Summary
Although it may not be transparent to many Americans, automotive Tier suppliers are usually linked to multiple OEM's. The failure of some of these Tier suppliers could interrupt component supply not only to GM and Chrysler, but to Toyota, Volkswagen, Nissan, Hyundai, and others. So, it is crucial that these suppliers are supported and find appropriate financing during these very tough economic times.
Analysis
Automobiles are a feel good purchase. Consumers have to feel confident that their income and wealth are preserved, stable, and growing in order to make a new car purchase. This is true whether it is someone buying their third vehicle in the United States, or someone buying their first car in Russia or China. In the media, most of the attention has been on the verge of failure that GM and Chrysler find themselves in currently. And we hear word of how far volume is down for even the strong like Toyota, Honda, or Volkswagen.
But an equally, and potentially more siginificant component of the automotive industry are the Tier suppliers that supply everything from windshield wipers, to seats, to turbochargers, to lithium ion batteries, to emissions control modules, to airbags. Most all are suffering due to lower volume globally. And those most closely aligned to GM and/or Chrysler are on the verge of extinction. The issue with some of these are that parts of their customer base also includes relatively healthy OEM's such as Toyota, Nissan, Honda, Volkswagen, Mercedes, and others. If they go under, then the supply of components to many OEM's will suffer. Ultimately, this can mean vital components will not be available for vehicle production, even at an adjusted US volume of 9.5 millions units in 2009. And the issue if they are not supported now, is that when global and/or regional market demand returns enought vehicles may not be available to meet the variety of customer demand.
In addition, the expenditure for R&D are growing for OEM's and Tier suppliers. This is driven by regulatory requirements - active and passive safety regulation, emissions compliance, and fuel economy compliance - as well as by customer demands such as hybrid and alternative fuel research, infotainment and telelmatics, and comfort and convenience features. If this content is not in the vehicles going forward, then at worst OEM's will not be allowed to sell in certain markets, and at best will not have the vehicles that the consumers want. With this investment, comes significant expenditure from the suppliers as well. They, along with the OEM's are developing the necessary fuel, emissions, safety, and connectivity technology that are required for future vehicles. It is hard to imagine an industry that is more regulated, more mandated, and more vulnerable to consumer emotion than this industry.
Many suppliers are receiving financial support from their OEM customers. This is taking the form of financing, favorable payment terms, partial owenrship, or assistance in consolidating with other partners.
Healthy suppliers are as necessary to Toyota, Nissan, Volkswagen, and Hyundai, and Porsche as they are to GM and Chrysler.
The TARP conditions are a very good start for the Tier suppliers. They should be able to count on this for investment to assure that their businesses remain viable when demand does return, and so that they can supply the components that will be required or and demanded in the vehicle of the future.
