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Relief on the Way for Auto Industry Suppliers

The Obama administration plans to provide broad relief to the American auto industry with the creation of a $5 billion fund to aid troubled parts suppliers. The plan is in keeping with the government’s strategy to prop up General Motors and Chrysler as it seeks to stabilize the industry.

The first step for the auto task force is to address the financial woes of the industry’s extensive supplier network—particularly those suppliers on the verge of bankruptcy. Failures by those companies, analysts say, would shut down the flow of vital parts to automakers and surely slow their production of new vehicles. Treasury Secretary Timothy F. Geithner said the $5 billion fund, drawn from the Troubled Asset Relief Program (TARP), would keep factories running while the industry undergoes a wider restructuring. It is estimated that half a million workers are employed by auto-supply firms in the United States.

“The Supplier Support Program will help stabilize a critical component of the American auto industry during the difficult period that lies ahead,” Geithner said. According to a Treasury Dept. statement, the supplier program would guarantee payments to parts firms for products already shipped to automakers. The funds will be funneled to suppliers through American auto companies that agree to take part.

Participating suppliers will also be able to sell their receivables to the government for cash, which will increase their operating funds and also make it easier to borrow money on the private market. Many suppliers have been unable to get loans from private financial institutions that refuse to use receivables from G.M. and Chrysler as collateral. The three Detroit automakers together buy about $5 billion worth of parts monthly, according to Ann Wilson, an executive with the Motor & Equipment Manufacturers Association, a trade group that represents hundreds of suppliers.

William Gaskin, president of the Precision Metalforming Association (PMA), said the association is encouraged by the announcement. He said the infusion of liquidity will help Tier 1 suppliers and should give them greater ability to satisfy the receivables of their Tier 2 and Tier 3 companies. At the same time, he said the association is very concerned that this “trickle down” of liquidity to lower Tier suppliers cannot be taken for granted because the financial situation of many Tier 1 companies—who need to shore up their balance sheets and reduce debt—is so substantial that meeting obligations of their lower Tier suppliers could be a low priority.

“The recovery of the automotive industry will only succeed if the entire automotive supply chain is involved, including the many small and medium-sized businesses who are Tier 2 and Tier 3 suppliers,” Gaskin explained. “These companies are experiencing the same serious liquidity and cash flow problems that prompted the administration to help Tier 1 suppliers.”

According to Gaskin, PMA will continue to work with the Obama administration and Congress to urge a method of providing loan guarantees on the receivables of Tier 2 and Tier 3 suppliers, and increasing the availability of credit to these types of small businesses, which employ the vast majority of Americans. “These small and medium-sized manufacturers are the backbone of this economy and are essential to the recovery of the auto industry,” he said.

Source: The New York Times, Precision Metalforming Association
 

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Automotive  •  Industry Trends & Happenings

 

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