GM tosses lifeline to Tier 2


Robert Sherefkin
and David Barkholz

Automotive News | March 16, 2009 – 12:01 am EST

 

GM tosses lifeline to Tier 2
 

Direct payments bypass Tier 1s to keep parts flowing

DETROIT — Nervous about the viability of its largest Tier 1 suppliers, General Motors last week launched an unprecedented program to make direct payments to Tier 2 suppliers.

GM is worried that its Tier 2 suppliers could find their payments tied up if a Tier 1 supplier goes bankrupt, Bo Andersson, GM group vice president for purchasing and supply chain, told Automotive News.

The automaker also is concerned that financially strapped suppliers are taking too long to pay their subcomponent vendors, Andersson said.

"GM is stepping in and offering a solution in an environment that is already very tough," he said.

Under normal conditions, car companies pay their direct suppliers within 45 days of receiving parts. They expect those suppliers to pay their Tier 2 suppliers on the same schedule.

Emergency bypass
A weakened supply base spurred GM last week to offer direct payments to 150 firms that make parts for — and normally get paid by — Tier 1 suppliers. Here’s why.
• Some Tier 1 suppliers could face bankruptcy, which would tie up payments to subsuppliers.
• Some distressed Tier 1s are delaying payments to subsuppliers.
• If a subsupplier were to demand cash on delivery from a Tier 1 supplier, that could push the Tier 1 into bankruptcy.

 

Stretched payments

But some suppliers have stretched out payments to Tier 2s beyond 60 days, Tier 2 sources tell Automotive News. So GM now is offering to pay certain subsuppliers directly.

GM is offering the payment option to 150 Tier 2 suppliers that make parts GM has directed its Tier 1 suppliers to use. Under the program, the subsupplier will continue to ship the parts to the Tier 1 supplier, but payment will come directly from GM rather than through the Tier 1.

Asked about GM’s new program, an American Axle & Manufacturing Holdings Inc. spokeswoman said: "We support this decision."

Said a Lear Corp. spokesman: "What GM is doing is helpful, but it’s something we still need to evaluate."

Neither Ford Motor Co. nor Chrysler LLC offers a similar program.

GM’s program will start with suppliers to GM’s full-sized pickups and the Lambda platform crossovers, such as the Chevrolet Traverse, then spread to other vehicles, Andersson said.

Carmakers are increasingly anxious about possible disruptions in parts supply caused by tight credit and suppliers’ lack of cash. Automakers cut North American production 55 percent through March 7, which in turn slashed suppliers’ revenues. Consequently, some Tier 2s are pressuring their Tier 1 customers for faster payment, suppliers have told Automotive News.

But there are strings attached to Andersson’s program. Participants will have to open their financial books to GM, as all direct suppliers must.

Troubled Tier 1s

Among troubled Tier 1 suppliers, American Axle said on Friday, March 13, that its auditors are warning that the supplier may not survive as a "going concern." Lear has said its auditors may issue a similar warning.

Fitch Ratings predicted last week that Visteon Corp. would have to seek Chapter 11 bankruptcy protection soon because of a liquidity crisis brought on by a reduction of revenue that began in the fourth quarter. Visteon made a bond payment in full last week ahead of a deadline, avoiding a default that had threatened to send the company into bankruptcy.

Suppliers are seeking help from any source. Trade association executives say hundreds of suppliers could fail this year. The associations are seeking $18.5 billion in financial assistance from the White House auto task force.

About 500 U.S. auto parts suppliers face a "high risk" of failure, Laura Marcero, partner in corporate advisory and restructuring services at Grant Thornton LLP in suburban Detroit, said last week. Said Marcero: "We are at a tipping point where the scale and scope of supplier failures at all levels will increase dramatically." 

GM’s Bo Andersson: Stepping in, but with strings attached. Participants must open their books.
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