March 20, 2009 - Obama Auto Task Force, Washington D.C.

Auto Woes Caught in Chain Reaction

The Obama administration announced yesterday that it will provide $5 billion in financial aid to auto parts manufacturers, signaling the government's continued interest in propping up the domestic car industry and raising hopes that it will soon provide even more money.

As auto sales have plunged, the companies that make parts for makers have shown increasing signs of weakness. While most of the bailout attention has focused on the carmakers, most of the hundreds of thousands of jobs in the U.S. auto industry are created by suppliers.

"The failure of a few key suppliers could have brought the entire industry to its knees," said Neil De Koker, president of the Original Equipment Suppliers Association, where a third of the membership reported that it would face severe financial distress in the first quarter.

The $5 billion in federal assistance will come out of the $750 billion Troubled Asset Relief Program, the financial rescue effort passed by Congress in October. The United States has extended $17.4 billion in loans from that program to General Motors and Chrysler, and those companies have asked for as much as $21.6 billion more.

Wall Street greeted the announcement of help for parts makers as a sign that the administration is likely to continue to aid the automakers. General Motors shares rose more than 8 percent yesterday, and Ford shares gained almost 2 percent.

But the Treasury's move was criticized by some Republican senators, who said the assistance wrongly extends the scope of the rescue package.

"Regardless of the merits, Treasury's decision to provide up to $5 billion to auto parts suppliers flies in the face of what they told us they would do in January -- provide aid to GM and Chrysler and only for comprehensive restructuring," said Sen. Bob Corker (R-Tenn.), a member of the Senate Banking Committee. "The administration needs to work with Congress instead of running the country by executive fiat without checks and balances on the use of taxpayer money."

Administration officials responded that the aid does not represent a new program but merely an extension of earlier efforts to aid auto companies because it provides support to them by propping up their supply base.

Automakers usually pay suppliers for parts 45 to 60 days after they're shipped. During that time, suppliers borrow against these billings, or receivables, to continue to pay their workers and fund operations.

The economic crisis has cut into such short-term financing, however, because banks have been reluctant to accept those receivables as collateral, given the weakened condition of so many companies.

In an effort to relieve that situation, the government said it would guarantee the auto company payments, making it easier for the parts makers to borrow against those amounts. The government also said it would give suppliers the option of exchanging their receivables for cash.

Participating suppliers must pay a small fee for the aid -- 2 percent of the receivable for a guarantee and 1 percent more to get cash.

The assistance, however, flows at the discretion of the automakers, who must agree to participate in the program. The program is not open to foreign automakers. Participating U.S. firms must contribute 5 percent of the money allocated in the program.

GM and Chrysler have agreed to participate.

Ford, which has not sought government loans, has not.

"We remain viable and expect no issue with continued payments to our suppliers," Ford said in a statement.

GM said the "U.S. Treasury program recognizes how critical the domestic supply chain is in keeping America's auto industry running. GM appreciates the Treasury and President's Task Force on Autos taking quick action that will improve suppliers ability to access much needed liquidity during these very difficult economic times."

Suppliers yesterday besieged automakers with questions about who would receive support and who wouldn't.

In a letter to its suppliers, Chrysler warned that the "government loan associated with this program is not large enough to permit all of Chrysler's U.S. based suppliers to participate."

"The news was good and bad," said Mike Ryan, the chief executive of FormTech, a suburban Detroit company that forges parts for the automakers. "Now we've got to rely on the decision from GM and Chrysler."

The program is the first official action of President Obama's auto task force. Members have spent the past few weeks assessing the viability of GM and Chrysler as they consider whether to grant their request for additional government loans.

"We will have more to say about the industry in the coming days," said a member of the administration's auto task force regarding the supplier program, who gave reporters a background briefing on the condition of anonymity.

Suppliers had originally sought far more money. Last month, for instance, they requested about $18.5 billion in aid. The smaller $5 billion program aims to support the suppliers most in need and keep the critical parts makers functioning, the task force member said.

"We have to allocate capital in a prudent manner," he said. "We can't help every company in every industry."

Major suppliers such as American Axle have recently issued warnings about their viability. On Tuesday, Lear received waivers from its banks so that its lenders would not force the company into default.

