GM and Chrysler have been stretching payables, which means that many auto parts suppliers are in dire cash flow straits. And if auto parts makers fail, it doesn’t hurt just the Detroit car makers, but the foreign transplants as well.
From the New York Times:
With Congress failing to agree on a bailout for Detroit, the odds that General Motors and Chrysler will be insolvent by year’s end are growing rapidly…
As a result, the hypotheticals about the domino effect of the companies’ troubles through the vast network of auto supplier firms — which employ more than twice as many workers as the carmakers — are becoming real.
General Motors and Chrysler, for example, owe their suppliers a total of roughly $10 billion for parts that have been delivered. G.M. has held off paying them for weeks, and Chrysler is paying in small increments. But the cash shortages at G.M. and Chrysler are getting more severe, according to their top executives and other officials….
Many of their suppliers are teetering on the verge of bankruptcy themselves, and do not have the luxury of extending credit much longer.
“I don’t think that suppliers will be able to get through the month without continued payments on their receivables,” said Neil De Koker, chief executive of the Original Equipment Suppliers Association in Troy, Mich., a trade group.
When suppliers big and small start failing, the flow of parts to every automaker in the country will be disrupted because as suppliers typically sell their products to both American and foreign brands with plants in the United States.
“There’s no question it will hit Toyota, Honda and Nissan too,” said John Casesa, principal in the auto consulting firm Casesa Shapiro Group.
“Many of the small suppliers will simply liquidate because they don’t have the resources to go reorganize in Chapter 11 bankruptcy,” Mr. Casesa said. “They’ll just go away.”
It is the dire scene laid out at the first set of Congressional hearings on an auto bailout in mid-November by Ford’s chief executive, Alan R. Mulally.
“Should one of our domestic competitors declare bankruptcy, the effect on Ford’s production operations would be felt within days, if not hours,” Mr. Mulally said….
In years past, suppliers have often been able to assist a troubled automaker by extending payment periods to get through tough times.
But by Mr. De Koker’s estimation, hundreds of suppliers no longer have that flexibility. They cannot borrow money in a frozen credit market, and they cannot buy raw materials without first being paid for parts they already shipped.
The Big Three, along with their foreign competitors, are what most people think make up the entire auto industry. But the car manufacturers are just the top of the pyramid.
While G.M., Ford and Chrysler employ 239,000 people in the United States, the country’s 3,000 or so auto suppliers have more than 600,000 workers…
Like the Big Three, most of the bigger suppliers have been restructuring their operations drastically to match the shrinking demand for new vehicles…
“Most of the suppliers are not highly waged; they have no big pensions,” Mr. Timothy] Leuliette [CEO of Dura Automotive] said. “People affected by all this are just the average Joes. Washington has a myopic view of the auto industry. They just think of the Big Three and don’t think of us.”
Suppliers make most of the 15,000 parts that go into a single car. More than 70 percent of a car’s value — from the seats to the chassis, from the electronics to the bumpers — are sold to the automakers by suppliers.
Since 2004, the supplier workforce has fallen by 23 percent from 783,000, according to the Original Equipment Suppliers Association.
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So why is no one exploring pre packaged bankruptcies?
Failure of imagination?
Chapter 11 doesn’t have to mean that the big 3 won’t exist tomorrow. If they had a viable plan how to turn things around they would make it. The problem is that they don’t have a plan that they can deliver on. If they had they would never have gotten to this point. I wonder what the market reaction is going to be like. And if the lawmakers are going to get blackmailed into changing their mind as they did with TARP earlier.
Prepackaged bankruptcies take time (months)… we don’t have time. Merry X-mas, from Sen Corker, as he heads off on vacation…
“It’s over with,” Majority Leader Harry Reid said on the Senate floor in Washington. “I dread looking at Wall Street tomorrow. It’s not going to be a pleasant sight.”
This reasoning sounds to me like the gentlemen on the Capitol think that their job is to support the market instead of thinking about the long term of the US. It eerily resembles the behaviour of the establishment at the time of the South Sea bubble.
Might be a good time to get your car worked on:
Thanks again!
The government can provide DIP financing with any twists it wants — like paying all parts suppliers on time.
That would improve things for them.
