Auto Suppliers Want Government Assistance, Too

It would be difficult to exaggerate the problems that suppliers to the auto industry face, with Chrysler and GM fighting potential bankruptcy, Ford only a little better off, and even major import brands like Honda, Nissan and Toyota cutting back in North America, too.

Lower North American auto production is a hardship for suppliers like ArvinMeritor, American Axle, BorgWarner, Dana, Johnson Controls, Lear and Tenneco.

The Washington-based Motor & Equipment Manufacturers Association said earlier this month that more than 40 major suppliers filed for Chapter 11 bankruptcy protection in 2008. The auto supplier lobbying group said about one-third of all remaining suppliers are in imminent financial distress. That was expected to double to two-thirds by the first quarter of 2009, according to MEMA.

MEMA and its affiliate, the Original Equipment Suppliers Association, asked the U.S. Treasury on Feb. 16 to provide U.S. government guarantees of supplier receivables from GM, Ford, and Chrysler. That would allow suppliers to use their receivables as loan collateral with lenders. The group also asked for accelerated payments from GM and Chrysler to their suppliers, and for government guarantees of commercial loans for supplier companies.

Meanwhile, Treasury is considering requests from Chrysler and GM for more and bigger government loans to keep them afloat, too.

In a separate note, Brian Johnson, auto industry analyst for Barclays Capital, said he expects the government bailout for the automakers ultimately to provide for the suppliers, as well.

However, that still leaves suppliers vulnerable to the general economic downturn. In a prolonged, “L-shaped” recession, which lasts three years or more, four out of the seven big suppliers Barclays monitors could run short of cash, Johnson said. In the most likely scenario, a “U-shaped” recession, the biggest suppliers can probably survive, but as a group, suppliers might not show much improvement in earnings before 2011, he said.

“With the government bailout likely to protect payment to parts suppliers, we believe that the key issue for parts investors revolves around the depth and duration of the economic downturn,” Johnson said.

Chart: Barclays Capital