NYT: Detroit Woes Wound an Army of Suppliers

I think many people do not understand the daisy chain that is the automotive industry - there are countless suppliers of various size. They have been in a "right sizing" for a decade now, decimating the ranks (we've lost about half of them as we offshore) but there are still literally thousands out there. Lost in the "headline news" of the week (green shoots mind you) was the bankruptcy of Visteon (yes last week) - which was spun off of Ford much like Delphi (in bankruptcy since 2005) was spun off of General Motors.

• Plagued by manufacturing cutbacks and falling profits, Ford's largest supplier, Visteon, filed for Chapter 11 protection in U.S. Bankruptcy Court in Delaware on Thursday

Those are the 2 largest suppliers to the 2 largest car companies. Now due to their "spin off" nature they were tied very closely to their former parents but most suppliers feed into multiple auto companies, including foreign automakers. Which is why even Toyota (TM) was fretting about bankruptcies coming to their domestic peer group. It's all connected - so if a supplier goes down due to car company A, they put at risk supply to car companies B, C, D, and E.

Metaldyne is another supplier that went bankrupt last week (a smaller supplier) and I expect a bevy more to go this summer and fall. So while I expect (government reported) unemployment to level off and even improve from the dramatic (twice in a lifetime) levels we have seen, we have a slew of folk that will be joining the ranks from this industry and I think it is being understated. Many of these 40-200 person sized suppliers have long gone; there work shipped to China in the past decade. Many of these small firms you will never hear of, and the government employment report will show "birth death model" job gains to hide these losses. But now we'll see some good sized firms go....

• "Visteon and Metaldyne are just the beginning," said Ann Wilson, senior vice president of government affairs for the Motor and Equipment Manufacturers Association. "We're talking 50 to 60 suppliers that will probably file in the next few months. Some will go straight to liquidation. Small companies will just close. But a number will enter the bankruptcy process, and it's important it's done with the same thought and care that's been afforded to GM and Chrysler."

Now most people could care less, because once we parcel off Michigan, Ohio, and Indiana and sell these states to Mexico it's long forgotten - but last I check these are still Americans. Who are supposed to be part of the green shoot brigade. While we have become numb to job loss numbers of 500K, 600K (remember these are government numbers which are being revised down 100-200K the month after, and also showing through "birth" of new businesses job growth anywhere of 100-200K a month i.e. we've really been losing 800K-1M jobs a month), I'd like to point out that in the 'depths' of the recession of the early 2000s we topped out at job losses at 150K. So even when we "improve" to 300K losses a month, it's still far worse than anything of recent memory. I only point this out to state those who think everything will be back to normal "in 4-6 months" are smoking some green shoots.

The other thing that has me scratching my head is when one day "semi normal" does return and auto sales return to some sort of decent level, how will capacity be ramped up with so much of the infrastructure wiped out? Guess that's where the Japanese come in.

Via NYT

• Auto suppliers, which employ more workers than the car companies themselves, have cut way back, almost hibernating, as they lay off employees earning $10 to $22 an hour, or cut back their hours. Some, like the Strongs, are trying to diversify, but such efforts have not noticeably offset the lost automotive business.
• “Most of these supplier companies are family-owned,” said Daniel Luria, research director of the Michigan Manufacturing Research Center in Ann Arbor. “And in a period when the families can’t sell, the decision is to preserve the companies as future streams of revenue for the next generation.”
• “We are estimating that 500 suppliers out of 4,000 could go out of business between now and the end of the year,” said Neil DeKoker, chief executive of the Original Equipment Suppliers Association. Billings just to the three Detroit automakers from the nation’s auto suppliers have fallen to $7 billion a month, on average, from $16 billion in January, he said. (that is staggering)

The rest of the story are various examples of small sized businesses, the type of which the government is saying is being created to the tune of 150K or so jobs a month. :) Just not in autos... one example of a few they cited.

• Pioneer Forge, near Toledo, Ohio, would also like to diversify, said Michael Regal. He manages the factory, which forges tie rods and other steering links for trucks, including pickup trucks assembled by Ford and Chrysler.
  
• The company has not made a profit for two months, Mr. Regal said, and the work force is down to 51, from 100 a year ago. Revenues have plunged to less than $10 million, at an annual rate, from more than $15 million in 2007, just prior to the start of the recession.
• Mr. Regal says he sees no other choice but to try to sell more steering mechanism forgings to foreign auto companies that assemble vehicles in the United States. He would like to diversify away from auto supply, but the economics work against Pioneer and many others in the industry.
• “You have to set up your operation to handle the mass volumes that the automotive industry sends at you, and you become a captive of the parts that you make,” he said. “If you want to venture out into some other business, you have to have a lot of capital to do that, and when things take a turn for the worse, the capital is not there.”

p.s. in "you can't make this stuff up" category, I put a post up this morning over at greenfaucet.com on how Chrysler now has access to GMAC as part of its government intervention. The same GMAC that has been bailed out via $14 some Billion of US taxpayer dollars. So what is Chrylser offering now? You guessed it... 5 year, 0% loans. Because if Americans can't afford to pay interest, let the taxpayer cover it. Just chalk up another one for the grandkids to pay off... we now are subsidizing car purchases - trying to create unnatural demand via taxpayer handouts.

What a system - we truly never learn from history.