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Auto suppliers to get up to $5 billion in federal aid

Treasury Secretary Timothy Geithner says the program will guarantee that automakers get the part they need and that suppliers will get paid.

March 20, 2009|Ken Bensinger

KEN BENSINGER — By deciding to give as much as $5 billion to struggling auto parts suppliers, the government could help keep afloat dozens of the companies that provide the seats, pistons and thousands of other components needed to assemble a car.

But Thursday's announcement also sent a strong signal that the Obama administration would pony up even more bailout money to General Motors Corp. and Chrysler.

The Treasury Department's Supplier Support Program will allow parts makers to be paid more rapidly, stabilizing their books and making it easier for them to seek outside financing.

Though the aid package is less than one-third of the $18.5 billion that suppliers requested last month, it comes as welcome relief for suppliers who have complained of delayed or halted payments from automakers, raising concerns that some could go bankrupt as a result. In turn it would bolster smaller companies, lower in the automotive food chain, that sell materials to larger parts makers.

All told, the initiative aims to protect the more than 500,000 workers employed in the supplier industry.

But in structuring the program to funnel the money through U.S. automakers -- effectively giving GM and Chrysler the power to decide which suppliers will receive aid -- the government seems to be telegraphing its intention to keep those carmakers solvent, analysts said.

"If they weren't going to step up and do something for Chrysler and GM, why would they do something for their suppliers?" said Shelly Lombard, auto industry analyst at debt research firm Gimme Credit. "I think this is a sign that they'll continue to support these guys."

Last month, the two Detroit companies requested $21.6 billion in addition to the $17.4 billion in bailout loans they have already received, saying that without help they would be forced to file for bankruptcy protection.

Less than two weeks remain before the government-imposed March 31 deadline to decide whether GM and Chrysler will continue to receive support. An auto bailout task force reporting to President Obama has been meeting regularly with auto officials, including suppliers, but has not tipped its hand on what it plans.

As conditions of their original government loans, GM and Chrysler were instructed to reduce their unsecured debt and renegotiate billions of dollars in cash obligations to a retiree healthcare fund managed by the United Auto Workers union. Neither has worked out any deals. The government has reserved the right to call back the loans, which would trigger a bankruptcy filing, should it be unsatisfied with progress.

But with the economy continuing to struggle, the political costs of forcing either or both of the automakers into bankruptcy could be huge, even with the public increasingly impatient with bailouts.

Conversely, if critical suppliers failed, the automakers would be unable to produce more vehicles.

"The administration is clearly saying that there's more than a little interest in the future of the industry," said Jim Hall, principal of industry consultant 2953 Analytics. "They know that if you take any one of the Big Three into bankruptcy, you'd bring down the entire industry."

Hundreds of thousands, if not millions, of jobs would go with it, experts contend.

Ford Motor Co., which has not requested any federal loans, said Thursday that it would not participate in the Supplier Support Program, maintaining that it has enough liquidity to pay its suppliers.

But with total industry sales in the U.S. down 40% through February compared with last year, and sales by domestic carmakers falling 49% in that time, revenue is declining too fast for GM and Chrysler.

Both have substantially altered the way they pay their suppliers in recent months as their own cash positions have declined, delaying full payment for up to 140 days after delivery, according to some vendors.

With payments coming in late, or in some cases not at all, suppliers find they cannot borrow money from lenders, and in turn are delaying payment to the companies that provide materials and other components to them.

As a result, more than 40 suppliers declared bankruptcy in 2008, and dozens more face the same fate. In recent weeks, several of the largest suppliers, including Lear Corp., which specializes in seats, have received notice from their accountants that they are not expected to be able to continue as a "going concern."

"This program comes at a very critical time and will help suppliers as they struggle to continue operations," said Neil De Koker, president of the Original Equipment Suppliers Assn.

In sending the parts makers aid through GM and Chrysler, the government is allowing the automakers to prop up the suppliers that are most critical to their operations, and most likely to weather the down economy. That prevents the government from playing favorites while leaving open the door for consolidation.

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