It’s trying times for U.S. auto suppliers as plants reopen — the industry needs at least $20 billion

- Advertisement -
KEY POINTS
  • The coronavirus turned a difficult situation into a dire one for some auto suppliers, particularly small- to medium-sized companies.
  • The Original Equipment Supplier Association says an influx of around $20 billion to $25 billion is needed to avoid widespread issues.
  • Industry experts expect the coronavirus to force bankruptcies, mergers and acquisitions of auto suppliers.
- Advertisement -
- Advertisement -
- Advertisement -
A worker assembles truck engine cooling module components at the MAHLE Behr Charleston Inc. auto part facility in Charleston, South Carolina, March 20, 2018.
A worker assembles truck engine cooling module components at the MAHLE Behr Charleston Inc. auto part facility in Charleston, South Carolina, March 20, 2018.
Luke Sharrett | Bloomberg | Getty Images

The U.S. auto supplier industry was facing challenges heading into this year of slowing sales and investing in emerging technologies such as all-electric and autonomous vehicles. Then the coronavirus pandemic hit, turning a difficult situation into a dire one for some companies.

Unlike major automakers, which have billions of dollars in cash available, many suppliers weren’t prepared for such a drastic downturn in the economy. The coming weeks, as automakers attempt to reopen and ramp-up U.S. factories, will be trying times for suppliers, particularly small-to-medium-sized companies.

Julie Fream, CEO and president of Original Equipment Supplier Association, a trade group representing hundreds of auto suppliers, said the industry needs an influx of around $20 billion to $25 billion as soon as possible to avoid widespread issues, including bankruptcies.

“We need to get liquidity into the automotive supplier community very quickly,” she told CNBC. “There’s nothing coming in right now and there’s a lot going out in terms of monies and we need to help them now.”

Auto suppliers, Fream said, are “in a time of tremendous uncertainty” in the short term as they attempt to reopen operations following Covid-19 shutdowns.

Auto suppliers are typically paid for completed work in periods such as 30, 60 or 90 days. With most factories being down since March, suppliers are now receiving little to no revenue as they restart production, which can be a capital-intensive process.

“Once they start to resume operations, the cash is going to disappear pretty quick,” said Fred Hubacker, a managing partner of consulting firm Conway MacKenzie. “We wouldn’t be surprised to see some bankruptcies at all tier levels.”

Auto suppliers are categorized in tiers. Tier-1 suppliers such as American Axle & Manufacturing, Robert Bosch and Continental are typically the largest and supply directly to the automakers. The lower tiers provide to the higher tiers and can significantly range in sizes from mom and pop shops to multimillion or multibillion corporations that may not exclusively supply to automotive.

S&P Global reported last month the odds of default for auto parts suppliers jumped in April, leading to expectations of increased consolidation and bankruptcies.

The amount of pressure on suppliers regarding cash during the coronavirus pandemic is two and a half times that of the Great Recession due to the “zero revenue situation,” according to Kristin Dziczek, vice president of industry, labor and economics at the Center for Automotive Research.

Lobbying efforts

Without cash, officials say, some suppliers will become insolvent, causing bankruptcies, mergers, joint ventures and acquisitions, likely by larger suppliers to assist in keeping the supply chain running.

A kink in the supply chain remains one of the greatest concerns for automakers restarting vehicle production in North America, which has been shuttered since March due to the coronavirus pandemic.

“All of our production manufacturing operations rely on healthy suppliers and their ability to start up is really critical,” Ford Motor Chief Operating Officer Jim Farley said Thursday during the company’s annual shareholder meeting.

Daimler confirmed Friday its Mercedes-Benz plant in Alabama, which was among the first U.S. factories to reopen last month, would once again idle next week due to a parts shortage.

OESA, according to Fream, is working with its parent group, the Motor and Equipment Manufacturers Association, and politicians in an attempt to get money to auto suppliers, including potentially carving out money from the Main Street Lending Program specifically for auto suppliers. Something like a short-term bridge loan, she said.

