Automakers fend off parts companies' cash demands

[December 16, 2008]  DETROIT (AP) -- Most auto parts suppliers know their futures are inexorably tied to Chrysler LLC and General Motors Corp., which explains why they are doing their best not to panic and demand cash on delivery from the carmakers that keep warning about how little cash they have.

That, according to industry analysts, is what's keeping impoverished GM and Chrysler alive as they await word from the White House on billions of dollars in critical federal loans.

Both automakers have said they won't be able to pay all of their bills in January without government help, something that in other industries would start a run of suppliers halting shipments or demanding cash up front.

But only a few GM suppliers and a relatively small number at Chrysler have made such demands because they fear they won't be paid in the normal 45-day cycle next month. Both companies say they have refused to change their payment terms.

"I think as far as suppliers are concerned, all operations look on schedule and without interruption," Chrysler spokeswoman Mary Beth Halprin said Monday.

Suppliers say that even though they're hurting for cash themselves, they don't want to push GM or Chrysler over the edge by demanding payment on delivery. Bankruptcy experts say if enough suppliers start demanding payment or refuse to ship, then both companies could be forced into Chapter 11, and the suppliers would soon follow.

Even Ford Motor Co., which says it hopes to get through the recession without any government assistance, could get dragged down if the supply chain falls apart.

But Jim Gillette, director of financial services at auto industry consultant CSM Worldwide in Grand Rapids, said parts makers are working with the car companies because it wouldn't be wise to cross them, either.

"It's not a good move from the standpoint that the industry has a very long memory," Gillette said. "If GM and Chrysler, or one of the two, more likely GM, come out of this, it'll make it more difficult for that supplier to get programs in the future."

Executives at GM and Chrysler have said some suppliers have demanded changes in their payment terms, but the companies have refused on the theory that if they make allowances for one, others will follow.

So far, GM's suppliers also have kept shipping, said spokesman Dan Flores.

"We remain focused on maintaining payment terms and being a prompt payer as we continue the transformation already under way to a stronger, more competitive GM," Flores said. "We appreciate our suppliers' ongoing support and patience during these difficult times."

Chrysler Chief Financial Officer Ron Kolka said in an interview last week that the company can't pay one supplier earlier than the normal 45-day payment cycle because others would demand early payments and Chrysler doesn't have the money to make them.

Without government loans, the company's available cash will fall below the $2.5 billion minimum level to pay the bills in January, he said. Also, Chrysler must pay $7 billion to suppliers every 45 days, but it anticipates little income in January, which is typically a poor sales month.

GM has several billion dollars worth of supplier payments due shortly after the first of the year, and analysts say it probably doesn't have the cash to pay them.

Dave Andrea, vice president of industry analysis and economics for the Original Equipment Suppliers Association, said it would be a last resort for suppliers to make changes in payment terms or demand cash on delivery.

"Looking at any changes in the customer relationship is really the last step you want to go to," Andrea said. "I think the suppliers all approach this from the perspective that we know there's going to be a strong industry in the future and that these are their customers."

Andrea said the biggest problem facing suppliers now is the inability to borrow on their customers' receivables and get the cash they need to produce products.

Gillette said financial problems at Chrysler and GM could end up dragging some smaller suppliers into bankruptcy if banks don't make credit available soon. Second- and third-tier suppliers, those that make parts for top-tier parts suppliers, have less access to cash and depend heavily on bank financing, he said.

"If something doesn't happen on the part of the federal government soon ... they're facing a pretty widespread problem that could even lead to shutting down some facilities," he said.

[Associated Press]

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