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Treasury To Support U.S. Auto Parts Suppliers
By Darryl Kelley
MidasLetter.com
Thursday, March 19, 2009
The United States Treasury Department announced the launch of a program designed to "help stabilize the auto supply base", according to a press release issued by the department earlier today.
The program makes an immediate $5 billion in financing available to parts manufacturers who are suppliers to major car companies to collect against receivables owed to them by auto manufacturers. The program is essentially a government guarantee against outstanding and yet-to-be remitted invoices that will be owed to suppliers, who have tightened up credit to the big three automakers in reaction to their perceived bankruptcy potential.
Many auto parts manufacturers have found themselves struggling to survive as manufacturers seek to limit inventory and negotiate better terms. Since it's the auto makers themselves who have been hogging the spotlight, most parts suppliers have found themselves floundering.
The greater fear is that if the suppliers stop providing credit to the manufacturers because they are afraid of not getting paid, the entire supply chain could end up seizing up, thus perpetuating and exacerbating the problems of suppliers and manufacturers alike. It is hoped that the U.S. Treasury's move will ameliorate the situation sufficiently to keep parts flowing to the automakers, and revenue flowing back to the suppliers.
Auto parts manufacturer Magna International (TSX:MG) lost US$148 million in the fourth quarter of 2008 as sales declined to $23.7 billion from $26.1 billion a year ago.
"While 2008 was a difficult year for the industry, 2009 is expected to be worse," co-CEO Donald Walker told a conference call Tuesday.
"Most industry observers expect light vehicle sales and production in most large automotive markets to be considerably weaker in 2009 than last year. The first half of 2009 is expected to be particularly challenging, as many OEMs (original equipment makers) struggle to reduce dealer inventories."
It is not immediately clear how the available fund will be apportioned, or what restrictions may limit eligibility for participation in the program.
The program will be run through U.S. automakers - General Motors, Chrysler and Ford Motor Co. - that agree to participate. Suppliers to those companies would have to agree to terms of the government-backed protection and pay a small fee for the right to participate.
Parts suppliers told Treasury that the estimated March 2009 payments to suppliers from the Big Three automakers are $2.4 billion compared to an average of $8.4 billion per month in the fourth quarter of 2008, threatening their industry.
"The Supplier Support Program will help stabilize a critical component of the American auto industry dur ing the difficult period of restructuring the lies ahead, " said Treasury Secretary Geithner. "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. "
SOURCE: http://www.midasletter.com/news/09031908_Treasury-to-support-US-auto-parts-suppliers.php
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