DETROIT (April 29, 2009) — A nine-week summer shutdown at most of General Motors Corp.'s North American plants could bankrupt as many as 10 percent of GM's top 300 parts makers, says a source familiar with GM's thinking.
The 300 top suppliers ship more than 80 percent of the parts that go into GM vehicles. The auto maker has 1,500 parts suppliers, all of which will suffer from the shutdown.
The 300 range from small companies such as mirror maker Gentex Corp. to multibillion-dollar enterprises such as seat maker Lear Corp.
GM spokesman Dan Flores declined to comment on the likelihood of bankruptcies. But he acknowledged that the lengthy production shutdown will cause cash-flow crises among suppliers.
"We recognize these production cuts are going to be very painful, but the decision was required as we continue to bring our inventories in line with market demand," Flores said.
GM's purchasing executives have been mindful of the potential for trouble, and they have kept suppliers informed of their intentions.
During his weekly teleconference with suppliers last week, Bo Andersson, GM group vice president for purchasing, notified suppliers of the nine-week shutdown. GM's action will expand the usual two-week summer shutdown and cut existing production plans by 170,000 units.
No government aid
Given the looming production cuts, federal officials may be forced to forestall disaster by providing additional financial aid.
The recently announced $5 billion Treasury Department bailout for suppliers offers them little prospective relief from GM's shutdown.
That program allows designated suppliers to be paid quickly for parts already shipped and guarantees those payments even in a bankruptcy. But it only applies to suppliers that actually are shipping parts. If GM doesn't produce vehicles for nine weeks, no payments will be due — hence, no government aid.
Already stressed
Moreover, suppliers will enter this cash-flow drought already stressed by GM's first quarter North American production cuts of about 58 percent compared with the same period a year earlier.
The collapse has left the cash balances of many GM suppliers drained when bank credit is virtually nonexistent. GM fears that its plant shutdown plans could provoke lenders to demand immediate repayment of their loans to suppliers, says a second source familiar with GM's situation.
Suppliers to GM's light trucks face the most pain, says Barclays Capital analyst Brian Johnson. Based on estimates from the consulting firm CSM Worldwide, 60 percent of the production cuts would occur in the highly profitable light-truck business, Johnson said.
For example, Magna International Inc. once built more than 1.5 million frames a year for GM's pickups and SUVs. That business has been halved.
Other suppliers to GM light trucks that are facing a storm include Lear, Tenneco Inc. and American Axle & Manufacturing Holdings Inc., analysts say.
Lear has $1.6 billion in cash to help it survive the cuts, said spokesman Mel Stephens. But it won't be easy.
"We are doing everything we can to lower our cost structure, improve our operations and maintain high levels of quality," Stephens said.
An American Axle spokeswoman said the company holds liquid assets worth $400 million but declined further comment. A Tenneco spokeswoman declined to comment.
There is one silver lining, says analyst Johnson: GM's production cuts this summer may mean a spike in second-half production as dealer inventories are drawn down.