Anxiety Over Auto Bailout Spreads Beyond Manufacturers to Suppliers

December 12, 2008

AskPatty has posted several articles recently about the Automotive Industry Bailout. Two of them in which we specifically commented on the potential trickle down of the disastrous effects that will occur to the smaller companies on which the Big Three rely to produce the nearly 15,000 smaller pieces and parts that go into a single car.

Bill Vlasic and Leslie Wayne of The New York Times have posted an extremely informative and educational story that explains this in greater detail, in which they state “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.” I’m summarizing some of it here, but it’s an excellent article. Please read it carefully after you finish reading this.

General Motors and Chrysler owe their suppliers nearly $10 billion dollars for such pieces and parts provided by large, publicly held companies that make car seats and axles, to much smaller firms that provide clamps, hoses and stamped metal parts. Many of their suppliers are teetering on the verge of bankruptcy themselves, and do not have the luxury of extending credit much longer.

These same companies provide parts to both domestic and foreign brands with plants in the United States, and when these companies begin to shut down, the flow of parts to every automaker in the country will be disrupted. “There’s no question it will hit Toyota, Honda and Nissan too,” said John Casesa, principal in the auto consulting firm Casesa Shapiro Group.

According to the article in the New York Times “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.”

“Most of the suppliers are not highly waged; they have no big pensions,” said Timothy D. Leuliette, chief executive of Dura Automotive Systems, just one of the automotive suppliers affected by the economic setback. “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.” His company makes brake pedals, doors, and glass parts; in the last 60 days, Leuliette’s company has cut 2,600 jobs, consolidated seven corporate divisions into four, and cut travel expenses and subscriptions.

Meanwhile, I watch the situation and am terrified about the future of this important industry which provides the livelihood of me, my family, and so many of my friends and colleagues. Many people hear “automotive industry” and think “Detroit.” But Detroit is just the place where the fracture to our economy begins… it will start there and shatter outwards until it affects every city in the United States – and beyond.

Who am I to comment? I’m not an economist, and I’m certainly not very politically savvy. Most of my friends know better than to ask me for deep analysis of topics in the news. But I can tell you this much: I certainly do agree with this opinion expressed in an editorial at the New York Times titled “What’s Plan B?“ “The rescue plan passed by the House this week won’t fix the ailing automakers that are hemorrhaging cash as sales plummet. But allowing one or more of these companies to collapse into bankruptcy proceedings could potentially cause the loss of hundreds of thousands of jobs and even greater economic havoc…. Nobody — including the carmakers — fully understands the depth of Detroit’s problems or how much money it will take to dig them out. Mark Zandi, chief economist at Moody’s Economy.com, http://economy.com/ told Congress last week that rescuing the companies would cost taxpayers $75 billion to $125 billion over the next two years. And that’s probably optimistic.”

As of last night, Republican senators have stalled the bailout efforts currently being debated in Congress. Some blame the UAW because it won’t agree to allow wage concessions in 2009 as part of a deal. However, at the time of this writing, President Bush and the Treasury Department say they might consider tapping into the $700 billion TARP bailout program to aid the Big Three car companies. “Under normal economic conditions we would prefer that markets determine the ultimate fate of private firms,” said Dana Perino, Mr. Bush’s spokeswoman, quoted from an article in the New York Times. “However, given the current weakened state of the U.S. economy, we will consider other options if necessary — including use of the TARP program — to prevent a collapse of troubled automakers.”

Somehow, Washington has got to show them the money. We need to give these businesses a cash infusion to keep them running long enough to reorganize and heal. Let's leave the fingerpointing to afterwards.

By Brandy Schaffels
AskPatty Editor, and anxious automotive industry insider