AKRON—The bleak picture in the automotive industry isn't likely to improve any time soon for rubber auto parts suppliers.
It could get worse if either General Motors Corp or Chrysler L.L.C. seeks bankruptcy protection under Chapter 11, several industry experts said.
Should that happen, primary source suppliers of key components probably won't see much change, said William Ridenour, president of Newbury, Ohio-headquartered Polymer TransAction Advisors Inc. “Tier 1s that are second- source suppliers, or those producing noncritical components, should be sweating bullets at this point ... they could be left with very little.” The same holds true for Tier 2 and Tier 3 companies.
As it stands now, there's an 80-percent chance GM or Chrysler will file for bankruptcy, said Jesse Burbage, an Atlanta-based attorney who represents a number of domestic and international auto parts suppliers. But there's also a 20-percent chance bondholders and banks—and possibly the United Auto Workers—will end up negotiating favorable deals with the two auto makers, which conceivably could stave off bankruptcy, he said.
Few industry insiders are betting that will happen.
“GM has more than $60 billion in total debt and has submitted a plan to reduce it through negotiations with the United Auto Workers and bondholders to $33 billion,” said Ridenour. “But the government has kicked it back as inadequate. Current estimates are for a reduction in overall debt to $24 billion or more. That's a huge jump. And the government also is demanding some other lean and mean cuts to go with this. But the union and bond holders are taking a tough approach.”
Chrysler has a deadline of May 1 to get its deal done; GM has until June 1.
Footing the bill
While that drama is being played out, parts suppliers are waiting on the sidelines trying to figure out where they fit now and in the future. All would like to get paid for parts delivered to the two auto makers while maintaining a good business relationship.
In terms of auto makers' payments on receivables, views are mixed.
The government is insuring the receivables, according to Dennis Virag, president of Automotive Consulting Group Inc. in Ann Arbor, Mich.
He said, however, that a $5 billion U.S. Treasury Department financing support program, launched April 8 to help keep parts flowing to GM and Chrysler, won't be enough to cover the bill. If a car manufacturer goes into bankruptcy, he estimated that probably $15 billion over the next two years will be needed to cover the costs of parts.
Under the support program, GM has been allocated $2 billion, while Chrysler gets $1.5 billion, Burbage said. Another $1.5 billion is available should the companies need it. Suppliers can sell parts to the auto makers at a small discount. GM and Chrysler will designate which suppliers get the financing.
Those companies not deemed critical could be placed in an unsecured creditors' committee and may have to negotiate with the automotive manufacturer through bankruptcy court to determine how much and when they would be paid. “In this instance, it would probably be a small fraction of each dollar owed,” Ridenour said.
Michael Meyer, executive vice president of BRC Rubber & Plastics Inc. in Churubusco, Ind., echoed that possibility, noting that generally suppliers' receivables are tied up for a long period of time if they are placed in the unsecured pool.
“There are some hardship rules that may apply that allow a supplier to get preferential payments, but that's case by case,” he said. “Otherwise, in most cases there's little they can do until they get out of receivership.”
However, Virag believes the bankruptcy court and the government will help cover some secondary suppliers because it doesn't want those firms to file for bankruptcy or shut down.
“I think the government will help cover them so they are not damaged,” said Virag, whose diversified company serves as a consultant on mergers, acquisitions, strategic development and implementation, growth initiatives and business performance improvement.
But it's also possible manufacturers of second source or noncritical components could be left with very little, Ridenour said. “We saw it happen with Valeo a few years ago. And this bankruptcy would involve an unsecured creditors committee on a massive scale.”
Burbage pointed out that many Tier 1s are sending out questionnaires to their suppliers in an effort to make them part of the program.
At this point, “everybody's concerned … (because) the entire supply chain has been squeezed for years,” said Ridenour, whose company serves as a merger, acquisition and bankruptcy adviser to the rubber and plastics industries. Most are cash-strapped because of declining auto sales, and many are having difficulty getting extended credit from banks to cover bills.
Some experts believe that as many as 500 parts suppliers could go under if bankruptcy is pursued by GM and Chrysler, he said. Estimates put the supplier base at about 5,000.
While that may cause anxiety for part manufacturers, it's also a major concern for auto makers, Burbage said. They could lose suppliers and will have a tough time replacing them, he said. “Their supply base is critical to their recovery.”
Any time a reorganization is involved, parts producers become worried, admitted Meyer. “Will the auto company ax the lines they supply? Will it close plants? If those are lines you service, you're in trouble.”
A variety of scenarios could take place if an auto maker files for bankruptcy, according to Burbage.
Under a standard bankruptcy, the car manufacturer would continue to operate and primary suppliers to core lines would get their full payments, thanks primarily to the government, which would help foot the bill. Secondary suppliers might or might not be part of that plan, depending on which lines are lopped off.
Another possibility, which has been rumored, would have GM splitting its company in two, with a core portion of the firm emerging from bankruptcy in 65-75 days to operate as a self-sustaining business under a separate ownership structure, Burbage said. Suppliers that service those lines would be in good shape. Those that serve the portion that remains in bankruptcy probably wouldn't be as fortunate.
Bankruptcy won't turn the market around and it's not a cure-all, Virag cautioned. In fact, “it may hurt car sales, and if GM and Chrysler don't recover orders they will be negatively impacted.” That, in turn, will hurt suppliers.
The dichotomy here is that GM estimates it would cost it far more—$45 billion in taxpayer money—to get out of bankruptcy than it would under its reorganization plan, which would be about $21 billion, Ridenour said. There also would be an estimated $110 billion in lost tax revenue over the next three years because of profit, job and other losses.
“In short, it would be bloody ugly,” he said. “It really saddens me to see how the Big 3 auto makers have sunk to these depths.”