Auto-Parts Suppliers Teeter as Car Production Halts

Date: Friday, April 3, 2020
Source: The Wall Street Journal

Shutdowns ripple through supply chain, prompting some to consider layoffs, delayed payments and adjustments to loan terms

With U.S. car factories idled because of the new coronavirus, the disruptions are falling hard on the nation’s auto-parts suppliers, some of which are already showing signs of distress.

Unlike the bigger, well-capitalized car companies, the thousands of parts firms that feed the industry’s global supply chain operate closer to the edge with less of a cash cushion and with contract orders that still need to be filled, say executives, consultants and industry lawyers.

Some are already laying off workers, delaying payments to vendors and asking lenders to adjust terms. Others are trying to preserve business by keeping some manufacturing lines running, knowing they need to be ready when the car companies resume production.

Many supply contracts require auto-parts firms to deliver on time or risk fines of up to $50,000 for every minute delay, industry attorneys say.

“It doesn’t take as much to send them under because they’re already stretched,” said Jeremy Rice, who works with auto suppliers at accounting firm Mazars USA. “This is just another giant weight on a very thin sheet of ice.”

Clarence Martin, president of Detroit-area auto supplier Eypex Corp., thought he could sidestep the temporary car factory closures in Michigan that began in March by filling parts orders coming from China, which has begun restarting manufacturing lines.

Then, Michigan ordered a three-week lockdown of all nonessential businesses, leading him to close one facility completely and send workers home. Another one is operating with minimal production. Some manufacturing in Michigan is deemed essential.

Figuring out how to navigate the uncertainty is like “trying to hit a curveball in the dark,” Mr. Martin said. “If we’re in this situation a month or two from now, it will be bedlam,” he added.

So far, 42 of the 44 auto-assembly plants in the U.S. have been idled because of the new coronavirus outbreak, according to the Alliance for Automotive Innovation, an industry trade group.

Ford Motor Co. said Tuesday that it would extend its temporary plant closures in North American indefinitely, reversing an earlier plan to restart some by mid-April. Fiat Chrysler Automobiles NV and Toyota Motor Corp. also have extended their work stoppages into April.

Halting work at a major car plant almost immediately sets off a chain reaction, affecting hundreds of auto-parts suppliers and in turn their vendors, which supply materials and smaller components.

Justin Whitmire, president of Southeastern Tool & Design Inc., a machine-maker nearVolkswagen AG ’s assembly plant in Tennessee, said his company is still open and making equipment, but because the VW plant is temporarily closed, he isn’t able to finish some work and receive payment.

He said he would have to consider laying off some of his 28 employees if work doesn’t resume this summer.

“For a small business like ours, it’s not going to be long,” Mr. Whitmire said.

The biggest threat facing the car companies now is the risk that smaller parts-suppliers go under, said Mark Fields, Ford’s former chief executive and a senior adviser at private-equity firm TPG Capital.

“The industry should probably be having that discussion with the government now to explain, ‘If we’re shut down beyond this date, it will be a problem for the supply base, which means it will be a problem for us,’” he said.

The average car consists of roughly 30,000 individual parts sourced to hundreds of suppliers. A disruption at even one firm could have a cascading effect, ultimately having an impact on production at multiple assembly factories, industry analysts say.

Auto makers, including Ford, Toyota andNissan Motor Co., say they are working with parts suppliers to ensure they can support them when their North American factories resume production.

A small number of suppliers have been able to land contracts to produce parts for General Motors Co. and Ford as they rush to establish production of ventilators and other medical equipment. Fewer than 100 of GM’s thousands of suppliers are involved in the ventilator effort, for example, and some of those say the work has replaced only a sliver of the lost automotive business.

The auto industry’s collapse during the 2008-09 financial crisis prompted a wave of bankruptcies and consolidation that ultimately thinned out the number of auto-parts firms operating in the U.S.

Suppliers are healthier now, due in part to the nearly decadelong boom in U.S. auto sales. But manufacturing parts is still a low-margin business. The industry’s transition to new technologies, such as electric cars, also has prompted many suppliers to invest heavily to revamp operations. As a result, many firms are highly leveraged and stretched on cash, industry executives and advisers say.

Even larger global car-part suppliers, such as electronics-maker Aptiv PLC and Detroit-based American Axle & Manufacturing Inc. are preparing for the worst, drawing down credit lines and suspending dividend payments.

Within the past three weeks, auto suppliers have laid off or furloughed more than 3,000 workers in Michigan, according to government notices.

Some firms also are working with lenders to adjust financing terms and borrow against future payments they expect to receive from customers—a move that provides short-term relief but increases interest payments longer-term, said Mr. Rice, the adviser at Mazars.

Government loans and tax breaks, like those included in the federal stimulus package, could help ease the burden, consultants and lawyers say.

Still, questions are mounting about whether some auto-parts suppliers will be able to survive if the car-plant work stoppages drag on into the early summer.

Restarting the idled manufacturing lines could cause another cash crunch for suppliers because they have to front the costs of hiring back workers and buying materials in advance of getting paid, executives say.

Dan Sharkey, a Detroit-area lawyer who works with suppliers, said he is already fielding calls from panicked companies, worried they will run out of cash.

“It looks like we could be headed to distressed-supplier land again,” Mr. Sharkey said. “That’s a scary place to be.”


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