“At this point and time, it’s all about cash,” Fream said. “It’s really about making sure you have the cash flow needed as a company to sustain your business.”

A bipartisan group of lawmakers, led by officials in Michigan, are urging the House to include auto companies, particularly suppliers, in any future pandemic legislative proposals.

Rep. Fred Upton, R-Mich.
Rep. Fred Upton, R-Mich.
Getty Images

“This next stimulus package needs to address not only the auto assembly folks but the auto suppliers, the whole supply chain,” U.S. Rep Fred Upton, R-Mich. told CNBC’s “Squawk Box” earlier this week. “This is a critical manufacturing industry that America needs to have.”

The lawmakers, in a letter, cited the auto industry’s employment of more than 10 million Americans as well as its $953 billion economic annual impact as reasons to include the auto sector in upcoming stimulus efforts.

A new $3 trillion coronavirus package that House Democratic leaders plan to pass on Friday did not appear to have any specific plans for the automotive industry.

Smaller companies most at risk

The companies most at risk of bankruptcy are the small-to-medium-sized suppliers, officials said. These are companies as large as 10,000 or so employees and revenue of less than $750 million.

Fream said many small suppliers were eligible for the government’s Paycheck Protection Program loans but some of the medium-sized suppliers were too large to qualify and don’t necessarily have access to credit lines like the largest suppliers

“The midsize companies we’re also very worried about,” she said, citing it’s “too early to tell” how many distressed companies will need assistance or go bankrupt. “We don’t know what the demand side volumes are going to be yet coming out of this.”

The smallest suppliers with fewer than 100 employees make up about 78% of the country’s thousands of suppliers, according to the Center for Automotive Research.

Techniplas, a producer of plastic components primarily for the automotive and transportation industries, filed for bankruptcy last week. The Nashotah, Wisconsin-based company employed more than 700 people at the time of the chapter 11 filing.

Peter Smidt, co-chief restructuring officer, cited that a number of factors contributed to the decline in the company’s earnings and liquidity, “not the least of which is the Covid-19 pandemic.”

The coronavirus pandemic added to challenging times for auto suppliers, many of which were attempting to shift business models to invest in new areas for all-electric and autonomous vehicles.

Suppliers, effective July 1, also face greater costs to adhere to additional requirements under the USMCA trade deal. Additional employees, logistics and technologies will be needed to meet the requirements, officials say.

“All this is happening on top of these technology changes and demands, trade changes and demands, and I think we’re either going to see greater partnerships, joint ventures and tie ups …. or mergers and acquisitions that take place because of solvencies,” Dziczek said.

Home of Science
Follow me

- Advertisement -

Discover

Sponsor

Latest

Nottingham Open: Dan Evans beats Jordan Thompson to win titleon June 12, 2022 at 5:34 pm

Dan Evans beats Jordan Thompson for his second Nottingham Open title without dropping a set in an ideal boost to his Wimbledon preparations.

Disabled actors patronised by TV industry, says artiston February 25, 2023 at 7:33 am

Actors with disabilities are often cast to make non-disabled people look inclusive, an artist says.Actors with disabilities are often cast to make non-disabled people...

Sbu Nkosi: Missing person case opened for South Africa wingon December 4, 2022 at 7:17 am

South Africa's World Cup winner Sbu Nkosi has been reported missing by his club in Pretoria.South Africa's World Cup winner Sbu Nkosi has been...

NI protocol: Unilateral action by UK government ‘could erode peace’on May 15, 2022 at 10:28 am

Irish foreign minister Simon Coveney says the EU is flexible and wants compromise.Irish foreign minister Simon Coveney says the EU is flexible and wants...

The Papers: ‘Cheers’ at roadmap – but normal ‘some way off’on April 6, 2021 at 4:47 am

Most of Tuesday's newspapers focus on Boris Johnson's press conference about easing lockdown.The paper reveals that more than 2,000 such incidents have been recorded...
Home of Science
Follow me