Many analysts predict that with or without the program, the ranks of auto parts manufacturers were destined to be trimmed -- there are simply too many car models and not enough sales.

"It won't be a cure-all to what ails the supply chain, but what it will help some of the firms that are on the brink and teetering from a cash flow prospective," said Mike Wall, an auto analyst with CSM Worldwide.

Original Story - Washington Post

Related Story - March 20, 2009

Suppliers thankful for aid but wary

Detroit's auto suppliers thanked the Obama administration Thursday after it announced a $5-billion financial aid package, even as questions rose about how many firms could be helped and how much more rescuing the industry would need.

The administration pledged Thursday that the Supplier Support Program was the first step of a broader auto industry aid plan that could be unveiled next week, addressing requests by General Motors Corp. and Chrysler LLC for $21.6 billion in survival loans.

The supplier program was "the first piece" of the Obama plan, said an administration official speaking on condition of anonymity, adding "we will have more to say about the industry in the coming days."

Spokespeople at several suppliers welcomed the news of aid to the supplier industry but said it is too early to tell how or if their respective companies would apply for federal help. Analysts agreed that the program will help bridge suppliers to an industry rebound but won't guarantee a future for all suppliers.

"It's a stopgap measure," said Tom Spillane, automotive partner at Foley & Lardner, who helped suppliers craft their proposal for $25.5 billion in credit guarantees and quicker payments. "But it doesn't provide the longer-term solution."

"There will be a lot of mouths to feed with this," said Mike Wall, auto analyst at CSM Worldwide.

The program will use a trickle-down method of funneling money through Detroit automakers to their direct suppliers, increasing the power of GM and Chrysler to decide which of their suppliers survive. Ford Motor Co. will not take part, saying it faced no problems in paying suppliers.

Auto suppliers employ about 600,000 people in the United States, more than twice the number the Detroit Three automakers directly employ. Suppliers typically have several customers. A large, sudden supplier bankruptcy or liquidation could derail the restructuring plans of the Detroit automakers and halt production at the Japanese automakers.

The Treasury Department said the program was not meant to save every firm.

"But as the restructuring process moves forward, the administration is committed to helping stabilize the industry, protect American jobs and give consumers the confidence and the means to purchase cars," the Treasury said in a statement.

Michigan lawmakers hailed the plan. Rep. Sander Levin, a Royal Oak Democrat, said the program was a "valuable first step." Democratic Sen. Debbie Stabenow said the plan was "a very significant sign that they understand the importance of suppliers, and they want to help."

With industry analyst firm Grant Thornton predicting last week that up to 500 U.S. auto suppliers are on the brink of failure, rescuing the auto supply chain had risen to the top priority for the Obama administration's auto task force. The weakest U.S. sales in four decades triggered massive cuts in production over the past few months, leaving suppliers struggling for cash.

In normal times, a supplier gets paid between 45 and 60 days after shipping a part to an automaker and can use the promise of that payment as collateral for loans. In recent months, the collapse of credit markets and the troubles at GM and Chrysler have made lenders unwilling to trust those promises.

The program will offer suppliers two ways to benefit. It will guarantee the payments from automakers to suppliers, easing the concerns of potential lenders. Auto suppliers also may sell the payment to the Treasury at a slight discount for an immediate cash infusion.

The offer applies only to parts shipped after today. It's available only to GM, Chrysler and Ford, and the guarantees can be applied only to parts made in U.S. factories, whether they're owned by U.S. or foreign firms -- a provision that some industry officials had pressed for to keep any aid from flowing overseas.

The administration official emphasized that the program was a line of credit that the government expected to be repaid.

Original Story - Detroit Free Press

Supplier aid is poised to start

Details of federal help being worked out

A federal program that has promised as much as $5 billion in aid to struggling auto suppliers could begin as early as next week, according to the Original Equipment Suppliers Association.

Details of the Supplier Support Program are still being finalized, but some specifics are emerging as suppliers continue to face a cash crunch because of low production during the first three months of the year.

About $2 billion is to be allocated to suppliers of General Motors Corp, said a person familiar with the plan.

