Whether you are a credit professional involved in the U.S. automotive industry or not, you
have probably been following the almost daily media reports on the industry.
Almost daily, pundits from just about every where have expressed their ideas of how to save the U. S. automotive industry. Many claim that bankruptcy is the only solution for the Big 3 auto Detroit makers. Equally, just as many claim that a government bail-out is the only solution.
Earlier this month, on December 10th, John Paul MacDuffie, Management Professor at Wharton University indicated he "favors government assistance to the industry, with strings firmly attached, over a forced bankruptcy. A negotiated financial package, he notes, could have the same impact as a reorganization accomplished through the bankruptcy court without the expense, delays and uncertainty that might cost the government even more in the long run. In addition, the size and complexity of the three automakers’ operations would make it highly unlikely that the industry could pull together all its claimants and get them to swiftly agree to a pre-packaged bankruptcy plan, he says."1
Later, on December 16th, Todd Zywicki, Professor of Law at George Mason University School of Law, stated that "Bankruptcy Is The Perfect Remedy for Detroit." In the article published in the Wall Street Journal, Professor Zywicki compares the automotive industry to a failed typewriter company and 19th century railroad companies. He also states in part that "….Detroit and the public have little to fear from a bankruptcy filing…..."2 This article seems to offer little in support of his belief that bankruptcy is the ’perfect remedy’’ for Detroit, rather to serve as a platform for his opinion of the UAW and certain Democratic politicos.
These two opposing views are descriptive of the many divergent opinions that we have seen most recently. However, in this writer’s opinion , they offer only a narrow view of the U.S. automotive industry as a whole.
The U. S. automotive industry does not consist only of auto makers Chrysler, Ford and General Motors. To think otherwise is to ignore thousands of other firms that comprise the entire industry.
"Automotive parts are defined as either Original Equipment (OE), or aftermarket parts. Original equipment parts that are used in the assembly of a new motor vehicle (automobile, light truck or truck) or are purchased by the manufacturer for its service network are referred to as Original Equipment Service (OES) parts. Suppliers of OE parts are broken into three levels. The first level is ‘Tier 1’ suppliers who sell finished components directly to the vehicle manufacturer. The next level is ‘Tier 2’ suppliers who sell parts and materials for the finished components to the Tier 1 suppliers. The third level is ‘Tier 3’ suppliers who supply raw materials to any of the above suppliers or directly to vehicle assemblers. There is often overlap between the tiers. Original equipment production accounts for an estimated two-thirds to three-fourths of the total automotive parts production.
After market parts are divided into two categories: replacement parts and accessories. Replacement parts are automotive parts built or remanufactured to replace OE parts as they become worn or damaged. Accessories are parts made for comfort, convenience, performance, safety, or customization, and are designed for add-on after the original sale of the motor vehicle."3
It should be noted that not all OE or OES Tier 1, 2 and 3 suppliers are located within the U.S. Also, OE and OES suppliers do not purchase their components or raw materials only from U.S. sources.
Few , if any of the myriad of recent media reports mention OE or OES suppliers when referring to the auto industry. Most focus only on the financial woes of the Big 3 auto makers and ignore the declining financial fortunes of OE and OES suppliers. During the past 3 years, six (6) Tier 1 suppliers have filed Chapter 11 bankruptcy:
February 2, 2005 -Tower Automotive, Inc. and its subsidiaries filed a Chapter 11 petition in bankruptcy with the U. S. Bankruptcy Court for the Southern District of New York. Tower reported assets of $787.9 million and debts of $1.3 billion. Claims of the top thirty (30) unsecured creditors totaled $728.8 million. Although Tower exited bankruptcy on or about 7/31/07, several hundred preference claims filed against unsecured trade creditors appear to unresolved.
April 26, 2005 - Meridian Automotive Systems, Inc. and its subsidiaries filed a Chapter 11 petition in bankruptcy in the U.S. Bankruptcy Court for the District of Delaware. Meridian reported assets of $530 million and debts of $815 million. Claims of the top thirty (30) unsecured creditors totaled $185.7 million. Meridian emerged from bankruptcy at the end of 2006., however, nearly 300 preference claims filed against unsecured trade creditors appear unresolved.
