Auto Companies Suppliers Next In Line For A Bailout

The black hole that is the auto industry needs to suck in more cash. The parts suppliers are once again lining up for federal aid.

From the WSJ:

U.S. auto-parts companies plan to ask the Obama administration for as much as $10 billion in new aid as the General Motors Corp. and Chrysler LLC bankruptcies deepen the suppliers’ troubles.

Trade groups will meet Wednesday with President Barack Obama’s auto task force at the Treasury Department to warn that hundreds of parts companies could collapse without the aid. They are mainly requesting that the government guarantee $8 billion to $10 billion in loans so banks will lend to the suppliers.

The parts companies account for more than three-quarters of auto-sector employment in the U.S., according to a Chicago Federal Reserve study, with employment of about 600,000—roughly five times as many workers as are expected to be employed by GM and Chrysler’s domestic operations once their government-subsidized restructurings are done.

Stabilizing the supply base is critical to ensuring the long-term viability of GM and Chrysler, said Neil De Koker, president and chief executive of the Original Equipment Suppliers Association.

“We could end up having all that money go to waste because they won’t be able to start up without suppliers,” Mr. De Koker said, referring to the taxpayer-funded assistance. “If there’s just one key part missing on a car, you can’t build it.”

His group, along with the Motor and Equipment Manufacturers Association, has prepared a 71-page presentation arguing that as many as 500 parts suppliers could be forced to liquidate this year. They cite several independent studies.

Make no mistake, the aid will be forthcoming. Once the government chose to go all in with the auto companies they committed themselves to preservation of the entire chain. All that remains to be seen is whether any sort of rationalization of the suppliers will take place. With a downsized GM and Chrysler there is arguably too much capacity upstream. 

This is where the Obama commitment to a hands off approach to the industry will run founder. In order to rationally allocate assistance the auto task force will have to parse the vast list of suppliers, try and make some sense of what an efficient network would look like and then take the hard steps necessary to bring it about. That means business failures, layoffs and local politics. Nothing but a festering sore for the administration.

With luck there may be enough of an economic recovery to mute some of these ongoing issues. They won’t go away but may become less bothersome. If the economy doesn’t turn, then this is may become a real threat to a second Obama term.