It's unclear whether Chrysler LLC will receive the remaining $3 billion or if some of that money will be set aside in case other automakers decide to participate in the program. Ford Motor Co. has said it does not plan to be in the program.

The program will guarantee a supplier's receivables, or the payments expected from their customers, which are typically used as collateral on loans from banks. Those banks in recent months have been leery about lending to suppliers.

Suppliers also will be able to sell the payment to the Treasury at a discount to receive an immediate cash boost.

To participate, suppliers must pay a fee amounting to 2% or 3% of the receivables they seek a guarantee for or to sell.

To be eligible, parts makers also must supply directly to the automakers, which excludes so-called Tier 2 and Tier 3 suppliers that sell parts to those direct suppliers.

Update Story - Detroit Free Press

U.S. Releases Aid To Auto Suppliers

Treasury Backs Payments to Firms

The Treasury Department yesterday gave cash-strapped auto suppliers the green light to begin shipping parts with the promise that the government would guarantee payment.

Treasury left it up to General Motors and Chrysler to decide which suppliers would be eligible for the aid. GM will initially get $2 billion in federal support, and Chrysler will receive $1.5 billion. Ford declined to participate, saying it had enough funds to support its supply base. In all, the government said it is prepared to set aside $5 billion to help finance the deals.

"These efforts, backed by U.S. Treasury resources, will help stabilize the auto supply base and restore credit flows in a critical sector that employs more than 500,000 American workers across the country," Treasury spokeswoman Jenni Engebretsen said in a statement.

Suppliers are paid 45 to 60 days after they ship parts. Under normal credit conditions, companies could borrow against these billings, but banks have been unwilling to lend because of the uncertainty in the industry. Under the Treasury program, suppliers can either pay a fee for their receivables to be guaranteed by the government or they can ask for payment upfront. The federal backing is essentially a line of credit, with the requirement that the automakers make capital infusions of 5 percent.

"We appreciate the Treasury's support and this program recognizing how critical the domestic supply chain is in keeping America's auto industry running," GM spokesman Dan Flores said. "This program will help suppliers access much needed liquidity during these difficult economic times."

At the same time, GM and Chrysler, which together received $17.4 billion in government loans, are trying to rework their restructuring plans to qualify for additional federal aid.

A government-led team of 15 financial experts arrived in Detroit yesterday and will return there next week to work with GM on its restructuring efforts, said an administration official, who spoke on the condition of anonymity because the meetings are private. The team is led by Harry Wilson, a former hedge-fund partner who is a member of the White House's auto task force. It includes experts from Boston Consulting Group and investment bank Rothschild Inc.

President Obama gave GM 60 days to gain concessions from the United Auto Workers and its bondholders.

Today, Ed Montgomery, President Obama's new point man to help manufacturing communities deal with the auto industry's downfall, plans to visit Cleveland to discuss the president's plan to revitalize the business. Montgomery, who visited Michigan last week, is scheduled to meet with Ohio Gov. Ted Strickland (D) and local officials for a private meeting.

Moody's analyst Bruce Clarke predicted that there is a 70 percent chance that at least one of Detroit's three automakers will file for bankruptcy because of the complexity of brokering concessions out of court.

As mandated by the auto task force, Chrysler is rushing to finalize its alliance with Fiat. Jim Press, Chrysler president and vice chairman, told CNBC yesterday that the company is prepared to file for protection in case it can't complete the deal with the Italian automaker within its 30-day deadline.

"We can't predict what will happen," Press said. "We're working toward avoiding bankruptcy. That's not our goal, but we'll be responsible in regards to the equity and the assets of the company whatever the outcome for the company is."

At the New York International Auto Show yesterday, Press arrived at his company's press conference in a Fiat 500 subcompact, one of Fiat's most successful models.

"Wouldn't that make a great new company car?" he told the crowd of journalists. "We're dreaming about the possibilities for the future."

Jim Lentz, Toyota's top U.S. executive, told reporters at the show that Toyota is prepared to deal with a possible GM bankruptcy. Toyota shares about two-thirds of its 500 parts suppliers with GM.

Still, foreign car companies like Toyota might need to prepare for bankruptcies of their shared suppliers even if the Detroit automakers don't go under, analysts said.

Update Story - Washington Post