By Ben Foldy
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 near Volkswagen 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 and Nissan 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."
Mike Colias contributed to this article.
Write to Ben Foldy at Ben.Foldy@wsj.com
(END) Dow Jones Newswires
April 02, 2020 08:14 ET (12:14 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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