Saturday, March 21, 2009
Auto parts supplier bailout will fail
The Obama Administration has committed $5 billion of TARP money to try to prop up the "Big Three's" supplier base. Under this program, suppliers to GM and Chrysler will be able to sell their parts to an intermediary if they are willing to pay a 3% premium. GM and Chrysler will have to pay $250 million each to join. Ford is declining this program. If GM and Chrysler are going to file chapter 11 soon, this might help the suppliers, who are very dependent on them, to survive a few more months until the bankruptcy is resolved. However, this will not be a long term solution to the problems of the auto parts suppliers. They are losing money on ever part they sell due to low volume and years of price squeezing by the auto manufacturers. This will make them less profitable. For instance, if they are losing $1 on a $20 auto part now, they will lose $1.60 under this program. They might be able to withstand this for a short time period, but long term this will force them into bankruptcy sooner or later. If GM and Chrysler quickly go into chapter 11 bankruptcy, then the suppliers will be able to drop this surcharge as soon as the bankruptcy judge arranges regular payments for their product. Perhaps that is the real plan.