The real problem that exists in the Auto Industry

[MikeMike]

Posted By: Phil LeBeau |
cnbc.com
| 05 Feb 2009 | 08:55 AM ET

Remember when the country was fixated on whether or not Uncle Sam should bailout GM and Chrysler? Remember how there was compelling evidence that allowing those auto makers to collapse could bring down the entire auto industry? Remember how it felt as if the Big 3 CEOs appearance on Capitol Hill was the climax of the liquidity crisis for the auto industry?

Forget all of that.

The real crisis brewing in the industry swirls around the auto parts suppliers.

No wonder the suppliers are now talking with the Treasury Department about getting $20.5 Billion in federal aid. These guys are hurting, close to collapsing, and on the verge of blowing a hole through the auto industry. Sound serious? You bet. In fact, if you ask most people in the auto business what scares them the most right now, and they'll tell you it's the chance of cascading bankruptcies among auto parts suppliers.

Why is this storm firing up right now?

Blame it on the weak economy forcing auto makers to stop or dramatically slow down their assembly lines. That in turn means the Big 3 (and other auto makers in the U.S.) will spend less money with suppliers. As a result, suppliers already struggling are now reeling. They call it the January effect, because every February the parts suppliers have to adjust to lower receivables because their customers shut down assembly lines in late December and early January. Typically, they can ride out the January effect because the drop in revenue is not huge and suppliers also have credit lines they can draw on to get through this slow period. Not anymore.

Due to extended plant shut downs at the start of this year, the Big 3 are expected to spend just $5-7 Billion a month in February and March on auto parts, compared to $15 billion per month in past years. As if that's not bad enough, many suppliers are now unable to borrow the money needed to pay their bills because they've already violated the covenants of their loans. The real concern is not with the large suppliers like Borg Warner and Magna. Those large suppliers have the means and access to financing to ride out this storm. The real concern is with the smaller tier 2 and tier 3 suppliers who do not have the credit lines that can save them.

If those smaller suppliers start to go under, there's a concern it could trigger cascading bankruptcies with other suppliers and eventually cause parts shortages that slow down the assembly lines for auto makers. Sure, some of you will read this and scoff at these concerns. Sure, some of you will see the parts suppliers asking for a $20 Billion bailout and simply see a group of companies looking for a handout. Those opinions will make it tougher for the suppliers to get Federal aid.

But the suppliers will eventually get money from the Treasury Department because few in Washington will want to see what happens if this crisis grows in the auto industry.

The Auto Industry is screwed very hard right now... The entire industry is literally a house of cards, with the manufacturers being the shelter/roof, and then the suppliers are the foundation that allow for the roof to stand, and everyone is interconnected... Toyota, GM, Ford, Hyundai, they all rely on the same suppliers to provide their parts... without parts, they wont be able to make cars, but without cars being made, the suppliers cant make money...

 

[yllus]

I have been talking about this for months, no one believed me.

If you say so, McOwen. Because nobody knew that auto parts suppliers are in fiscal trouble.

 

[MikeMike]

Originally posted by: yllus

I have been talking about this for months, no one believed me.

If you say so, McOwen. Because nobody knew that auto parts suppliers are in fiscal trouble.

http://forums.anandtech.com/me...258109&highlight_key=y

ahem, im getting more proof, but it is from other sites, and i do not use the same username there... but i will show you proof. (unlike that other guy)

 

[StageLeft]

I think this was always the issue that in theory these suppliers would die so hard that even strong auto manufacturers would get hurt.

Anyway, bailing them out is brainless. It's like paying farmers to make food they cannot possibly sell so it will rot, or akin to making 10,000 steering wheels but there are only 5,000 cars.

Oh, hold on, that last one wasn't an analogy at all.

On the plus side, when this stimulus goes through as it likely will, I can finally update my sig with prediction perfection!

 

[MikeMike]

Originally posted by: Skoorb
I think this was always the issue that in theory these suppliers would die so hard that even strong auto manufacturers would get hurt.

Anyway, bailing them out is brainless. It's like paying farmers to make food they cannot possibly sell so it will rot, or akin to making 10,000 steering wheels but there are only 5,000 cars.

Oh, hold on, that last one wasn't an analogy at all.

On the plus side, when this stimulus goes through as it likely will, I can finally update my sig with prediction perfection!

Talking with some people within the industry, they go by referring to the axle strike of last year... "how many axles does it take to shut down an entire industry" and that number is 4... 4 axles... if 4 suppliers close, the entire industry is down, everyone, even Tata... Hyundai has already experienced this issue due to Chrysler shutting down one of their lines, Hyundai had to find a new supplier, and re certify an interior trim piece... with the current JIT production methods, at most there is 1 wk supply of parts for a line... it takes about 2 months to re certify and get into production a new part...

