GM Bankruptcy Spells Disaster for Small Suppliers
The quote "What's good for General Motors is good for the country" is widely attributed to Former GM chief executive Charles Erwin Wilson, who made the remark during his confirmation hearings for Secretary of Defense in 1952. Back then it may have been true, but it's a different world now for General Motors, which is likely to file for bankruptcy next week.
If the company files a Chapter 11 petition by Monday, as many believe, dozens of small businesses that supply GM with parts and raw materials are facing likely bankruptcy as well, with no prospect of government bailouts.
Independent suppliers manufacture 70 percent of the 15,000 parts -- including seats, engine blocks, electronics, and bumpers -- that go into a single automobile. Collectively, they make up a $388 billion industry that accounts for more than 600,000 of the 2 million American jobs tied to the auto industry. Of those, the overwhelming majority are small businesses with an average of 80 to 100 employees, according to industry experts.
Last November, in a column titled GM's Survival Is Critical to Small Businesses, I reported that a General Motors bankruptcy would deliver a catastrophic blow to the economy that would not just rattle windows on Main Street, but crush thousands of small businesses across the country.
As it turns out, the deconstruction of General Motors's extended web of suppliers has been underway for months. With a bankruptcy filing, it's likely to accelerate, costing thousands of workers their jobs and likely destroying dozens of firms.
Chris Norch, president of Denison Industries, employs 125 employees in a metal casting business founded in 1991. It supplies aluminum castings for the automotive, defense, aerospace, and commercial industries. He's also president of the American Foundry Society, which represents about 3,000 metal casting firms, the majority of which are family owned and employ an average of 100 people or fewer.
He told the House Small Business Committee recently that GM and Chrysler, which already has filed for bankruptcy, owe their large and small suppliers about $10 billion for parts that have been delivered. GM has held off paying them for weeks. In bankruptcy, GM may not have to pay them at all.
In the past six months, 15 metal casting companies have closed down, and the trade association estimates that another 30 could close their doors over the next six to nine months.
Ron Overton, chief executive of Overton Industries, a company his father founded in 1968, has seen similar fallout among so-called second-tier suppliers. In his case, they make machine tools for companies that make auto parts. "In my 30 years in this industry, these times are by far the most dire for the automotive sector and particularly the thousands of small middle-market suppliers around the country," he told the committee during a recent hearing.
His company is holding several million dollars in receivables from direct suppliers to GM and Chrysler and he's worried about getting paid. Although the Obama administration has insured GM and Chrysler receivables to direct suppliers, companies like Overton have little recourse in the event of a GM bankruptcy.
"In the current environment, these accounts receivables remain open for a longer period of time than ever before," he said. Some companies in the administration's Supplier Support Program funded under the Troubled Assets Relief Program (TARP) are withholding payments for up to 180 days, even though they are receiving payments from GM and Chrysler in less than 60 days.
Because of the impact on cash flow, small middle-market auto suppliers say the doors are being slammed shut on credit. "The moment a lender or receivables insurance broker sees we are involved in the automotive industry, they immediately move us to a high-risk category, will not extend credit, or they will transfer us to a third-party lender," said Overton. "Simply put, they believe we are not 'bankable' due to our auto industry work."
The Administration has been touting the Small Business Administration's 7(a) loan program as a source of funding for small businesses facing a credit crunch. Under the American Recovery and Reinvestment Act, the government will guarantee up to 90 percent of the loan.
"For the automotive industry, anything short of a 100 percent receivables program will not work," Overton said. "In addition, the 7(a) program also requires all holders of 20 percent or more of a small business to personally secure the loans -- something very few of us are willing to risk in the current environment," he added.
If current trends continue, his industry trade group estimates that 30 percent of the nation's tool and die makers will be forced to shut down.
For the auto supply industry, the worst is yet to come. Chrysler has already shut down plants during its bankruptcy, which is severely curtailing orders. Now GM's surprise announcement that it will shut many of its plants for most of the summer will be disastrous, according to those who testified.
The economy has stabilized since I wrote my column on GM last November, which may help ease some of the impact of its bankruptcy. But I would have to take issue with General Electric Chief Executive Jeff Immelt, who said this week in a speech to the American Chamber of Commerce in Japan that the worst of the global downturn is over. With GM's bankruptcy, the worst could be yet to come for hundreds of small firms.
