Supply Chain Car Wreck
The Journal of Commerce Magazine
"Supply Chain Car Wreck"
By: Alan Field
Diversification is the name of the game as auto suppliers, haulers and 3PLs brace for GM, Chrysler fallout
Fasten your seat belts, the bankruptcies of GM and Chrysler are about to disrupt every aspect of an already-battered North American automotive supply chain.
No one will be immune - not the parts suppliers; not the ocean carriers, motor carriers and railroads that transport vehicles; and not the third-party logistics providers that provide value-added services.
The damage begins at the humblest level, at companies such as Computed Tool & Engineering, a six-person California-based supplier of auto transmission sensors.
"The production slowdown at GM has hurt us," said Patricia Szczuka, vice president of the parts manufacturer. "One of our customers, a supplier of parts to GM, just told us, 'Don't ship us any parts, and if you do ship, you won't get paid.'"
The GM plant where those parts would have been used has shut down. That leaves Computed Tool holding an inventory of raw materials it purchased to make those parts months ago when automakers were forecasting higher volumes.
"Whenever things stop, companies like us are caught in the middle," Szczuka said. "We hold all the risks."
Major parts suppliers Visteon and Metaldyne recently filed for Chapter 11 bankruptcy protection.
"A lot of tier one companies are going under, and that will breed another wave of bankruptcies in the tier two and tier three companies," said Bill Gaskin, president of the Precision Metalforming Association, which represents manufacturers of metal auto parts. (Tier one suppliers feed parts directly to the automakers, while tier two and three companies supply tier one or each other.)
Jim Gillette, an auto analyst at CSM Worldwide, predicted that 12 to 25 percent of domestic suppliers would disappear by 2012, because of bankruptcy or consolidation.
So far, the Obama administration's efforts to stop the bleeding have failed. The Treasury Department's Supplier Support Program, unveiled in March, was supposed to provide suppliers with up to $5 billion in financing to give them "the confidence they need to continue shipping parts, pay their employees and continue their operations." Using two programs managed by troubled Citibank, auto suppliers would get back at least some of their receivables if Chrysler and/or GM went bankrupt.
That hasn't happened. "Our concern is that neither of these programs affected tier two or tier three," Gaskin said. The only suppliers bailed out by Treasury have been "select tier ones chosen by the car manufacturers" that deemed them critical to their future revival.
A week after it filed under Chapter 11 on April 30, Chrysler identified its critical suppliers, who have been paid in full, using government bailout money. GM promised to issue such a list.
If troubled tier two and tier three suppliers don't get some of those funds soon, they may be forced to seek Chapter 11 protection. Auto suppliers usually get paid 45 to 90 days after delivering their products, but Chrysler took no orders in May. That means suppliers depending on Chrysler will be short of cash this summer.
"When you have no cash, how are you going to pay for the steel and for rehiring employees?" Gaskin asked. Many of those suppliers also sell to Toyota, Nissan and Honda, so the ripple effect could be huge.
Magliano is more optimistic about Treasury ultimately bailing out more than just a handful of suppliers. "The government cannot let this happen," he said. "All their efforts to act aggressively on the Chrysler and GM bankruptcies will go for naught if we start to see supply chain bankruptcies in a massive way."
And while Chrysler's strategic alliance with Fiat is a step in the right direction, it offers no guarantee. "This is by no means the end of Chrysler's bankruptcy case," Ed Neiger, founder of Neiger LLP, a creditors' rights and bankruptcy law firm, told CNNMoney.com. "So many issues still need to be resolved, which may take months or even years."
The impact on companies hiring car haulers, drive-away employees, rail loaders, yard employees and truck mechanics could be dramatic. "It's not just the bankruptcies," said Fred Zuckerman, director of the Teamsters' automotive transportation division." Over the last two years, the reduced volumes have been quite devastating. Fifty percent of our members are on layoff." Zuckerman's union has contracts with Allied Systems, Jack Cooper Transport, Cassens Transport, Active Truck Transport and DMT.
"We are trying to survive," he said, by negotiating contracts competitive with nonunion contracts in wages and work rules. But his drivers get paid by the loaded mile, so when car-hauling trucks are empty, they don't get paid. Any further disruptions in the automotive supply chain could cost even more jobs.
"Third-party logistics providers offering value-added warehousing, subassembly support, parts distribution and other services to the automotive sector could suffer further declines in revenue and profit.
"The margins tended to be pretty good, and the quality processes were easy to replicate so it was easy to get stuck in a rut" of depending on the automotive sector, said Evan Armstrong, president of logistics consulting firm Armstrong & Associates.
This year, 3PLs will suffer a combined 32 percent drop in their revenue for such services, he said.
How do troubled companies plan? They start by downsizing. Computed Tool cut its already small staff in half, and broadened job descriptions. "Now everyone wears multiple hats," Szczuka said.
To further reduce risk, firms that supply products and services to the auto sector are diversifying wherever possible. Companies such as Computed Tools, which also supplies parts to aerospace, construction and medical equipment manufacturers, are less likely to go out of business. While demand in the construction industry is "dead," and aerospace isn't doing well, the medical sector continues to be strong, she said.
Many 3PLs highly dependent on the auto sector have been moving into retailing, food and other sectors less sensitive to recession, Armstrong said. As early as 2001, Menlo Logistics, Penske Logistics and Rider Logistics - all significant GM customers - began to diversify their revenue stream out of the auto sector.
Latecomers to diversification will find it takes time to get new customers, Armstrong cautioned. Contracts usually last three to five years, so 3PLs need to work from a long-term plan to win new business.
On the positive side, a well-restructured auto sector might bring back some 3PLs that moved away from the sector in the past. "If these (auto) companies look viable, and if we have a reasonably low expectation of unionization, we are very open to working" in the auto sector again, said Mike Schoenfeld, senior vice president of Fidelitone Distribution Services, which focuses on providing service parts and electronics logistics.
Contact Alan Field at afield@joc.com.