Metro Detroit auto supplier bankruptcy could signal storm approaching

Michigan manufacturers have yet to find the light at the end of the snarled supply chain, and some are running out of time.

Gissing North America L.L.C. is the latest casualty of the inflation and production volatility that has defined the automotive industry over the past two years. As the first metro Detroit-based supplier to file for bankruptcy in recent years, it could be a harbinger of other small- and midsize suppliers caving to financial pressures.

"I think you're starting to see the compression happening. Consumer confidence is declining," said Van Conway, CEO of Birmingham-based turnaround firm Van Conway & Partners. "It's somewhat unanimous across the board dealing with these middle-market lenders that they think a storm is coming."

Bankruptcy lawyers and restructuring specialists have been forecasting that storm for months. While there has been some restructuring and distressed M&A, there have been few bankruptcies. The fallout from the semiconductor shortage and other supply chain problems has been nothing close to what many had feared.

However, pricing disputes between suppliers and OEMs have escalated in the past few months, suggesting potential trouble on the horizon, said Daniel Rustmann, co-chair of Detroit-based law firm Butzel Long's global automotive group.

"I would say that it resulted in suppliers being a lot more aggressive than I've ever seen them be in the past, partially due to desperation and partially because they're just fed up," Rustmann said.

Some clients are just now starting to see success in renegotiating contract terms to spread inflated costs of materials, labor and transportation more evenly between supplier and customer, he said, but the financial pinch remains sharp on suppliers.

At Birmingham, Mich.-based Brooks Wilkins Sharkey & Turco P.L.L.C., firm co-founder and supply chain litigation attorney Dan Sharkey said he is also seeing more business disputes coming through the door.

"The biggest single issue remains pricing: In the face of all of these increased costs, suppliers need price increases to survive, and some customers are still fighting tooth and nail," Sharkey said in an email.

Sharkey said he doesn't think suppliers have reached a tipping point because OEMs learned during the Great Recession that letting suppliers fail is bad for business.

At the same time, driving costs down is part of the auto makers' DNA, and Sharkey said many of his clients are working to exit unprofitable relationships to avoid financial distress.

"I've not heard a lot of optimism," Rustmann added.

That tracks with the latest Supplier Barometer report released Aug. 2 by the Original Equipment Supplier Association, which saw supplier sentiment plummet.

In the survey of executives from more than 100 automotive suppliers, their top three concerns were production shutdowns, weakness in the U.S. economy and labor availability. Most said they think a recession is more likely than not in the next year and 35 percent said that worries of being unable to recover increased costs from customers are hindering investment plans.

"The outlook for the third quarter fell deep into pessimistic territory due to continued concerns over production shutdowns, and heightened concerns over a weakening U.S. economy," according to the OESA. "Sentiment deteriorated sequentially across businesses of all sizes but fell drastically for mid-level suppliers."

Gissing N.A. falls into the mid-level class with a projected revenue of $136 million. The maker of interior acoustic and cargo management systems has up to $100 million in liabilities, including $13.3 million owed to Tesla Inc., according to its Chapter 11 bankruptcy filing in the U.S. Bankruptcy Court of the Eastern District of Michigan in Detroit.

The Chinese subsidiary indicated it could no longer sustain the cost hikes and production shutdowns. The price of resin, its core raw material, increased by 50 percent since 2019, and the worker shortage forced the company to relocate temporary employees to its plant in Ohio and pay for lodging, food and above-market wages.

"Significant price increases for all input costs—material, labor, transportation and burden—have presented unprecedented challenges to Debtors and auto suppliers across North America," the filing said.

Its customers, including Tesla, General Motors Co., Toyota Motor Corp. and BMW, agreed to keep the supplier afloat by funding Gissing's projected liquidity shortfall of more than $14 million until it is sold.

Larger suppliers are better positioned to weather the storm because they have more resources and diversity among product catalog and geography, Rustmann said.

Seating supply giant Lear Corp. said it is cutting headcount, freezing hiring and "de-risking" its business ahead of economic uncertainty and after reporting a $69 million net income plunge in the second quarter. Meanwhile, its competitor Adient P.L.C. reported losing $30 million in the quarter.

Still, executives from both companies expressed optimism about future supply chain relief. Ray Scott, CEO of Southfield, Mich.-based Lear, suggested that despite recession worries, the company has pushed through the darkest days of the COVID-19 pandemic and supply chain snarls and come out leaner and more flexible.

"The sophistication with how we work with our customers in respect to product, in respect to options and alternative design, is significantly different," Scott said in a recent interview with Crain's. "So we're much better at understanding a particular issue and resolving it quicker than probably where we were two years ago."

Adient CEO Doug DelGrosso said on a recent call with investors that labor and freight costs remain headwinds, but the cost of commodities, especially steel, has fallen significantly. More importantly, DelGrosso said the Plymouth, Mich.-based company is finding success in recovering costs from customers not just with materials, but also with freight and energy.

"So, I would anticipate we'll have some level of success either getting it in a one-time form or somehow building that into our future contracts," he said.

DelGrosso also said there are signs that production is starting to smooth out. Six months ago, OEMs were producing only 75 percent of the volume they planned; now it is more like 80 percent.

"Not ideal, but we're moving in the right direction," he said.