U.S. Automotive Industry: Credit Executives Latest Challenge

Shakeout of the automotive industry

At one time or another, most everyone has seen the video of a long serpentine chain of falling dominos. With this image in mind, picture the falling dominos labeled with the names of the companies within the U. S. automotive industry who have filed bankruptcy within the past year: Tower Automotive, Inc. (2/05); Meridian Automotive Systems Composites Operations, Inc. (4/05); Collins & Aikman Corp. (5/05); Delphi Corp. (10/05); Dana Corp. (3/06), and most recently, Dura Automotive Systems, Inc. (10/06).

How many more "automotive industry dominos will fall is subject to analysis and speculation by industry experts. 

"The shake-out of General Motors and Ford Motor during 2005 has caused the most violent and wide-spread dismantling of the U. S. auto parts supplier sector in the more than century-old history of the automobile.  The suppliers sector represents the ‘undercarriage’ of the auto industry:  It produces the brakes, electrical wiring, shocks/struts, seats and other vital components.
The automotive suppliers’ collapse reminds us that the auto sector crisis is not months away, but upon us.

"During recent years, the Big Three U. S. automakers Ford, GM and DaimlerChrysler have been under tremendous pressure to reduce costs.  Viewed by some within the industry as relentlessness, their cost cutting efforts included plant closures, worker layoffs, and demands on suppliers to reduce prices.

Epitomizing the manner by which the Big Three automakers forced auto suppliers to cut their prices, and thus accelerating the suppliers’ collapse, is the case of Troy, MI-based Collins & Aikman, which produces parts for 90% of the vehicles that are built in the United States.

On October 20, 2006, CBS news reported that Ford would shutter l6 plants and hopes to cut 30,000 hourly jobs by the end of 2008.  Ford reportedly has also offered buyout or early retirement offers to 75,000 works.

On October 21, 2006, The Detroit Free Press reported: "In the next two weeks, Detroit auto suppliers are likely to report declines in their third-quarter earnings per share because Detroit’s automakers have scaled back production, forcing suppliers to make adjustments.

DaimlerChrysler AG has said it will cut North American production by 16%, or 35,000 units, in the second half of the year.  General Motors Corp. estimates its North American production will be down 12% in the final three months of the year, or about 50,000 units, from the fourth quarter of 2005.  And Ford Motor Co. plans to cut its North American production by 21% or 168,000 vehicles, in the final three months of the year

Lear Corporation, Visteon Corporation and Johnson Controls, Inc. have all previously reported they have already begun layoffs in an effort to keep pace with the automakers schedules.  American Axle & Manufacturing Holdings, Inc. has offered buyouts to 6,000 employees to align its workforce with reduced customer orders.

On October 28, 2006, BorgWarner reported its profits were off 36 percent and it missed its forecast.  In September, BorgWarner cut about 850 jobs, or 13 percent of its North American workforce due to a production slump.

Also on this date, the Timken Co. announced that 700 workers would lose their jobs.  "Friday’s announcement was about matching demand in the market place, President and Chief Executive Officer, James W. Griffith said.

"The automotive business has continued to lag behind Timken’s industrial bearing and steel groups, posting losses in quarterly returns. Griffith said the latest cuts will fit with the company’s push to diversify its customer mix.

The general direction of the company has been to lessen our dependence on the automotive market and the Big 3 specifically, he said.

Several credit executives within the automotive sector were questions about the pressures being placed upon their respective firms by the events described above.  Speaking on the condition of anonymity, their comments are as follows:

"Many of my fellow credit professionals in the automotive related industries are running scared.  Despite the recent bankruptcy filings, production cutbacks, plant closures and labor-force layoffs, we are still under pressure from our executive management to protect our accounts receivable assets and minimize losses.

"Numerous suppliers to the automotive parts industry must rely on off-shore sources for their raw materials such as copper, aluminum and steel. While we do our best to hedge on pricing in the international market place, we are being squeezed by the ‘big auto parts suppliers’ to cut prices and adjust production schedules to fit their schedules, while at the same time stretching us out on payment terms.

"Prior to filing bankruptcy, several of the ‘800 lb gorillas’ in the industry had come to us with ‘strong requests’ for extended payment terms, with the threat of taking their business elsewhere. Since their bankruptcy filings, the same firm are voicing the same threat and still requesting extended terms.

"Our firm has historically done business within the industry under contractual terms, which in some cases covered purchases over an extended period. Efforts to renegotiate the terms and period of these contracts prior to the bankruptcy filing of one customer were unsuccessful. Now, since their bankruptcy filing, they have filed a motion with the court to cancel the contract as ‘being unprofitable’.

"My firm was not a direct supplier of parts or materials to the automotive industry, rather we supplied construction materials to one of the parts supplier’s plant expansion. Despite our properly filed lien rights, we were forced to hire an attorney to represent us in the bankruptcy proceedings.

"The ‘Attitude Adjustment hour usually held before the beginning of our industry credit group meetings now begins the night before the meeting and continues through to the following day. In the words of Alfred E. Newman, ‘What, Me worry?’

"My staff is spending more and time on deduction resolution. Customers have been increasing the number and value of deductions taken from payments to us, shifting the burden of ‘proof’ to us.  Not only is this time consuming for my staff in terms of resolving the issues, it really constitutes an interest free loan to the debtor for the time it takes for resolution, which requires much haggling back-and-forth and in some cases can take up to six months.

"Not much has changed within the automotive and related industries. My experience in the industry dates back to the mid-80’s and even then the big players in the industry were pretty much dictating terms to the vendors who chose to do business with them. The same games are being played today as back then; payments delayed beyond terms; unauthorized deductions and continual pressures to reduce prices. All the while, we are expected to ‘do more with less’. 

As events continue to play out within the automotive sector, which dominos will topple next?……..Lyons and Tigers, [but no Bears]? Oh my……….sorry, I couldn’t resist. Seriously however, one of the dominos to fall within the near future will be the filling of preference actions against creditors for the recovery of payments made by the auto parts suppliers within the ninety (90) day "preference period prior to the filing of their petitions for protection under Chapter 11 of the United States Bankruptcy Code.