Think of it as the great automotive freeze of 2008.
It's not just about credit being frozen, though automakers and suppliers alike are finding it hard to get their hands on commercial loans. And it's not just about federal funding, though the Big Three carmakers are still waiting to hear if Congress will provide the funds they say they need to survive.
It's not even just about the Big Three.
It's about a freeze that has extended far beyond General Motors Corp., Ford Motor Co. and Chrysler LLC and beyond Wall Street to small and big suppliers that are trying to figure out what will happen to them and wondering what moves they can still make.
``Everything is being held in limbo right now,'' said Mike Benson, managing director of investment banking for Stout Risius Ross Advisors LLC in Southfield, Mich. ``Deals aren't being done. There's fear that if someone out there is even willing to buy a supplier right now that they'll end up with a customer that goes into bankruptcy. Everything is on hold.''
Ford, GM and Chrysler submitted plans to Congress on Dec. 2 laying out how they would spend billions of dollars in tax funds as bridge loans to help them survive the next year. Dearborn, Mich.-based Ford is in better shape than Detroit-based GM and Auburn Hills, Mich.-based Chrysler. The impact on the supply base from one auto company's fall would be devastating to Ford as well, the company said.
``We are acutely aware that our domestic competitors are, by their own reporting, at risk of running out of cash in a matter of weeks or months,'' Ford said in its 32-page report to Congress. ``Our industry is an interdependent one. We have 80 percent overlap in supplier networks … that is why the collapse of one or both of our domestic competitors would also threaten Ford.''
Chrysler noted that failure to secure financing would endanger $7 billion in payments due to suppliers.
Ford provided the most information about its supply base in its business plan. The company has already reduced the number of suppliers it works with, with 1,600 direct suppliers today compared with 3,300 in 2004. It plans to reduce that number to 750 in the future.
The consolidation will ``result in more business for our major suppliers, which will increase their financial strength,'' the company said.
Ford also repeated its plan to sell or close its remaining four Automotive Components Holdings LLC plants — formerly part of supplier Visteon Corp., which was itself spun off from Ford. The plan includes the Saline, Mich., interiors plant, which molds and assembles instrument panels, center consoles and other parts.
The impact that a shutdown by any of the automakers would have is making suppliers, creditors and other firms unwilling to make a move until they know what will happen.
``It's across the board,'' said Jim Gillette, director of supplier analysis for CSM Worldwide, an auto research company based in Northville, Mich.
Hayes Lemmerz International Inc., which injection molds air-intake manifolds and valve covers in addition to making wheels and metal engine parts, stated in financial papers filed Dec. 4 that it will no longer provide guidance on future business and earnings, ``due to the difficult and unpredictable conditions in the global economy and the global automotive markets.''
CSM's Gillette noted that some companies, including interiors parts maker Key Plastics LLC of Farmington Hills, Mich., have managed to refinance existing debt to improve their fiscal picture. Some hedge funds are considering potential acquisitions even with the current climate.
But those deals are not likely to proceed until the industry knows for sure what will happen.
And in one piece of irony, banks are not even acting against insolvent companies by forcing them into U.S. Bankruptcy courts — in part because foreclosing on those businesses will not guarantee they will get much in return.
``Obviously there are some businesses that have already hit the brick wall, but right now the banks are on hold because they're waiting to see where it goes, and it's not going to be any worse tomorrow than today,'' Benson said. ``They could liquidate and still get nothing.''
Even companies in good fiscal shape are stuck in limbo, waiting to see which customers will survive, and whether those firms will delay or cut new vehicle launches, he said.
Consider a toolmaker, for instance, who already has a purchase order for a new mold for an upcoming model, Benson said. If the automaker is forced into Chapter 11 protection, the car may never be built, and the company may never be paid. If the automaker decides to delay the start of production for six months until it has more cash on hand, the mold maker will have to wait longer to receive payment for the tool. But at the same time, the company has to be ready to start cutting steel if that vehicle is rushed into production as part of the carmaker's restructuring focus.
``Things are really frozen from the perspective of the supplier,'' Benson said.