May 17, 2005 - Collins & Aikman Corporation and its subsidiaries filed a Chapter 11 petition in bankruptcy in the U.S. Bankruptcy Court for the Eastern District of Michigan. Claims of the top fifty (50) unsecured trade creditors totaled $1.02 billion. A liquidation plan became effective on 10/12.2007. However, several hundred preference claims against unsecured trade creditors appear unresolved.
October 8, 2005 - Delphi Corporation and its subsidiaries filed a Chapter 11 petition in bankruptcy with the U. S. Bankruptcy Court for the Southern District of New York. Delphi reported assets of $17.1 billion and debts of $22.2 billion. Claims of the top fifty (50) unsecured trade creditors totaled $2.7 billion. Delphi’s efforts to exit from bankruptcy continue to be challenged by negotiations with potential financiers, not the least of which is General Motors, Delphi’s former parent. Several hundred preference claims against unsecured trade creditors also remain resolved.
On March 3, 2006, Dana Corporation and its subsidiaries filed a Chapter 11 petition in bankruptcy with the U. S. Bankruptcy Court , Southern District of New York. Dana reported assets of $7.9 billion and debts of $6.8 billion. Claims of the top fifty (50) unsecured trade creditors total $1.7 billion. Although Dana emerged from bankruptcy in March, 2008, several hundred preference claims against unsecured trade creditors are believed to be resolved at this time.
October 30, 2006 - Dura Automotive Systems, Inc. and its subsidiaries filed a Chapter 11 petition in bankruptcy in the U.S. Bankruptcy Court for the District of Delaware. Dura listed assets of $1.9 billion and debts of $1.7 billion. Claims of the top thirty (30) unsecured creditors totaled $999.4 million. Dura’s exit from bankruptcy was approved in May, 2008. However, several hundred preference claims filed against unsecured trade creditors are believed to be unresolved.
September 28, 2008 - Bill Heard Enterprises, Inc. and its subsidiaries filed a Chapter 11 petition in bankruptcy in the U.S. Bankruptcy Court for the Northern District of Alabama. Assets and liabilities were estimated at $500 million and up to $1 billion respectively. Trade publication Automotive News described the firm as the largest Chevrolet dealer in the U.S., with 14 dealerships in Alabama, Florida, Nevada, Tennessee , Texas and Georgia. Claims of the top 40 unsecured trade creditors were reported as $7.1 million.
At the time the above listed firms filed for bankruptcy, their total debts exceeded $33 billion and the claims of their unsecured trade creditors exceeded $7 billion.
For the most part, the plight of the unsecured trade creditors in the six bankruptcy cases cited above are invisible to those outside of the industry. In many, if not all of these bankruptcy cases, unsecured trade creditors were selling to all six debtors and have taken multiple hits on outstanding claims, as well as preference claims filed against them for payments received from the debtors in the ninety (90) days prior to the bankruptcy filings. It is not uncommon for preference claims to be resolved well after a plan of reorganization or liquidation has been approved and implemented.
The bankruptcy cases cited above involve "Tier 1" OE or OES firms. The causes for the bankruptcy filings of these Tier 1 firms also affect Tier 2 and Tier 3 firms and a number of them are known to have filed for bankruptcy. Many of the unsecured trade creditors dealing with the Tier 1 firms in bankruptcy were also extending credit to Tier 2 and Tier 3 customers, thus further exposing them to losses due to the collapsing of the automotive industry supply chain.
"Ever increasing competition, changing business models, and industry productivity gains are progressively adding to the
pressure for consolidation [for parts suppliers]. Some industry analysts estimate that up to 90 percent of U. S. parts suppliers were acquired, merged , or left the business during the 1990s. Industry analysts speculate that of nearly 800 major suppliers in 2000, fewer than 100 will be left by 2010 as a result of bankruptcies, mergers and acquisitions, and migration to other industries."4
Credit professionals should fasten their seatbelts tightly, as the next year to two are shaping up to be an extremely challenging and bumpy ride.
3 U. S. Automotive Parts Industry Annual Assessment, Department of Commerce, March, 2008
4 U. S. Automotive Parts Industry Annual Assessment, Department of Commerce, March, 2008