Suppliers demand cash from troubled Chrysler

A major oil company and a utility are demanding cash up front from Chrysler, offering a glimpse of the threat posed by a collapse of the North American auto supply chain.

A major oil company and a utility are demanding cash up front from ailing Chrysler LLC, offering a glimpse of the threat posed by a collapse of the North American auto supply chain.

Executives at Chrysler, which is considered the most vulnerable of the Detroit Three, refused yesterday to identify the two suppliers.

“The biggest risk we have is our suppliers coming and saying ‘I want to be paid on delivery,'“ Chrysler chief financial officer Ron Kolka explained.

“We can't do that. The math just doesn't work.”

It's the classic Catch-22: The Detroit Three can't survive without their suppliers and parts companies need the auto makers to live.

If Washington balks at a rescue of cash-starved General Motors Corp. and Chrysler, the companies won't have the cash they need to pay their vast network of suppliers, triggering a cascading series of bankruptcies throughout North America. The two companies are facing bills totalling $9-billion (U.S.) for already delivered parts.

In turn, if suppliers start slipping into bankruptcy first, assembly plants would be starved of the parts they need to produce cars and generate cash.

Ford Motor Co., which is better off financially, could also be dragged to the brink if its suppliers follow GM and Chrysler into bankruptcy.

In a sign of the deepening financial woes in the auto supply chain, metal stamping company PPI Holdings of Rochester Hill, Mich., filed for Chapter 11 bankruptcy protection yesterday.

“The Big Three's precipitous loss of market share has devastated the automotive supply chain,” lawyers for the company said in a court filing.

And earlier this week, Canadian parts maker Burlington Technologies Inc. was granted protection under the Companies' Creditors Arrangement Act – Canada's equivalent of Chapter 11.

“Although the vast majority of [Burlington's] contracts are profitable, the severe slowdown in the automotive industry as a whole has resulted in a substantially reduced volume of sales,” the Oakville, Ont., based company said in court documents.

“We need to satisfy suppliers that there is going to be a tomorrow,” United Auto Workers president Ron Gettelfinger told reporters in Detroit.

“If suppliers believe they can't operate, what are they going to do? They aren't going to deliver the goods. If they don't deliver the goods, the plants go down.”

Chrysler's Mr. Kolka said the company would face imminent collapse if it had to pay its suppliers before taking delivery of parts.

“If I had to pay $7-billion tomorrow before I get all my parts, there is no Chrysler,” he said. “Same thing with GM and Ford. You just don't have enough money to pay it.”

Persisting in such demands for cash up front could cause a scenario in which the cash-strapped auto makers have to file for protection, setting off a cascading collapse of suppliers that could ripple throughout the industry because most parts makers supply several auto companies.

Chrysler acknowledged the problem in a meeting with suppliers yesterday.

“It's important that the [auto makers] and supply network work together with a sense of calm and discipline. The situation in Washington has created tension in the supply network that threatens the delicate interconnected relationships this industry needs,” Chrysler said in a memo to suppliers.

A massive January shutdown announced by GM yesterday will be another blow to Canadian parts makers that are already struggling and increases the need for government assistance for that section of the auto industry, said Gerry Fedchun, president of the Automotive Parts Manufacturers Association of Canada.

Parts makers said they, too, should be included in any bailout offered to the Detroit Three.

“That cascade effect, it's real,” said Craig Fitzgerald, an auto analyst with Plante & Moran in Southfield, Mich.

Original Story - Globe and Mail