There are two weeks to go until General Motors Corp. hits a federally imposed deadline that will determine if it goes into bankruptcy, and auto suppliers can do little more than wait and watch.
The auto industry already has been hit by Chrysler LLC's move into Chapter 11 protection, along with a slowdown in production and delays in starting work on future products. Chrysler filed in April for protection in U.S. Bankruptcy Court in New York.
Detroit-based GM has needed federal loans to remain afloat and must submit a new restructuring plan to the government by June 1 to qualify for more funds. That restructuring could include a stint in Chapter 11 to reorganize. GM buys millions of dollars in parts every day from companies whose futures are tied tightly to it. Those firms have no certainty about what would happen to those payments under a bankruptcy, if GM follows Auburn Hills, Mich.-based Chrysler into court.
Lear Corp., for instance, is awaiting payment on between $75 million and $100 million worth of parts on any given day, Matt Simoncini, Lear's senior vice president and chief financial officer, told analysts in a May 14 telephone conference call.
While GM recently has been paying those bills within a month, and Lear calls its exposure to both Chrysler and GM as “manageable,” that is a lot of value in transition at any time.
Lear is not alone.
Magna International Inc. of Aurora, Ontario, said it cannot predict how a GM bankruptcy will affect its business. Even without bankruptcy, GM is planning a series of production cuts through the summer that will hit suppliers' profit streams, Magna officials said May 6 while discussing the auto supplier's first-quarter results.
“We are facing the worst industry conditions in decades, particularly in our primary markets,” said Vincent Galifi, Magna's executive vice president and chief financial officer.
Lear, which uses urethane foam extensively in seats and in plastics for its electronics unit, is among major U.S. suppliers that can benefit from federal payment guarantees — part of the government's $5 billion supplier support program, Simoncini said. He said Southfield, Mich.-based Lear is enrolled for both GM and Chrysler.
But the company expects that its suppliers — which do not qualify for the federal support because they do not do business directly with the automakers — also will be under pressure. Simoncini said Lear anticipates spending between $40 million and $50 million to handle distressed suppliers within its own network this year. That could potentially equal the amount Lear spent in 2005 related to supporting a distressed supply base when its product line included interior parts in addition to seats and electronics.
Lear has since spun off its interior unit to International Automotive Components LLC through a joint venture.
The costs racked up by distressed suppliers can range from early payments for parts to canceling a contract and moving the work to another company.
Lear spent about $25 million on distressed suppliers in 2006 and almost nothing in 2007. As credit tightened and consumer spending on cars slowed last year, the company had to spend about $10 million on distressed suppliers in the last quarter of 2008 and another $10 million for the first quarter of this year, Simoncini said.
The industry's Original Equipment Suppliers Association and the Motor & Equipment Manufacturers Association are lobbying the federal government to extend support to Tier 2 and smaller firms.
“This is a critical time and the stakes could not be much higher,” OESA President Neil DeKoker said.
The bulk of Tier 2 suppliers are privately owned and do not have to disclose sales, but public companies including Lear and Magna have shown the extent of the hits suppliers are taking.
Lear saw its sales drop to $2.2 billion during the first quarter, down 44 percent from the same period in 2008, and posted a net loss of nearly $265 million compared to profit of $78 million.
Magna's global sales dropped to $3.57 billion from $6.6 billion for the quarter, and had a net loss of $200 million, down from $207 million in profit in 2008.
And while Visteon Corp.'s major customer, Ford Motor Co., is not having the same fiscal problems as GM and Chrysler, it has also made major cuts affecting its suppliers. Visteon, based in the Detroit suburb of Van Buren Township, posted sales for the first quarter of $1.53 billion, down 55 percent from last year. It had $2 million in net income for the quarter.
Lear and Magna executives both stressed that they have cash on hand to continue to finance operations.
“I'm confident we will withstand the downturn, and be established to take advantage of the recovery,” said Lear CEO Bob Rossiter.