March 10, 2009 at 3:22 pm

Cracks in auto supply chain spreading

Automakers' drops in demand, unpaid bills put stress on Visteon, Delphi, others mired in crisis.

Van Buren Township-based Visteon Corp., which owes $16 million today on a bond payment, is believed to be on the bankruptcy bubble. )

The automotive supply chain is at a breaking point with no cash, no credit, no decision on a request for $18.5 billion in federal aid -- and a lot of bills to pay.

The next company to fall could be Van Buren Township-based Visteon Corp., which owes $16 million today on a bond payment and is widely believed to be on the bankruptcy bubble. But hundreds of smaller suppliers could be forced into bankruptcy court, too, as they struggle in the worst auto market in decades.

"With the industry being down, our biggest concern is the health of the suppliers," Ford Motor Co. Chief Executive Alan Mulally said Friday.

Suppliers face a money crunch now because March is when they typically get paid for parts they ship in December and January, but automakers all but shut down in those months. With vehicle production ramping up again, they need money to pay for raw materials. But no parts shipped means no income, said Neil De Koker, president of the Original Equipment Suppliers Association, a Troy-based trade group.

Suppliers may see just $2.4 billion in revenue in March, down from $8.4 billion a month at the end of 2008, according to a report to the Treasury Department from Ducker Worldwide LLC, a consulting firm.

Many parts makers began 2009 with losses, plans to further cut costs, little liquidity and forecasts that production would be cut in half for much of the year.

Today, "two-thirds of suppliers are in a negative cash flow situation," said De Koker, who is hopeful the government will decide on aid as early as this week. Members of the White House's auto team were in Detroit on Monday to meet with General Motors Corp. and Chrysler LLC officials before deciding whether to grant their requests for up to $21.6 billion in additional loans; they have already received $17.4 billion.

The troubles of the supplier sector are also critical for Japanese that produce vehicles in the United States.

Jim Lentz, president of Toyota's U.S. sales subsidiary and its top U.S. executive, will raise the automaker's concerns about U.S. suppliers Wednesday when he meets with the White House auto team, company sources said. Toyota has not been hit as hard by the sales downturn as Detroit's automakers, but it relies on many of the same suppliers for its U.S. assembly plants.

Close to half of Toyota's U.S. parts supplies, in revenue terms, are produced by component manufacturers that also supply Detroit's automakers, according to Birmingham consulting firm Planning Perspectives Inc.

Tom Spillane of Foley & Lardner LLP in Detroit, who helped with the suppliers' proposal for aid, said the government knows time is critical as suppliers struggle to ramp up production with no cash and no financing. "Everyone understands it's an emergency."

One in four parts makers surveyed by the supplier association said they would be in severe distress by the end of March and 31 percent by the end of June, De Koker said. The respondents were of all sizes and represented the full spectrum of the supply chain, from stampers to tool vendors.

Visteon's troubles could have a significant effect on Ford, which counts on the supplier for 30 percent of its business. Analysts believe Visteon will hold on to the money it owes for its bond payment to use toward debtor-in-possession financing for bankruptcy. A Visteon spokesman declined to comment.

The supplier was delisted from the New York Stock Exchange last week when its shares closed at 2 cents under low volumes.

Last week, the ailing company paid bonuses to about 2,700 of its 8,700 salaried workers, most of them in the United States. A spokesman said they are part of an annual program to reward quality and a 36 percent improvement in 2008 triggered a payout.

Visteon isn't alone in its troubles. American Axle & Manufacturing Holdings Inc. shares on Monday closed at 29 cents, and a growing list of major suppliers are trading for pennies. Others that have been trading for less than $1 include Lear Corp., ArvinMeritor Inc., Dana Corp., Delphi Corp., Tenneco Inc. and Hayes Lemmerz International.

"Over the next six months it will be a bloodbath in the supply industry," said Charles Chesbrough, chief economist at CSM Worldwide of Northville.

The nature of the supply chain is that the big auto parts makers, or Tier 1 companies, rely on hundreds of lower-tier companies. For example, steel from a Tier 4 supplier is sent to a Tier 3-forging company that cuts it into pieces that are sent to a Tier 2 supplier that machines them into gears. The gears are sold to the Tier 1 transmission maker who supplies the finished gearbox to an automaker. Failure at any of these levels can stop an assembly line. The intertwined relationships rely on the final customer, the automaker, being financially stable and able to pay the bills.

The attrition rate in the supply chain has been 5 percent to 10 percent with about 40 major bankruptcies in 2008, many of them progressing rapidly from Chapter 11 to liquidation, said Dave Andrea, OESA's vice president of industry analysis and economics. That figure could easily double in 2009, he said.

Even with attrition, there are too many suppliers, and failure to shrink the supply base in an orderly fashion means it will occur in a more painful way, said Tony Brown, Ford group vice president of global purchasing.

Suppliers still employ about 700,000 in the U.S., but the number of companies has fallen below 5,000 from 20,000 in 1990, according to the suppliers' association.

You can reach Alisa Priddle at (313) 222-2504 or apriddle@detnews.com">apriddle@detnews.com.