There’s nothing more taboo across all manufacturers and/or suppliers than making a mistake to shut down a plant. Of course, it’s usually something unintentional but extremely costly.
However, certain Chrysler suppliers did just that today. Except, they knew exactly what they were doing….how can you blame them?
Nonetheless, two Metro Detroit Chrysler Stamping Plants (Warren and Sterling) unexpectedly stopped the presses and shut down the plant. Until further notice…..
From the Detroit Free Press
Suppliers balk, shutting 3 plants
BY GREG GARDNER • FREE PRESS BUSINESS WRITER
• April 30, 2009
Good GM, Bad GM Will Lead to Happy Tier One’s, Mad
Tier Two’s and eventually Sad Tier One’s.
The North American Auto Industry Doesn’t
Operate in a Vacuum.
By: Joe Brown
GM has until June 1st
to come up with a viability plan that cuts far deeper than their recent
proposal. One can only imagine the magnitude of complexity that makes up this
plan.
If the UAW and the
bondholders continue to posture in their seemingly ill-advised version of a
Mexican standoff with the future of GM or Chrysler it’s inevitable that
President Obama won’t hesitate to demonstrate just how serious he is. Publicly
removing Wagoner was a brazen move and should serve notice that he isn’t
playing around.
While it’s refreshing
to see a President take on this much, so soon on the job, there should be
concern that he intelligently delegates all of these initiatives accordingly.
So far he seems to have organized an impartial group of constituents that make
up his Auto Task Force team. This select group isn’t exactly some motley crew
but part of their legacy rides on the state of more than just the future of the
auto industry. Included is the future of thousands of companies, millions of
jobs and the economic well-being of North America
in decades to come as well the nation’s manufacturing relevance and quite
possibly, our national security.
This past week has seen
talks of a possible bankruptcy in which GM is split into the “Good” or viably
competitive brands such as Cadillac, GMC Trucks and Chevy while the clunkers –
or “Bad” – such as Hummer and Saturn along with burdensome plants haven’t
operated in the black in over a decade.
For the record, I
happen to agree with many pundits and opinion-leaders out there that Saturn is
potentially GM’s best brand but they don’t know what to do with it.
If I’m not mistaken,
the intention is that Good GM would quickly emerge from bankruptcy
reorganization while Bad GM wallows in despair waiting for somebody to buy
them up for what would likely be at a steep discount or their operations wind down.
As this possible
scenario has—and will continue—to work up a full head of steam, imminent
dangers will hopefully begin to surface before any ink dries.
Griping about the U.S
government meddling, rather mandating, direction in corporate America is a moot point. However, I truly believe they
don’t want to be involved, but issues of change were obviously not prevalent in
the DNA of these vehicle manufacturers thus necessitating a change, just as
much as the free-capitalist followers don’t want them making business
decisions.
But when was the last time there was a situation of these
proportions?
Up For the Challenge?
So when it comes time
to sift the Good from the Bad, I’m fairly certain we can rest assured that
Obama’s hand-picked task force members will not feel they know what’s best for
GM & Chrysler on their own. Don’t get me wrong, ranting and raving in the
blogosphere or watching Limbaugh and Hannity disciples get riled up over
government sticking their nose where it doesn’t belong can be a delightful way
to kill some time—especially when they take what those two say as Gospel. But come on,
the decisions as to which brands stay or go will undoubtedly be, at least
partially, influenced by the automotive industry acumen of some of the
brilliant—yes brilliant—minds that still exist and care for a prosperous North
American Automotive industry.
What concerns me is the
sheer scope of this concept is so radical and comprehensive in nature that this
needs to be analyzed six ways from Sunday to make sure as much collateral
damage—both short and long-term— is first recognized in the go-forward plan so
as to minimize the damage
Case in point, about a
dozen life preservers were thrown to Tier One companies in order to prevent a
catalyzed meltdown to the tune of $5 billion. Unfortunately, it’s simply not
enough and now these parts suppliers (Tier One’s) are preparing another request
for aid. It seems to be centered on having access to term asset-backed
securities loan facility (TALF) as well as an incentive program to encourage
investors to pump private equity back into this part of the automotive supply
chain.
Where does the Tooling industry fit in?
