Summary
Publications have used many adjectives over the years to describe the automotive tier one supply base; troubled, distressed, beleaguered, crippled, restructuring, etc... But the last six months it has interesting and painful to watch how the descriptions have progressively deteriorated to the most recent “unable to remain solvent”.
Analysis
In this time of bailouts I have been on both sides of the argument concerning the financial assistance recently given to General Motors (GM) and Chrysler LLC by the U.S. Government and their subsequent request for additional funds. The point that continues to trouble me is we are going to give GM potentially $30 billion dollars and Chrysler $ 9 billion dollars to continue to produce vehicles and avoid bankruptcy proceedings, meanwhile the very companies that supply the components to enable that process go bankrupt. I surmise the folks governing this process believe that some of this $39 billion is going to trickle down to these suppliers and all is good in auto land, when realistically the OEM’s and particularly these two have only put more price reduction pressure on their supply base as part of their cost cutting measures in their reorganization plans presented to the U.S. Government this past week. It just seems ironic that if the purpose of the bailout money is to preserve jobs and help boost the economy the supply base for GM and Chrysler employ more people at a ratio of almost five to one. Understandably you can make a case that everyone deserves a bailout check but unfortunately there just isn’t enough money to go around. The real point is that the OEM’s need a healthy supply base to continue producing quality vehicles and the supply base is also the “new technology” portal for the OEM’s to develop the energy efficient vehicle technology the government has demanded. So, getting back on point, I have recently discovered that four out of the twelve largest tier one suppliers to the North American Market are facing “solvency” issues per their independent audits. One rebuttal would be that “for every supplier that fails there are a half dozen in line to take their place”; this is not the case of these commodities. Presently there are only three to four companies globally that have demonstrated the capabilities to manufacture these components and assemblies at production capacities and quality standards and these companies control over 90% of the current requirements. In addition, the current competitors would not have the capacity to absorb the additional market share and financially would be hard pressed to develop a business case ROI to substantiate buying the assets at the current contract rates. The analogies could go on and on but the real point of this article was to bring attention to the process surrounding these bailouts we are told we have to do! Do we really have all the right parties at the table prior to writing a $39 billion dollar check and would it make more sense to have representatives from all facets of their business model or at least the primary facets to realize success? I suppose you can question any policy proposal and make arguments to support most any position but I cannot help thinking we are saving the “cart” and forgetting the “horse” that pulls it!
