Auto supplier woes present a major problem
The government's focus so far has been on bailing out the Big Three Detroit automakers, but 500 of their 1,700 direct suppliers are at "high risk" too, according to the Washington Post. In today's auto industry, suppliers provide about 70 percent of the value in a car and employ 673,000 people. The Big Three employ 239,000 according to the Bureau of Labor. So while billions of dollars are going to help keep the Big Three afloat, what happens if their supply chain fails? Auto manufacturing would basically shut down in this country. And now comes news that the auto suppliers are getting their own $5 billion bailout.
Thomas Klier, a Fed economist, wrote about auto industry suppliers, "If you want to save the auto industry, you can't just save the car makers. Think about it like an iceberg. What's above the waterline is the automakers -- that's what we see. But what's below the waterline is the suppliers, and it's much, much bigger."
If an auto supplier goes under, it's not that easy to replace the supplier and move on. Suppliers coordinate closely with the manufacturers, or the parts won't fit right. When a new part supplier is picked, car makers send molds and other machinery to the supplier. Then, the tests begin: Dimensions are checked numerous times; the parts from the new supplier undergo stress analysis and get crash tested. Only then can that new supplier's part be used on a car. While a new supplier's parts are being tested, assembly lines could be shut down.
To avoid massive shutdowns, large companies assist smaller companies in trouble until work can be shifted to another supplier. But with so many smaller suppliers in trouble, fears are that the bigger suppliers may soon be overwhelmed without some government help. "For those outside the industry, it is difficult to truly grasp the interconnectivity of the automotive industry," James Kamsickas, IAC's chief executive and president told the Washington Post. He added, "The failure of one or more key suppliers can shut down entire supply chains."
Suppliers started meeting with the Obama administration's auto task force last month. Suppliers want the government to guarantee payments owed them by the Big Three or to backstop the Big Three loans. The Big Three and Toyota support their position. Jim Lentz, president of Toyota's U.S. sales, told the task force Wednesday, "The biggest challenge that we face is really on the supplier side of the business."
An even bigger question needs to be asked: Are so many suppliers still needed with auto sales down 40 percent? Or is the industry facing a permanent contraction? These questions must be answered before the government throws a lot more money toward the bailout.
Lita Epstein has written more than 25 books, including Reading Financial Reports for Dummies and Trading for Dummies.