This would be a good
time to clarify something that needs to be thoroughly understood by anybody
with a stake or say in how the North American auto industry looks in about two
months. Forgive me as this will be rudimentary for many of you but too many
times the inherent meanings of the specifying terms OEM, Tier One, Tier Two and
Tier Three are misunderstood completely. Actually, I’d bet if you asked 10
different people you’d get 10 different definitions of these terms but I will
attempt to simplify it. Also, this will serve as a lead-in to the main
objective of this article. What would a Dr. Jekyll-Mr. Hyde GM mean to all the
tooling companies?
OEM (Original Equipment
Manufacturers): these are the brand-name car companies Ford, GM, Chrysler,
Honda, Volkswagen, etc. Think of them as the final assemblers of all the
different components, modules and other products that are sent to them.
Tier One Supplier:
generally considered a company that supplies directly to the OEM. For the sake
of this article these guys are also considered the “parts suppliers”. They run
production or mass lot runs for the final product assembled at the OEM level.
Think of Metal Stamping companies such as Martinrea, Magna and Johnson
Controls.
Tier Two Supplier: A
supplier that deals with a Tier 1 and contributes to the final product. 1. A
manufacturer who supplies a part component or raw material to a larger
assembly, or secondary, sub-assembly product to the Tier One. 2. a tool, die or mold builder that sells their
goods through the Tier 1 to the OEM.
For
the sake of this column, a relevant example would be die and mold builders. A normal
door or body-side Panel, or “panel to gage”, often takes about 8-10 months to
build. The typical process is; 1) die design 2) Patterns and castings 3)
Machining & Assembly 4) Tryout. Once tryout is complete, the dies are ready
to be sent to the stamping plant for production runs.
Tier Three Supplier: A
supplier that deals with a Tier 2 and provides additional services that can be
considered both critical and precautionary. Examples include companies that
provide heat-treat, engineered materials or surface treatments.
With all of this talk
about Good GM and Bad GM I’ve heard plenty of commentary and predictions about
what could happen. However, the extent of speculation I’ve seen and heard only
discusses possible scenarios as it would pertain to Tier One companies.
Structured Bankruptcy Not a Panacea
In a
government-mandated bankruptcy, GM could ask the court to cancel tooling
purchase commitments to Tier One’s for any Bad GM-related vehicle programs.
That’s fine and dandy but all the money the Task Force has invested to protect
the Tier 1’s could turn into a boondoggle unless the Task Force plans on paying all tooling
purchase commitments.
Why? Well if, rather when, the
bankruptcy court cancels the OEM-Tier 1 tooling orders the Tier 1 is still
“holding the bag” on tooling. The Tier 1
still has to pay the tooling supplier for all the work to date.
How big is the
problem? HUGE! Billions of dollars in tooling is unpaid and off
the balance sheets of GM and Chrysler until they PPAP (Production Part Approval
Process) the tooling. In case you haven’t realized, one of the primary reasons
many tool and die companies have been forced to close was their inability to
make payroll payments and other financial obligations because of PPAP triggered
payments—often 12-18 months after delivery! Go ask somebody whose tools weren’t paid for until PPAP if they think it’s simply a term that is not defined with a set date and is easily floated out if a company wasn’t ready to pay for their tools.
The only winners if the
tooling industry is not included in the solution will be company lawyers and
bankruptcy attorneys. Actually, if you own or are in a position to deal with
this I expect you’ve already consulted and prepared strategies for pre and
post-bankruptcy situations.
I’m not a lawyer but I
know enough that all of you should be reviewing your purchasing contracts and
terms and conditions with any customer that will be impacted by this. Before
talking to your lawyers I strongly recommend familiarizing yourself with
Section 365 of the Bankruptcy Code under Chapter 11 procedures.
There are other options
that may protect many of you such as Setoff and Recoupment as well as
Reclamation and 503(b)(9) claims. I suggest you look up an article titled,
“Automotive Supplier Survival Strategies”, written by Nicole Y. Lamb-Hale,
Managing Partner at Foley & Lardneer LLP. She does a great job of
explaining these options. You can also email me (see my contact information
below) and I can send you the link.
