DETROIT (June 8, 2009)—Investor Wilbur Ross sees trouble for suppliers who will need to restart parts production after Chrysler L.L.C. and General Motors Corp. exit bankruptcy.
Chrysler's complete vehicle production shutdown and GM's rolling series of shutdowns have so eviscerated many small suppliers that they will be unable to borrow funds to gear up for production this summer, he said.
"It will be an issue for everyone," Ross said.
Think of it this way: Suppliers pay for their steel and other materials with earnings from parts shipped last month, cash on hand or a loan from a bank. But the production cuts mean suppliers haven't been paid lately, their cash reserves are about wiped out, and banks are increasingly reluctant to lend to the auto industry.
Hope of a loan
Ross offers hope to some subsuppliers. He heads a private equity fund that can lend money to those shipping to his International Automotive Components Group.
But hundreds of other Tier 2 suppliers lack access to such deep pockets. Industry leaders, including top purchasing executives at auto makers, are worried that many suppliers, already shaky financially, will be in no condition to resume production when asked to do so, probably in July. Supplier failures could spike then, they fear.
Said Bill Diehl, CEO of the turnaround firm BBK Ltd., of suburban Detroit: "Suppliers will have difficulty getting the additional working capital to meet requirements of materials and labor - before they make a part."
He warned that lenders who provided working capital in the past will be "unlikely to increase their exposure if they have any question about a supplier's future." And many suppliers are maxed out on their lines of credit.
At greatest risk are small to medium-sized Tier 2 and Tier 3 suppliers. But Diehl said small Tier 1s share similar risks because smaller companies in general have less access to capital.
Ross said smaller suppliers tend to use receivables - IOUs for parts already delivered - as collateral to borrow needed working capital.
But with Chrysler shut tight and GM operating at limited capacity, there will be dramatically smaller receivables to borrow against when the two car makers get back to full production this summer, Ross said.
"This means that the private equity sponsors such as ourselves will likely need to provide supplemental financing at least temporarily until the inventories become sales and therefore accounts receivable," Ross said in an e-mail. "Longer term, things will even out, provided that volume is high enough to generate profits."
The hedge fund Ross operates, W.L. Ross & Co., is preparing to step into the void for suppliers to his International Automotive Components. The company supplies instrument panels, carpeting and other interior parts for nearly every U.S. vehicle platform.
Scott Garberding, Chrysler's chief purchasing officer, warned the U.S. Bankruptcy Court of the risk. If Chrysler were shut down for an extended period, he said, "the absence of cash flow to our suppliers and the lack of a clear, definitive and short timeline for that cash flow to resume would cause many of our suppliers to shut down and liquidate."
The failure of Chrysler's suppliers also would cause severe problems for other auto makers that rely on the same suppliers, he said. Ninety-six of Chrysler's top 100 suppliers are used by either Ford Motor Co. or GM.