Next blow to Rust Belt: bankrupt parts suppliers

The ripples from the Chrysler and General Motors bankruptcies are spreading to the companies that produce parts for the beleaguered industry.

Lear Corp., the second largest producer of car seats, filed for bankruptcy Tuesday. At the end of May, Metaldyne and Visteon, both large suppliers of parts to Detroit, threw in the towel.

Industry insiders doubt the bankruptcies will stop there.

“There will be quite a few more. Just the fact that we are operating at volume about 50 percent of normal is the killer,” says Neil De Koker, president and CEO of the Original Equipment Suppliers Association in Troy, Mich. “Two-thirds of our members say they will have a tough time making it through the end of the year unless volume increases, lenders extend credit lines, or there is some other help.”

The problems for the parts suppliers probably mean more belt-tightening in gritty Midwestern towns, former mill towns in the Carolinas, and manufacturing hubs in Missouri. Unemployment in the manufacturing sector could stay at an elevated level as the auto companies use fewer parts suppliers – something the companies have already indicated they will do.

Assuming the auto market eventually revives, there could be parts shortages and price pressures because fewer companies will be competing.

Although much of the automotive focus has been on the bankruptcies of GM and Chrysler, the parts-supplying industry is larger in terms of the number of employees. According to Mr. De Koker, there are 229,000 active auto workers and 680,000 people in the equipment supply business.

But those numbers are bound to shrink. Ford has said it will reduce its suppliers from 1,600 to no more than 850. GM and Chrysler have said they will reduce their suppliers by about 30 percent.

For the past several years, the tendency of the auto industry has been to cut production expenses. “There has been huge pressure on the vehicle manufacturers to cut costs, and then they put pressure on the suppliers to cut costs,” says Martin Zimmerman, a professor of business administration at the Ross School of Business at the University of Michigan in Ann Arbor.

“They have been after them to reduce costs 5 percent a year based on productivity,” he adds.

But productivity increases could not keep up with falling revenues as Americans bought fewer cars. In recent years, auto production was about 16 million vehicles. But by the end of last year, it had plunged to under 10 million.

“Demand is down 35 to 40 percent. That implies significant downsizing,” says Jack Nerad, executive editor of Kelley Blue Book, a provider of car-price information in Irvine, Calf.

The supplier industry has sought aid from Washington. In March, the suppliers won a $5 billion loan guarantee and the promise of a 10-day government-guaranteed payment of invoices.

“That part was implemented,” De Koker says. “The part that was not implemented is that we asked for another $8 billion to $10 billion to guarantee direct loans to lending institutions so the lenders would lend to the industry.”

Without the government guarantee, he says, the banks have stopped lending.

The industry may have more rough times ahead. If unemployment hits 10 percent, consumers may pull back, says Professor Zimmerman. “People have to feel secure before they buy big-ticket items,” he says.

There are some estimates that the auto industry will need three to four years to recover, De Koker says. On the other hand, used-car prices and sales are rising, he says.

“In a few years, we should see demand for new cars increasing,” he says.

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