DETROIT — With Congress struggling to agree on a bailout for Detroit, the odds that General Motors and Chrysler will be insolvent by year’s end are growing rapidly.
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Ford Motor Co
Go to your Portfolio » The companies have been warning that they would run out of money for some time, but crushing bills from their suppliers are coming due. It appeared unlikely that they could hold on until President-elect Barack Obama takes office next month, when he and a new Congress might be able to provide a lifeline, as a Congressional rescue this year looked increasingly unlikely.
As a result, the hypotheticals about the domino effect of the companies’ troubles through the vast network of auto supplier firms — which employ more than twice as many workers as the carmakers — are becoming real.
General Motors and Chrysler, for example, owe their suppliers a total of roughly $10 billion for parts that have been delivered. G.M. has held off paying them for weeks, and Chrysler is paying in small increments. But the cash shortages at G.M. and Chrysler are getting more severe, according to their top executives and other officials.
A bailout seemed unlikely Thursday afternoon, as Republican Congressional leaders indicated they would not agree to the plan offered by Democrats and the White House. But late Thursday, Senator Bob Corker, Republican of Tennessee, was trying to persuade Senate Democrats to back an alternate plan that would require steep concessions by the United Auto Workers union and by creditors to General Motors and Chrysler.
G.M. has said its cash reserves are falling by more than $2 billion a month, and the company has hired bankruptcy advisers, including Harvey R. Miller of the firm Weil Gotshal & Manges. Chrysler is a private company, but its sales are falling faster than any other company in the industry, and has acknowledged it will run out of money soon, too.
Many of their suppliers are teetering on the verge of bankruptcy themselves, and do not have the luxury of extending credit much longer.
“I don’t think that suppliers will be able to get through the month without continued payments on their receivables,” said Neil De Koker, chief executive of the Original Equipment Suppliers Association in Troy, Mich., a trade group.
When suppliers big and small start failing, the flow of parts to every automaker in the country will be disrupted because as suppliers typically sell their products to both American and foreign brands with plants in the United States.
“There’s no question it will hit Toyota, Honda and Nissan too,” said John Casesa, principal in the auto consulting firm Casesa Shapiro Group.
“Many of the small suppliers will simply liquidate because they don’t have the resources to go reorganize in Chapter 11 bankruptcy,” Mr. Casesa said. “They’ll just go away.”
It is the dire scene laid out at the first set of Congressional hearings on an auto bailout in mid-November by Ford’s chief executive, Alan R. Mulally.
“Should one of our domestic competitors declare bankruptcy, the effect on Ford’s production operations would be felt within days, if not hours,” Mr. Mulally said. He has said his company has enough cash to last through 2009, even if the current sales environment for new vehicles — down 16 percent over all so far this year — continues.
In years past, suppliers have often been able to assist a troubled automaker by extending payment periods to get through tough times.
But by Mr. De Koker’s estimation, hundreds of suppliers no longer have that flexibility. They cannot borrow money in a frozen credit market, and they cannot buy raw materials without first being paid for parts they already shipped.
The Big Three, along with their foreign competitors, are what most people think make up the entire auto industry. But the car manufacturers are just the top of the pyramid.
While G.M., Ford and Chrysler employ 239,000 people in the United States, the country’s 3,000 or so auto suppliers have more than 600,000 workers.
Suppliers range from large, publicly held companies that make car seats and axles, to much smaller firms that provide clamps, hoses and stamped metal parts.
Like the Big Three, most of the bigger suppliers have been restructuring their operations drastically to match the shrinking demand for new vehicles.
For example, Dura Automotive Systems, which makes brake pedals, doors and glass parts, has cut 2,600 jobs in the last 60 days and consolidated seven corporate divisions into four, and reduced travel expenses and subscriptions. Even coffee has been removed from the corporate board room.
“We’re operating as if we don’t know where the bottom is,” said Timothy D. Leuliette, Dura’s chief executive. “It’s as if we are hungry all the time, and we don’t know where things are going.”
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Ford Motor Co
Go to your Portfolio » Dura, a global company with sales of $1.8 billion, is in better shape than many other suppliers. Even so, Mr. Leuliette joined other supplier executives on a trip to Washington last week to knock on Congressional doors in support of federal aid to the automakers.
“Most of the suppliers are not highly waged; they have no big pensions,” Mr. Leuliette said. “People affected by all this are just the average Joes. Washington has a myopic view of the auto industry. They just think of the Big Three and don’t think of us.”
Suppliers make most of the 15,000 parts that go into a single car. More than 70 percent of a car’s value — from the seats to the chassis, from the electronics to the bumpers — is produced by suppliers and sold to the automakers.
Since 2004, the supplier workforce has fallen by 23 percent from 783,000, according to the Original Equipment Suppliers Association.
The thousands of auto suppliers operating today — most along a line stretching from Detroit down to Kentucky close to assembly plants — are expected to shrink by half, to around 1,500, over the next three years, according to estimates from Plante & Moran, a consulting firm in suburban Detroit.
At Dura, tough times seem to be the order of the day. The company emerged from bankruptcy this year, which allowed it to cut $1.2 billion from its debt load and close 16 manufacturing facilities out of 48 worldwide. Still the company has been able to land $1 billion in new orders and still has around 13,000 employees worldwide — with foreign operations in Brazil, Europe, China, Japan and India.
Some 27 percent of Dura’s revenues come from Ford, 9 percent from G.M. and 9 percent from Chrysler, according to the company’s federal filings. Volkswagen and Japanese automakers also represent a large portion of its business.
And, like others, Dura cannot get any bank to lend it money while it waits for payments from the Big Three, who are holding off paying their bills.
“For suppliers there is no place to go, no place to hide,” Mr. Leuliette said. “The automakers are not paying, so we have to carry them. They are forcing the suppliers to loan money to Ford and G.M. Until G.M., Ford and Chrysler are viewed as financially stable, the worldwide spigot is turned off to suppliers.”
Mr. Leuliette said that he has worked through five previous downturns in the auto industry, but the difference with this one is the lack of bank lending. “In a normal recession, we could have gone to the capital markets, but the capital markets are closed to us,” he added.
The same is true for companies further down the supply chain like TNT-EDM, a precision tool and die shop in Plymouth, Mich., that provides parts used by larger suppliers like Dura.
“It’s like the dog chasing the tail,” said Tom Mullen, the company’s chief executive. “When G.M. isn’t paying the tier one guys, they are not paying us. It’s like a spoke on a hub that keeps falling off a bit. Normal course of business, we’d get paid in 35 to 45 days, 60 days max. Now, if you get paid in 120 days, you are doing good.”
Mr. Mullen has seen his revenues fall from $15 million a year over the last few years to around $10 million, while saying that his plant has capacity to run at $20 million a year. He has held off investing the $1 million to $2 million he spends annually in new equipment and he has cut back on the hours of his 35 employees to avoid layoffs.
In addition, he has shifted about 20 percent of his precision business to aerospace and medical equipment suppliers, while keeping 80 percent tied to the auto industry.
“Everyone is stretched like a bungee cord,” he said. “We are waiting to hit the bottom of the river and waiting to be slingshot back up, hopefully.”
“We still sell 80 percent to auto,” he added. “I’d love to sell that much to aerospace. But automotive, it’s in our blood."
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