U.S. auto suppliers are scrambling to extend their holiday-season shutdowns, shedding workers and developing contingency plans to deal with a potentially devastating failure of some of their biggest customers in Detroit.The moves come as General Motors Corp. on Friday announced more production curbs and lawmakers in Washington began hashing out conditions that the Big Three auto makers -- GM, Ford Motor Co. and Chrysler LLC -- will have to meet before Congress will consider giving them a $25 billion emergency cash infusion. Many suppliers are counting on a federal bailout to rescue their big customers -- and, by extension, themselves.
Auto suppliers are developing contingency plans to deal with potential fallout in Detroit. Above, a Ford Dearborn, Mich., plant.
In the meantime, suppliers, still unsure of what will happen to the nation's car makers, are conserving cash by shifting to shorter workweeks, canceling capital-spending plans and accelerating layoffs. Problems in the supply network have the potential to spread pain to a wide swath of the U.S. economy. Auto suppliers employ more than 730,000 workers in the U.S., about three times more than the Big Three.
Nescor Plastics Corp. in Mesopotamia, Ohio, which makes plastic parts such as cup holders, in the past month has shifted to a four-day workweek, implemented an across-the-board salary reduction and canceled costly machine upgrades planned for the company's normal two-week holiday shutdown. The company also has added a week both before and after its two-week shutdown in which it will operate at only partial strength.
Like many auto suppliers, Nescor doesn't sell directly to the car makers. Rather, its plastic parts are sold to larger suppliers that assemble modules that get fitted onto cars on the assembly line.
"Over the past 12 months, we had three customers file Chapter 11 on us, so we know what it means when you suddenly aren't getting receivables you're counting on," says Darrell McNair, the company's president. The company has cut back on purchasing materials.
Angell-Demmel Managing Director Richard Anglin says the main survival strategy for suppliers like him is a tighter credit policy. Two years ago, Angell-Demmel began shifting away from allowing customers to pay bills 60 or 90 days after they take delivery. It is now 30 days, or, in some cases, payment in advance. The Dayton, Ohio, company, which makes decorative metal parts and many of the nameplates used on cars, now relies on an outside insurance agency to rate the credit risks of customers.
"I'm not sure what would happen if a GM would go into bankruptcy," he says. "I'm just not sure how you plan for that, other than what we're doing now."
Many suppliers would like to cut their exposure to the Big Three, but that is difficult to do at a time when the entire industry is in a deep swoon. GM's sales were off 45% in October, for instance, compared with a year earlier. Most analysts expect the slide to continue.
"The biggest problem facing suppliers right now is that they still don't know where the bottom of this market is, because it just keeps falling," says Kimberly Rodriguez, an auto expert at consulting firm Grant Thornton LLP.
Ms. Rodriguez estimates that a third of U.S. auto suppliers are in danger of insolvency and this number would spike in the event of a bankruptcy-court filing by one or more of the Big Three producers.
Ms. Rodriguez says that many suppliers that normally would have already filed for bankruptcy protection themselves have resisted doing so, in part because the financing necessary to conduct a restructuring under Chapter 11 of the U.S. Bankruptcy Code is no longer available to them because of the credit crunch.
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