Any negotiations with the Big 3 should not be influenced by their effects on the foreign transplants, one way or the other. And I’m confident that there will be an auto industry in the USA. We don’t have to give in to these companies’ top managements and the UAW to keep it.
Anyway, the rumor is that if Congress doesn’t appropriate money, Bush might direct Paulson to pay some out of TARP. There just happens to be about $15 billion left there, the same size as one recent auto bailout proposal.
Paulson probably wants every penny to go to his banker buddies, but I hope Bush has better sense than that.
One big advantage of funding a bailout from TARP instead of by Congressional legislation is that random stuff like “green” programs cannot get attached to the bill. This is no time to be restricting what the Big 3 can build, especially if we let foreign makers sell without the same restrictions and required programs.
Anon (2),
The problem is, these guys never have a plan B. They work and work on plan A, and when it falls apart, they sit and stare at each other just shrugging their shoulders while tens of thousands lose their jobs.
Now we get to watch both Congressional approval ratings and stock indexes drop like stones (today). Whee, what fun!
Our govt is representative of the desires of the few against the many. Why did blagojevich feel so comfortable with what he was doing?
Because he knew the system was rotten to the core. Obama and pals are no different!
A solid link by Chris Hedges on the rape of the American people by the sub-human garbage elite. Get your pitch-forks ready!
http://tinyurl.com/6c3fbx
cds impact?
thanks much for any insight.
Hopefully the treasury or FED (through GMAC?) will fill the void, or congress will return to their senses today, before we all end up in the poor house.
yeah, let’s drive workers wages lower !!after all, they don’t have college educations and are not smart like us !
@Jeff
Why should Big 3 workers get paid more to make an inferior product? That is just devoid of economic sense. Getting the SAME wage as Toyota workers for still making an inferior product seems MORE than fair. This is a competitive business: The market (read US consumers) have decided that they prefer Toyota to GM. Why should the government force consumers to buy products they don’t want? Why don’t we just levy a 100% tax on non-Big 3 cars? Detroit would be happy plus more money for big G!
@anon – CDS
This is the latest scare tactic to be used by Detroit in order to get its snout it the taxpayer trough. The same was said of LEH, WM etc. In the case of LEH, the $72 bln CDS warehoused at the DTCC resulted in $5 bln transfer of funds. In other words, banks and hedge funds were long and short with various counterparties and the net exposure was small. Otherwise, the 8.7% recovery rate would have triggered $65 bn in losses. It didn’t. And it won’t at GM.
The thing that worried me about GM is its $15 bn in outstanding debt. Even this summer, it was still rated investment grade (rating agencies-waytago!) suggesting that a lot of pension $ was parked there. I thought a downgrade to junk (August?) would have triggered a mass exodus and inflict massive losses to pensions, but it seems the fund managers got out ahead and avoided major losses.
I think it is shameful that Detroit is trying to scare the nation with the specter of massive job losses, a la bankruptcy means that all the factories close and all the workers get tossed out on the street tomorrow. (As it is American are in a pretty bad mood.) This is a blatant lie. Chapter 11 is reorganization – the factories will continue to produce cars and workers work while a reorganization plan is devised and executed. The total lack of vision at these companies that has brought them to the brink and now management cannot figure a way out and is resorting to playground bullying. Go ahead, give ‘em yer lunch money. I’m sure he’ll leave you alone tomorrow.
Meanwhile, why is GM still in the Dow Jones? It’s a freakin’ microcap!
Bobby 99,
You didn’t respond to my comment. You delivered drivel from an Econ 101 textbook.
If you want to live in a country without pensions or health care, that’s the country you will get. Like most free market types, you don’t even know what supports a economy.
Prepackaged bankruptcies take time (months)… we don’t have time. Merry X-mas, from Sen Corker, as he heads off on vacation…
No. It’s Merry Christmas from the partisanly Democratic UAW. Three of the five top officers used to openly brag about their Democratic Party activism in their bios on UAW’s website.
It’s just boring, and I mean really boring, to hear the Democratic sheeple in here bleating today’s talking points.
It manifests the same lack of creativity that has made UAW products the world renowned junk they are today. It’s also immature at a very adolescent level.
Grow up, sniveling Democrat whiners.
fyi, I’m a registered political independent. so spare me the “shrub” talk and all the rest of it. I see absolutely no difference between a Falwell/Robertson zombie and the average “liberal” bleating their b.s.
