Suppliers: A Sinking Industry Could Mean Drastic Depletion

Business became more complex in the U.S. auto supplier world after General Motors Corp. and Chrysler L.L.C.’s comeback plans failed to impress the U.S. government this week, making the notion of a bankruptcy for the American automakers an even more likely outcome.

Auto suppliers are reeling from current market conditions. An A.T. Kearney study released in March found current market conditions could cause more than half of the country’s major auto parts makers to file for bankruptcy this year. That would result in one million job losses.

The study reported fallen auto sales, raw material price increases, and high fixed cost and excess capacity were cited as top factors.

“We are facing a situation where 50% of all black-owned businesses could be out of business a year from now,” says Louis Green, president of the Michigan Minority Business Development Council

in Detroit. “We are looking at a high likelihood that we may lose half of all of our black automotive suppliers.”

In the state of Michigan alone, home to the domestic auto companies and some of the largest black-owned auto suppliers, the ramifications could be bleak. The effect on black-owned auto parts businesses could be even more severe as these businesses have operated for only a fraction of the auto industry’s century-long existence and many have not diversified their businesses or customer base fast enough to cushion the blow.

Before GM and Chrysler’s recovery plans were rejected by the government, the industry was expected to shed close to 30% of all supplier businesses based on market conditions.

“But things have been a lot more dire, I think, than anyone would have suspected,” Green says. “When you look at things like potential bankruptcies, very few businesses are equipped to handle that.”

Suppliers trying to stay afloat have been burning through cash as they keep their facilities open to produce very few parts. “The industry is so complex and so massive that there is no escaping the serious amount of pain that will be felt,” Green adds.

The cash reserve overall for auto suppliers aren’t typically as deep as healthier auto manufacturers, meaning if GM or Chrysler — which have already received $17.4 billion in federal aid — go bankrupt, so will many auto suppliers.
“There’s that fear that any company — supplier or [original equipment manufacturers] — could potentially go away,” says Leon Richardson, head of the National Association of Black Automotive Suppliers

forwp-incontent-custom-banner ampforwp-incontent-ad3"> (NABAS), about the industry’s rocky state.

Auto parts manufacturers tend to depend on short-term loans for the 45 to 60 days it can take for automakers to pay for car components delivered. With vehicle sales down 40% this year and vehicle production drastically slowed, orders for various auto components ranging from seating to dashboards to navigation systems are on hold.

“Our business has a high fixed cost, so at some point, without the volume, the math just doesn’t work,” says Kirk Lewis, president of Bing Group, a Detroit-based, black-owned supplier that does about 98% of its metal business with GM and Ford Motor Co., the only domestic car company that has not asked for federal aid.

Lewis, who is also treasurer of NABAS, has attempted to rally support from Capitol Hill for struggling U.S. auto makers, conveying to lawmakers during past conversations the effect market conditions are having on suppliers, he said. “If our customers are weak then we’re going to be weak,” Lewis says.

Several weeks ago, Obama’s auto task force put forth a $5 billion supplier support program to help prop up weakened suppliers. The program, which was $20 billion short of what was requested and draws funds from the Treasury Department’s Troubled Asset Relief Program (TARP), does not include specific language aimed at minority-owned businesses.

GM and Chrysler will handle the funds and decide which suppliers can participate. The program is still being tweaked, insiders say.