Automotive suppliers employ more than 500,000 U.S. workers and manufacture most of the parts of the vehicles that the big car companies put together. Until now, the public and the bailouts had overlooked these key industry players. That changed April 8.
Chrysler L.L.C., fueled with $1.5 billion of federal money, and General Motors, pumped by $2 billion of taxpayer funds, launched Auto Supplier Support programs to help keep these manufacturers in business.
“This is very much needed in terms of making sure that the supply community is viable and salvaged to make it all work,” says Joseph B. Anderson, Jr., chairman and CEO of Troy, Michigan-based TAG Holdings L.L.C. (No. 6 on the BE Industrial/Service 100 with $605 million in sales). “The supply base is critical to the car companies being successful, because so much of the components and assembly work is outsourced from the car companies.”
One of TAG Holdings’ six operating companies provides engine parts. It will participate in the section of one manufacturer’s program that will protect TAG in case that company files for bankruptcy. TAG will receive payment, even if that auto maker goes bankrupt.
Administered by the U.S. Treasury Department and CitiBank, each of the automakers’ program allocation goes into a special fund. The companies must also contribute some capital — 5% of what they get from the government. An additional $1.5 billion remains available if needed. The program lasts a maximum of 12 months.
General Motors corporate spokesman Dan Flores says to qualify in the GM program, a firm must be a Tier 1 supplier –Â a company that ships directly to GM — that provides auto parts which actually go onto vehicles, such as mirrors or seats. General Motors’ voluntary program has two components: a credit insurance program and a quick-pay option.
With the GM credit insurance program, a supplier can choose to pay the federal government a fee of 2% of the value of its GM accounts receivable in exchange for a government guarantee of the money GM owes it. The government backs money GM owes the supplier so that lenders know they will be paid back on loans using accounts receivable as collateral. Lenders, therefore, are expected to start making these types of loans again.
On average, GM pays suppliers 47 days after taking delivery of parts. For suppliers short on cash who would fold if they waited that long, there is the quick-pay option. Suppliers can choose to essentially pay a fee of 3% of the value of their accounts receivable in exchange for fast access to cash. The government fund advances participating suppliers 97% of what GM owes them. GM does not actually change its payment terms; when the scheduled pay date arrives, GM pays 100% of what it owes the supplier back into the government fund. This creates virtually a $2 billion revolving line of credit. “The beauty of this part of the program is that suppliers can get paid faster, but it has no effect on GM cash flow,” Flores says.
About the likelihood these programs will save smaller black-owned suppliers that may be facing bankruptcy, TAG Holdings’ Anderson says, “Some suppliers will benefit from the program, but some will not if they have too much fixed costs and too much banking debt.”
The Detroit-based Michigan Minority Business Development Council (MMBDC) has among its members about 130 African American-owned automotive suppliers that gross more than $10 million a year. MMBDC president Louis Green believes that, as implemented, only a handful of these black-owned automotive suppliers will be able to take advantage of the Auto Supplier Support programs.
“I think it will do little or nothing for black-owned businesses,” Green says. First, the program is only for direct parts suppliers, and only about 80 African American MMBDC firms directly supply automakers the parts that go on vehicles.
Second, it’s expensive. “It can cost somewhere around $35,000 per $1 million in insurance. You have some minority auto suppliers that may have $10 million in receivables, so paying $350,000 a month for insurance is an untenable situation for them,” Green says.
Green is highly critical of the program. “There was little or no input from black automotive suppliers to this program. There are some distinct and definite needs that are there, but they’ve gone unheeded by the administration with this plan. This plan got the input of the large, nonminority auto suppliers, and to no one’s surprise, this plan benefits the large, non-minority auto suppliers.â€
Layoffs of 40% are not uncommon among his organization’s black-owned automotive suppliers, Green says, and a third of them probably face bankruptcy in the next 90 to 120 days. “If either GM or Chrysler files bankruptcy, we could lose 60% to 70% of those black automotive suppliers. The next 30 to 60 days are going to be critical for black automotive suppliers,” Green says.
“A strong supply base is necessary for GM to successfully restructure,” says GM’s Flores, who urges eligible minority suppliers to participate and take advantage of this opportunity. “This is a program that will help our suppliers through this very difficult time right now, as we are restructuring. We hope as we work our way through this, that we are going to be successfully restructured and demand for products is going to pick back up. That will be the medicine needed for the industry. With greater volumes comes more health not only for GM, but for our supply base,” says Flores.