 

[Ktulu]

Originally posted by: yllus

I have been talking about this for months, no one believed me.

If you say so, McOwen. Because nobody knew that auto parts suppliers are in fiscal trouble.

I don't know how many times I would sit here and read many P&Ners ideas about why the US auto industry is so screwed. It would almost always turn into a domestic bashing fest. But as the months have been dragging on now we're seeing the so called unbreakable manufacturers like Toyota and Honda taking hits. It was NEVER about GM/Ford/Chrysler not making cars people wanted or whatever you guys would all say.

 

[StageLeft]

Originally posted by: MIKEMIKE

Originally posted by: Skoorb
I think this was always the issue that in theory these suppliers would die so hard that even strong auto manufacturers would get hurt.

Anyway, bailing them out is brainless. It's like paying farmers to make food they cannot possibly sell so it will rot, or akin to making 10,000 steering wheels but there are only 5,000 cars.

Oh, hold on, that last one wasn't an analogy at all.

On the plus side, when this stimulus goes through as it likely will, I can finally update my sig with prediction perfection!

Talking with some people within the industry, they go by referring to the axle strike of last year... "how many axles does it take to shut down an entire industry" and that number is 4... 4 axles... if 4 suppliers close, the entire industry is down, everyone, even Tata... Hyundai has already experienced this issue due to Chrysler shutting down one of their lines, Hyundai had to find a new supplier, and re certify an interior trim piece... with the current JIT production methods, at most there is 1 wk supply of parts for a line... it takes about 2 months to re certify and get into production a new part...

So we have to ask the question why would a company shut down if there are will payers for its product?

EDIT: Meaning, if there are still companies that want and need these crucial products, the suppliers for them will not all vanish if they still have customers.

 

[MikeMike]

Originally posted by: Ktulu

Originally posted by: yllus

I have been talking about this for months, no one believed me.

If you say so, McOwen. Because nobody knew that auto parts suppliers are in fiscal trouble.

I don't know how many times I would sit here and read many P&Ners ideas about why the US auto industry is so screwed. It would almost always turn into a domestic bashing fest. But as the months have been dragging on now we're seeing the so called unbreakable manufacturers like Toyota and Honda taking hits. It was NEVER about GM/Ford/Chrysler not making cars people wanted or whatever you guys would all say.

1 out of every 2 cars sold is domestic... those people were idiots... not to mention the media is definately not helping, did you see the WSJ cover on thursday? Detroit Meltdown, and it included Ford, which lost less in % sales than TM, but they only made a brief mention of the issues foreign manufs have had.

 

[MikeMike]

Originally posted by: Skoorb

Originally posted by: MIKEMIKE

Originally posted by: Skoorb
I think this was always the issue that in theory these suppliers would die so hard that even strong auto manufacturers would get hurt.

Anyway, bailing them out is brainless. It's like paying farmers to make food they cannot possibly sell so it will rot, or akin to making 10,000 steering wheels but there are only 5,000 cars.

Oh, hold on, that last one wasn't an analogy at all.

On the plus side, when this stimulus goes through as it likely will, I can finally update my sig with prediction perfection!

Talking with some people within the industry, they go by referring to the axle strike of last year... "how many axles does it take to shut down an entire industry" and that number is 4... 4 axles... if 4 suppliers close, the entire industry is down, everyone, even Tata... Hyundai has already experienced this issue due to Chrysler shutting down one of their lines, Hyundai had to find a new supplier, and re certify an interior trim piece... with the current JIT production methods, at most there is 1 wk supply of parts for a line... it takes about 2 months to re certify and get into production a new part...

So we have to ask the question why would a company shut down if there are will payers for its product?

EDIT: Meaning, if there are still companies that want and need these crucial products, the suppliers for them will not all vanish if they still have customers.

but, there are still customers, aka the auto manufacturers, who are losing 50% of their business... 50%, most companies couldnt take that, so you are watching the roof collapse onto a weakened foundation... yet the foundation relies upon the roof, and the supporting dirt around it (the people). if the dirt pulls away, the foundation is instantly weakened, but you see the results in the roof from it collapsing first... the problem becomes that everything is so intertwined, there are no other suppliers who already have the equipment... it takes months to get a full supply chain going... small delays cause other delays... companies cant get the money to invest into new equipment since they are already selling less parts, that means less money, which they already cant get from banks... then one goes under, suddenly GM, Toyota need a new supplier, but that new supplier must also be certified after rigorous testing of the part they are producing... you now have GM and Toyota stopping manufacturing due to part problems, causing them to make even less money... see the huge circle that starts to form? basically a black hole within the auto industry.