An Intrinsic Viewpoint
According to the Automotive
News Future Product Tables, the 2010 Model Year vehicle launching this calendar
year for Saturn was to include Aura and a potential Sports Wagon. Next years’
launches, which tooling would be nearing substantial completion over the next 3
months, would include Astra, Sky, Outlook and a possible mini-van and, on the
Hummer ledger, the H3. And let’s not forget the Chrysler launches, as delayed
and “re-timed” as they may be from previous MY 2010 and 2011 forecasts: 300 Sedan, Hornet, Avenger, Grand Cherokee, Town &
Country, Grand Caravan, Compass, Rampage, Patriot and Wrangler. Sure not all of these will be tooled but what
is the value and status of these tools right now? Because of the PPAP triggered accounting
systems does GM, Chrysler or the Task Force even know what the dollar value of
the termination claims would be to clean up this mess?
Off Balance Sheet
transactions caused the deaths of other notable companies and the losses of
billions in investments for every day Americans. Now, 8 years after Enron implosion, GM and
Chrysler (and Ford and every other vehicle manufacturer that recognizes their
tooling purchase commitment liabilities in their financial statements only at
PPAP) other forms of Off Balance Sheet obligations may well come back to haunt
the automotive recovery.
How many times do the
boardrooms of corporate America have to make selfish and self-serving decisions
to add window dressing – albeit with the all-to-familiar cry of the CFO that it
was “acceptable under GAAP” – to their quarterly results before they realize
American jobs and the families they support are at risk?
I wonder if the parts
suppliers (Tier 1) are even discussing what a mess this would be. Where do they get the hundreds of millions -
if not billions of dollars – to pay for tooling their OEM customers had them
order?
In order for the
creditors to Bad GM and Chrysler to maximize value, won’t they need to sell off
the brands and vehicles to some new buyers, if they exist?
Unless the Task Force
is planning on paying out all the “tooling purchase commitments” how can they
and other creditors hope to sell “Bad GM” or Chrysler vehicle programs to Fiat,
Tata, VW, Hyundai or a Chinese buyer (assuming they want Saturn, Saab or
Hummer) without having the possession of the very production tools that will
make the next version of the vehicle. For the record, it appears that there is
another group of people out there that agree with me about the Saturn brand.
However, they have much more money than I do and appear primed to make an offer
for this underrated GM brand. This group should be prepared to purchase the
in-progress tooling if they want new vehicle models in the showroom!
Eventually the outfall
could cause an industry meltdown of epic proportions. How? Because those tool sources will not give a
damn if GM is not paying the Tier 1 for Bad GM and they will very likely hold
shipments of all “Good GM” tooling and for that matter all Toyota, Honda, Ford
tooling destined to that Tier 1 until the Tier 1’s “Bad GM” bills are
paid.
So while the Task Force
has done a commendable job protecting the Tier 1’s from the vehicle
manufacturers and bad debts, they may be incubating a problem with any form of
Bankruptcy—surgical and pre-packaged—at either GM or Chrysler, by not
understanding the domino effect of this highly integrated industry.
The solution – the
taxpayer is not going to like it – pay for the tooling and make sure that
vehicle manufacturers are not allowed delay payment obligations to run up
future debts they cannot afford to pay for like pensions and tooling. Unfortunately, pensions will not stop new
vehicle launches like withheld tooling can.
I assure all of you
that there are many companies with tooling on their floor that will likely be
tagged as “Good” and “Bad” if this program materializes. If they aren’t made
whole in this process we will witness a rash of tooling ransom and tooling
hostage cases like you’ve never seen before sure to create chaos for every OEM,
domestic and New Domestic alike.
I will put my
journalistic future and reputation on it that nobody—at this point in time—can
quantify how much that is. This is critical and if it’s ignored only the
Nostradamus part of me will be satisfied
Again, none of the
companies involved operate in a vacuum. Any approach—including unprecedented
bankruptcy programs—needs to be holistic and include the tooling companies that
have already sacrificed more than other industry in the automotive supply
chain.
Please pass this letter
on to your friends, colleagues, political representatives or anybody else that
needs to realize this.
If you have any
questions, requests or comments please don’t hesitate to email me at, marketingforward@yahoo.com
Thank You,
Joe Brown
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