Today’s (June 26, 2009) Wall Street Journal reported that Lear Corp is preparing to file for bankruptcy protection as early as next week. This action would make Lear the eighth major auto parts supplier to file for Chapter 11, since Delphi filed in ‘05. A temporary production shutdown for Lear has ramifications well beyond their doors.  As the world’s second largest auto seat supplier, a Lear shutdown could cause a variety of auto assembly plants to shutdown. An unsettling prospect to an already fragile US Auto Industry.

I found interesting that the Journal noted that Lear’s filing seemed more about aggressive restructuring than a cash crunch. In this past March, it was noted that Lear was sitting on approx. $1 billion in cash.

My worries surround the Tier 3 and Tier 4 suppliers to all of these major auto parts manufacturers. These smaller cash strapped companies have been absolutely hammered by the filings of these large suppliers. Additionally lenders seem increasingly focused on divesting their position in the automotive industry; causing additional pain.  It is obvious from my perspective, more cash strapped participants in the auto supply chain will simply ’slip under the surface’ as this flood of bankruptcies continues.

Nonetheless, as bad as this sounds, it has been needed; a ‘culling of the herd.’ The remaining participants should have the needed strength to service and grow with their automotive customers. The reinvention of the US Auto Industry requires a strong supply base, without it, survival is not possible.

http://online.wsj.com/article/SB124595993731955785.html

So what does this all mean? Lear is not the only Parts Manufacturer in danger and vulnerable. Cooper-Standard is in danger of filing. While Dura Automotive and American Axle are experiencing threats of supply interruption from their vendor base, too. Dura CEO comments that they have suppliers demanding checks for $500,000 or more or they won’t ship. He comments further saying that there just isn’t any cash.

Neil Dekoker-President of the Original Equipment Suppliers Association was quoted in FreeP.com June 21st,  ”There is a pending crisis. I just worry that we could end up shutting down GM, Ford, Chrysler, Toyota and everybody else.”

Automotive suppliers have been alerting us for years that the squeeze of profits has weakened the entire parts supply base. By capitulating to price demands from the automakers, making poor business decisions, and debt acquisition; auto suppliers found themselves ill prepared for the current economic storm.  As some suppliers have dipped deeply into their cash reserves, they have been left with broken loan agreements and banks unwilling to continue to lend them money.  The absence of DIP financing leaves companies with little choice but bankruptcy or liquidation.  Tough times indeed!

We will continue to monitor Lear, cheering for their success; all the while realizing this is the 1st half of a very long game.

The quick sale outlook for Delphi hit a speed bump when Bankruptcy Judge Robert Drain ordered Delphi to conduct an ‘open auction’ for its assets.  This action has distressed-debt investors circling as they have been crying foul regarding the Obama Administration’s handling of the sale. You see as DIP financiers, these investers generally have the right to take control of the company if they can’t be paid in full. GM and the gov’t have been entrenched in their view that Platinum was the only acceptable buyer. Not everyone believes this to be true

Certainly, Judge Robert Drain wasn’t when he commented, “I don’t know what makes Platinum acceptable to GM and why Platinum is unique.  Unless I hear more, there’s something going on that doesn’t to me make sense.” He also commented, “As far as I am concerned, they’re (Platinum) just guys in suits. Why can’t other guys in suits pay more?” 

It should be noted that as DIP Financier for the GM and Chrysler Bankruptcies the Gov’t said it had wide latitude to determine the companies’ future.  But when it comes to Delphi’s private lenders, it has taken a very different position. Judge Drain deserves an applause for putting the brakes on this decision.

In the meantime, media outlets have reported that well-known investor Carl Icahn is considering making another run at Delphi Corp. Perhaps complimenting his auto parts company Federal Mogul Corp.  Suitors now have until July 10th to make competing offers for Delphi.

The obvious effort here by Platinum will be to create a stable, smaller, capable parts supplier to US based automakers. This goal will call for additional cuts in plant and personnel as Delphi works to emerge as a viable parts supplier with desirable returns for the Platinum investors.

What I believe remains to be seen is how many smaller auto parts suppliers, especially Tier II, III, and IV can survive the current production drops of GM and Chrysler. Additionally, those who are on the edge will be especially vulnerable to payment delays which are the norm during a time of ownership transfer. This latter issue is what worries me most; how long can the smaller, undercapitalized auto suppliers last? Many won’t.  Yes this will result in delays and line outages. However, since it seems the prospective car buyer is not rushing to the showroom… intent on purchasing a car today. Rather, there is a nagging lethargy tothe potential car buyer as they approache the showroom today. Until automaker inventories decline significantly I believe most auto producers are more focused on their own survival. This focus means that long term relationships get discounted in our current environment. Sadly be prepared to hear more comments like, ‘What have you done for me lately?”

ABC Metals continues to focus on mutual survival techniques; resulting in ’Win/Win’ scenarios not ‘Take it or Leave It’ conflicts. Call us today and let us ’Uncoil the Power’ of ABC Metals, together.

Interestingly Bloomburg.com noted on 5/21/09 that the US Government has said it has the right to block GM from contributing further to Delphi. http://www.bloomberg.com/apps/news?pid=20670001&sid=ar76BQD2FD9Y

Delphi is quoted in RubberNews.com as stating, “If we cannot remain in compliance…our lenders…may seek to foreclose upon substantially all of our assests and proceed toward a sale or liquidation.” These comments can only stike fear in the hearts of Delphi Suppliers; who are already reeling in this current economic downturn.

It appears that the future of an American Icon will be known shortly.

The e-newsletter ‘Inside Indiana Business’ reported this past Wednesday that a company considering to purchase Sumco has let its exclusivity agreement expire. It appears that Sumco; a major supplier of electroplating to the Automotive sector will continue to operate … at least through the end of this month.

With the shudown of production at many Chrysler facilities, a ‘9 Week’ shutdown at approx 13 GM plants, reduced or severely curtailed production at the ‘New Domestics’ like Toyota and Honda; the automotive sector is very fragile right now. We will continue to ‘blog’ regarding what we believe to be newsworthy items- keeping you posted by staying connected.

http://www.insideindianabusiness.com/newsitem.asp?id=35564