Automotive suppliers employ more than 500,000 U.S. workers and manufacture most of the parts of the vehicles that the big car companies put together. Until now, the public and the bailouts had overlooked these key industry players. That changed April 8.
Chrysler L.L.C., fueled with $1.5 billion of federal money, and General Motors, pumped by $2 billion of taxpayer funds, launched Auto Supplier Support programs to help keep these manufacturers in business.
“This is very much needed in terms of making sure that the supply community is viable and salvaged to make it all work,” says Joseph B. Anderson, Jr., chairman and CEO of Troy, Michigan-based TAG Holdings L.L.C. (No. 6 on the BE Industrial/Service 100 with $605 million in sales). “The supply base is critical to the car companies being successful, because so much of the components and assembly work is outsourced from the car companies.”
One of TAG Holdings’ six operating companies provides engine parts. It will participate in the section of one manufacturer’s program that will protect TAG in case that company files for bankruptcy. TAG will receive payment, even if that auto maker goes bankrupt.
Administered by the U.S. Treasury Department and CitiBank, each of the automakers’ program allocation goes into a special fund. The companies must also contribute some capital — 5% of what they get from the government. An additional $1.5 billion remains available if needed. The program lasts a maximum of 12 months.
General Motors corporate spokesman Dan Flores says to qualify in the GM program, a firm must be a Tier 1 supplier – a company that ships directly to GM — that provides auto parts which actually go onto vehicles, such as mirrors or seats. General Motors’ voluntary program has two components: a credit insurance program and a quick-pay option.
With the GM credit insurance program, a supplier can choose to pay the federal government a fee of 2% of the value of its GM accounts receivable in exchange for a government guarantee of the money GM owes it. The government backs money GM owes the supplier so that lenders know they will be paid back on loans using accounts receivable as collateral. Lenders, therefore, are expected to start making these types of loans again.
On average, GM pays suppliers 47 days after taking delivery of parts. For suppliers short on cash who would fold if they waited that long, there is the quick-pay option. Suppliers can choose to essentially pay a fee of 3% of the value of their accounts receivable in exchange for fast access to cash. The government fund advances participating suppliers 97% of what GM owes them. GM does not actually change its payment terms; when the scheduled pay date arrives, GM pays 100% of what it owes the supplier back into the government fund. This creates virtually a $2 billion revolving line of credit. “The beauty of this part of the program is that suppliers can get paid faster, but it has no effect on GM cash flow,” Flores says.