Fed Economist: Auto Parts Makers May Need More US Money
April 15 2009 - 9:14PM
Dow Jones News
The $5 billion in federal aid designated for the auto parts
industry may not be enough to sustain suppliers if General Motors
Corp. (GM) and Chrysler LLC. file for bankruptcy, a senior
economist for the Federal Reserve Bank of Chicago said
Wednesday.
Thomas Klier said the quick and orderly bankruptcy restructuring
being contemplated for the two auto makers would be difficult to
achieve if suppliers begin collapsing because payments to them are
suspended or reduced while the auto makers are under bankruptcy
protection.
"It's hard to envision the process being as clean and neat as is
being talked about," said Klier, after a panel discussion sponsored
by the Michigan-based Center For Automotive Research.
The U.S. Treasury Department has agreed to loan the auto
companies up to $5 billion from the Troubled Assets Relief Program
to make payments to their suppliers.
But it's unclear how long that money would last if Chrysler or
General Motors file for bankruptcy. Some industry observers have
estimated the money would be exhausted in just a few weeks if both
companies file.
The auto makers are trying to avoid bankruptcy by working out
cost cuts with the United Auto Workers Union and agreements with
banks and bondholders to reduce their heavy debt loads. The Obama
administration, which is keeping the two companies afloat with more
than $17 billion in federal loans, has given them only weeks to
work out deals.
Klier said the government is leaving decisions about the
distribution of federal money for suppliers to the auto companies,
essentially allowing them to pick and choose which suppliers they
want to survive.
But the layers of companies that supply component makers make it
difficult to identify all the companies worth preserving in a short
time frame.
"It's messy," said Klier, whose research has focused on the
parts industry. General Motors and Chrysler "don't know who's in
the second and third tiers of suppliers that can't go under."
Klier added it would be nearly impossible keep the fallout from
Chrysler and General Motors' decisions from affecting other auto
makers. Parts suppliers on average do business with four different
car manufacturers.
Dozens of parts companies have folded or filed for bankruptcy.
Companies have come under pressure in recent years from rising
material costs and shrinking margins on components.
More recently suppliers have been suffering from plunging
production volumes of cars and light trucks because of the downturn
in the U.S. economy.
-By Bob Tita, Dow Jones Newswires; 312-750-4129;
robert.tita@dowjones.com