What’s wrong with Reid?
When McConnell, Shelby, Corker et al threaten to filibuster until the new Congress arrives, he should make them do it.
Why should they have a paid Christmas vacation when so many Americans have no paycheck at all?
Even if the big 3 get a the money (forget the source for a moment), who is buying the vehicles?
Have you looked around dealer lots lately? I don’t know anyone who is in the market for a vehicle at this time.
If the demand for cars has dropped and no one is buying (again ignore why no one is buying for a moment), what difference does it make to keep the big three afloat.
If they are not selling any vehicles, it really does not matter how much money you give them?
Am I missing something here?
I still think the bailout will occur, 14 billion is chump change after all the money that has been flushed down a rat hole and these guys seem to love working weekends option expiration next week.
Party on.
“Chapter 11 doesn’t have to mean that the big 3 won’t exist tomorrow. If they had a viable plan how to turn things around they would make it.”
You should watch this video. Everyone’s in agreement that Chapter 11 becomes Chapter 7 eventually.
There’ll also be cascading bankruptcies with all the suppliers.
The GM, Ford, and Chrysler pensions will all get picked up by Penny Benny and American taxpayers will start to fund them fully.
America’s about to pay the price for electing idiots. Well done to everyone here, you should’ve done a better job in picking your leaders. You failed. This is your reward for your failure. And you’re going to have to deal with the consequences.
David said…
What’s wrong with Reid?
When McConnell, Shelby, Corker et al threaten to filibuster until the new Congress arrives, he should make them do it.
Good point and says much about responsibility within the political class. I doubt the Democrats were that hot to get 60 seats knowing that they then would be responsible for all outcomes but the party understands they are a big tent and have so many subsets that its easier to blame the republicans for stalling etc.
@Jeff
I think I answered you question in full from a real world perspective. You merely chose to ignore it. From the point of view of the country as a whole, and not a subset of workers that consider themselves privileged for some reason, it really doesn’t matter whether workers work at Ford or Toyota.
The Japanese have pension and health care. They may be inferior (I am not qualified to comment) but they exist. A huge number of American workers (including myself) have only social Security and Medicare, which are shitty now and probably will be much worse in the future. In other words, workers who have these great benefits want to further disadvantage those who don’t, i.e., the billions that go into the black hole that is Detroit could be spent on providing health care for low-income people. What says the Union about that?
The only real downside is that the profits accrue mostly to a foreign owner, although Toyota is a public company and you can buy shares.
I do not want to live in a socialist country. I visited the USSR once upon a time and did not like it. If a company cannot make a competitive product it should go the way of the dodo. Many industries have and the US has not collapsed.
In the real world I live in, I have to perform everyday and deliver results. If I don’t, my ass will be out the door in a heartbeat – I have no guaranteed contract, no union commissar to step in, no job bank. In a sense it’s not really fair, since when things are great I do not reap all the upside, but fiduciary duty is a bitch. US industry has largely died (services ARE the economy, forget about support) because many workers live in fantasyland, extracting outrageous concessions while their products collect dust on the shelf. It’s time to get back to reality before the last vestiges of US industry die, which would not be good for the US of A. (How about a Boeing strike in support of the UAW – solidarity! Da!)
When you are ready to have a serious discussion, let me know. In the meantime, I think your “drivel” and other similar rhetoric indicates a lack of maturity/understanding. I see no point in any further exchanges, especially on a blog like this which is fairly insightful and focused on the economic issues, not their political/personal interpretations.
Adieu!
This is Reid’s mess. He only got 42 D votes on this. Even with Obama taking a vacation, if Reid made this a party line vote he could get enough R to defect.
This wasn’t a filibuster, it was a vote on closure, and presumably Senators want to go home for Christmas. So keeping debate open would kill the bill. The answer, of course, is to keep the senate and house open.
All sound and fury and it forces Bush to kick in the TARP money. The only politics is Bush should try to kill Shelby and Corker for screwing up his plans.
Why do people act like it’s bailouts or pain. One or the other. The bailout money is coming out of someone’s pocket. Remember the government doesn’t have any money. It takes money from some and gives it to others. So bailouts (pleasure) for some is pain for others. Our economy is totally screwed with TOO MUCH DEBT and the UAW and Big 3 management act like if we have a bailout there will be no pain. No pain for them maybe but how about for the rest of the middle class who has wealth redistributed to them???
