Auto Suppliers Get A Life Line

Auto suppliers to get $5 billion in aid:

The Treasury Department will pump up to $5 billion in financing into troubled auto parts suppliers to prevent an auto industry collapse that could undermine the government’s work to restructure General Motors and Chrysler.

The funds, announced Thursday, will be made available from the government’s Troubled Assets Relief Program, or TARP, in a financial entity similar to a revolving credit. Large suppliers would be eligible for financing auto parts they have shipped to the Detroit carmakers but have not yet received payment.

U.S. automakers — General Motors Corp., Chrysler LLC and Ford Motor Co. — will have the option of using the program and designate the companies that need financing, giving them a large role in determining which parts suppliers will survive.

The program could have a significant impact in Ohio, which ranks first in the United States in the number of auto suppliers.

GM and Chrysler, which have received $17.4 billion in government loans, said they would use the program. Ford, which has not sought the government aid, said in a statement it would not participate “as we remain viable and expect no issue with continued payments to our suppliers.”

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“The program will provide supply companies with much needed access to liquidity to assist them in meeting payrolls and covering their expenses, while giving the domestic auto companies reliable access to the parts they need,” Treasury Secretary Timothy Geithner said in a statement.

Officials said foreign automakers with U.S. operations would not be eligible to use the so-called “supplier support program.”

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Auto suppliers have sought up to $25 billion to stabilize the beleaguered U.S. auto industry and have met with members of President Barack Obama’s auto industry panel, which is trying to restructure GM and Chrysler. The two companies want an additional $21.6 billion in aid.

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But the program was not intended to save company in the supply chain. Treasury officials said certain suppliers would still fail as part of the natural business cycle and analysts expect some suppliers to collapse because the industry has too much manufacturing capacity for current sales levels.  Suppliers that manufacture body side moldings and other parts that can be duplicated elsewhere will not likely receive the aid, he said.

Suppliers who ship parts to car companies typically receive payment for those shipments about 45 to 60 days later. Under normal credit conditions, suppliers sell or borrow against those commitments to pay their workers and fund their operations. But banks have been unwilling to extend credit to suppliers because of the uncertainty of the auto companies, so the government entity will help parts suppliers access financing.

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Under the program, auto companies will be required to pay a 5 percent fee of up to $250 million to join. Suppliers will have to agree to terms of the government-backed protection and pay a small fee to participate. Suppliers will be able to sell parts that they have not yet been paid for into the government program at a modest discount.

Parts makers employ about 600,000 people nationwide and many of the nation’s roughly 5,000 suppliers have been cash-strapped for several years as GM, Chrysler and Ford have reduced car and truck production because of falling sales. Their outlook has deteriorated with the economic downturn, a steep decline in auto sales and prolonged car plant shutdowns in December, January and part of February.

Suppliers in Ohio have been in downward spiral the past five years, long before the economic meltdown, sandwiched by rising costs for raw materials and automakers increasing pressure to sell them parts at lower prices.

Several already have gone through bankruptcy protection, including Toledo-based Dana Holding Corp., which this week said it will cut 5,800 people worldwide, taking it down to 23,000 employees by year’s end. But the company has no plans to participate in a bailout program.

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Cleveland-based Eaton Corp. said last month it expects a 10 percent decline in its markets this year. Elsewhere, American Axle & Manufacturing Holdings Inc., Visteon Corp. and Lear Corp. have all warned in recent weeks that they could be forced to file for bankruptcy protection if business didn’t pick up soon. Meanwhile, Delphi Corp., GM’s former parts division, is still trying to restructure itself after more than three years under Chapter 11 bankruptcy protection.

In all, auto suppliers have said that more than 40 major suppliers have filed for Chapter 11 bankruptcy protection and more could collapse if the government does not act.

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“This aid comes at a critical time for this vital industry,” said Rep. John Dingell, D-Mich. “I am pleased the program will be able to keep the doors open and lines operating at many U.S. auto suppliers.”

Auto supplier & manufacturer have rallied in the past week. With bankruptcy out of the picture these stocks can keep rallying…no more safe to short them