A Second Crisis in Detroit: Failing Suppliers?

(NEW YORK) — The financial woes of U.S. automakers have grabbed Washington's attention, but similar problems at auto suppliers have the potential to set off a cataclysmic chain of events in the industry if key parts makers run out of cash and fail.

As with the automakers, auto suppliers' sales have tumbled this year because of the steep drop in demand for new vehicles. (See TIME's pictures of the week)

That has forced suppliers to burn through their cash reserves and slash their costs to stay in business, said Craig Fitzgerald, an automotive analyst with Southfield, Mich.-based Plante & Moran PLLP, which advises about 400 small and midsize auto suppliers.

Meanwhile, banks and other credit providers have become dead-set against lending to any company in the faltering automotive industry, making it difficult and expensive for suppliers to get needed financing.

But if the companies at the bottom of the supply chain don't find a way to recapitalize, Fitzgerald warned, numerous bankruptcies and liquidations among the small companies will set off a string of parts shortages that could reach all the way to the vehicle assembly line.

The resulting disruptions could negate any help the government might give General Motors Corp., Ford Motor Co. and Chrysler LLC.

"Either they deal with the liquidity issues at the lower tier, or these problems have the potential to just devastate the Detroit OEMs and the other automakers," Fitzgerald said, referring to so-called original equipment manufacturers GM, Ford and Chrysler. "It's an issue equal to what's going on at the Big Three, they just don't have the heft, so it doesn't get quite the play."

In most cases, auto suppliers have their own suppliers, who in turn receive their parts from other companies, meaning that many automotive components pass through a chain of several companies before they're sold to an automaker.

"The fragility of the whole thing is very much like a house of cards," said Bob Viswanathan, an assistant professor of operations management at the University at Buffalo School of Management. "Everybody knows that the finance markets are so interconnected, but the auto industry is worse."

Tom Wiethorn, co-owner of Craig Assembly, said orders for his St. Clair, Mich., company's hose connectors — used in radiators that end up in GM and Ford vehicles — have fallen significantly in recent months.

As a result the company, which has $12 million in annual sales, has cut its work force by 20 percent to about 60 people and is worried that it could end up violating its debt agreements.

"This is very serious," said Wiethorn, who also serves as a manufacturing representative setting up contracts for other auto suppliers. "Some of the suppliers I know are teetering on bankruptcy."

The Motor & Equipment Manufacturers Association is hoping to win a piece of a proposed rescue package that would use $25 billion of the $700 billion financial industry bailout to help GM, Ford and Chrysler.

"We are all connected by some very thin threads and if any piece of the chain from the manufacturers to the small suppliers fails, the whole thing could fail," said Ann Wilson, the association's vice president of government affairs.

Top Republicans, however, have said the Wall Street money should not be used for the auto industry and would only postpone its demise. Sen. Richard Shelby of Alabama on Sunday called the industry "a dinosaur."

Yet even foreign automakers that build cars and trucks in the United States could be affected. Companies like Toyota Motor Corp., Nissan Motor Co. and Honda Motor Co., with plants scattered throughout the South and Midwest, get their parts from the vast, multilayered network of U.S. suppliers that employs about 800,000 people.

Dave Andrea, vice president of industry analysis and economics for the Original Equipment Suppliers Association, a division of the Motor & Equipment Manufacturers Association, said that's why lawmakers need to be looking at the U.S. auto industry as a whole.

"We need to be talking about this at the U.S. level, not talking about the Detroit Three and then putting the other automakers in another bucket," he said. "If we have major failures of suppliers, the foreign automakers are going to be affected as well."

Automakers generally only have a one- to two-shift supply of some key parts, Andrea said, making them very susceptible to supply chain disruptions.

The nearly 3-month-long strike at American Axle and Manufacturing Holdings Inc. this spring crippled truck production at GM, showing how fast a parts shortage can shut down assembly lines.

GM's production cuts led to millions in lost sales at other suppliers such as Lear Corp., Superior Industries International Inc. and Magna International Inc.

Andrea noted that automakers have contingency plans for sourcing their parts should one of their suppliers shut down. But those plans can come with hefty hidden costs, such as the expense of importing parts from overseas, he said.

"It's really the logistics part you don't see," Andrea said. "And those are the kinds of costs the industry can't bear in these troubled times."

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