There will be pain, period. We need to liquidate debt and if that means liqudiating companies, then we need to do that too. The sooner we do the sooner real investment can be made in building up viable enterprises which will employ all the people that will need jobs at that point, and the sooner we can get back to a healthier economy.
The Fed and it’s fractional reserve system SUCKS!
Politicians, both aisles, mostly suck.
Big 3 managment SUCKS!
UAW management SUCKS!
See you at the bottom.
Gamma
I can’t tell who’s a worse speaker, Bush or Gettlefinger. I’d go with the latter.
The auto market shrank 30% in October and November. Does anyone believe 15 or 34 billion dollars will save the industry if the slump lasts another 6-12 months. Meanwhile, the UAW is willing to make concessions in 2011. Let them BK.
why doesn’t the fed just lend them a bunch of funny munny if these companies are so important? There’s absolutely nothin to stop them, what with “trade secrets” jargon obliterating all remaining accountability/transparency. Face the facts: no one really knows whats been going in the Fed and Treasury at the higher levels because the rule of law has long since been abandoned.
Hell, maybe they already loaned the carmakers a ton, maybe they’ve been trying “moral suasion” behind the scenes all year, maybe nationalization is the only route to reform but is politically unpalatable. Maybe this is the end game of a process to which we have not been privy.
ignorantCanadian
PS A word of advice to Americans: don’t get bogged down in regional hatreds (there is a somewhat regional/civilwar rhetoric of rivalry surfacing on these pages and others). As a Canuck, I can attest that it is not a fun game to play (unless of course you work for the demagogy)
“They cannot borrow money in a frozen credit market,…”
I thought that all the money going to the banks was supposed to give the banks the ability to set-up loans. What gives?
Letting the Detroit 3 go down will have wide-ranging collateral damage. One reason they fear bankruptcy over Federal loans is the additional stigma and difficulty securing credit. The credit markets are already dry but the fear is they’ll be sucking air if they enter Chapter 11. In which case, they’ll exit into Chapter 9.
My mom works/worked for a supplier for $15/hour. Her company supplies the Detroit 3, as well as Honda, Toyota, Nissan, and Subaru. I’m also certain they supply the Germans, too (it is a German company), but not from her plant. The company laid her off the other day. From a workforce of 350 three years ago, they are now down to 29 working three days a week. The company has notified the foreign automakers that if any of the Detroit 3 file for bankruptcy, it will need to close its remaining US factories and raise prices. Like most of the suppliers, it operates on volume with little margin. It is already struggling but take out any of the Detroit 3 and it will not make it without further adjustments.
As for the bank bailout, don’t get me started. Not only did Treasury give money without restrictions, it waived application of 382(h) to banks.
Treasury (or the Fed) should buy the receivables paper from the suppliers (possibly at a discount). That will keep the suppliers alive and breathing.
Then, they should wait for the carcass that is GM/Chrysler to roll over and die. Use that paper as leverage to remake those clowns into something better.
As distasteful as a bailout of Detroit is, it fundamentally comes down to whether there will be an effort to maintain what’s left of the nation’s industrial patrimony – now on life support after more than a generation of wealth extraction and exportation by financial parasites – so that it can hopefully be re-tooled for more commercially viable and socially useful production.
As for those who talk about bringing UAW wages in line with those of plants in right-to-work-for-less states, please see labor economics 101: it was only the pitifully and tragically insufficient threat of UAW organization that made the wages at the non-union plants track those of the UAW, albeit at a lower rate. Remove even the remote possibility of union organization, couple it with a collapse in demand, and you’ll quickly see a corresponding decline in wages throughout the industry. That seems to be something the Senators from those states enthusiastically await.
Should Detroit go down, it will be a crystallization of ideology – in this case, vicious SOB union busting – trumping economic common sense: the costs of the PBGC taking on the auto pensions alone will far exceed the cost of a bailout or two.
The financial statements of GM at 9/30/08 say that trade debt is $27.8bn.
http://www.sec.gov/Archives/edgar/data/40730/000095015208009040/k46806e10vq.htm#102
Where did the NYT get its $10bn for both GM and C?