Focus: May is crunch time for U.S. auto suppliers amid coronavirus shutdown

Aisin

09/04/2020 11:00

By Nick Carey and Ben Klayman
    DETROIT, April 9 (Reuters) - Auto parts maker Kevin Clay
landed a series of new contracts from customers early this year,
and was bullish on 2020 after two challenging years.
    "I had the audacity or stupidity to say in January 'I can't
imagine what could happen this year that could slow us down,'"
said Clay, president and third-generation owner of Grand Rapids,
Michigan-based Pridgeon & Clay, which supplies stamped steel and
stainless steel parts to automakers and which has annual revenue
of close to $350 million. 
    But now, with much of the United States at a standstill due
to the coronavirus outbreak  urn:newsml:reuters.com:*:nL4N2AY3AS  urn:newsml:reuters.com:*:nL8N2AB5TN, one of
the company's two U.S. plants is idled and the other has a
skeleton staff producing parts for commercial trucks. Pridgeon &
Clay is juggling pressure from lenders, automakers and its own
suppliers, gambling that automakers can restart North American
production by mid-May before the auto parts maker's money begins
to run out. 
    "If we weren't working on special deals with our suppliers,
with our customers and with our banks, then the music would stop
for us some time in mid-May, as it will for virtually
everybody," Clay said.
    Suppliers and restructuring experts say major automakers are
still paying bills, and suppliers received checks recently for
goods shipped in February and March before factories shut down.
    The real crunch for suppliers will come by mid-May. That is
when the cash backlog runs out unless automakers are able to
restart assembly lines, industry executives and consultants
said.
    Fiat Chrysler Automobiles NV (FCA)  FCHA.MI   FCAU.N  and
Honda Motor Co Ltd  7267.T  said this week they aim to gradually
restart production in early May. General Motors Co  GM.N  and
Ford Motor Co  F.N  have not set reopening dates. Some Asian and
European automakers are aiming to restart U.S. production later
this month.
    "If the auto industry starts back up in early May, most
suppliers should be able to turn the lights back on," said Steve
Wybo, a senior managing director at consultant Conway MacKenzie.
"But the longer the shutdown lasts, the harder it will be for
them to get the lights on."
     
    STRONG STARTING POSITION
    Many larger auto suppliers were in better shape financially
when the coronavirus shutdowns came than they were when the
2008-2009 financial crisis hit. 
    But Laurie Harbour, CEO of Harbour Results Inc, a
manufacturing consulting firm that works with suppliers, said
she is concerned about smaller companies farther down the supply
chain.
    "If you weren't strong going into 2020, your challenges are
going to be significant for the balance of the year to get
yourself back up to speed."
    Suppliers like Bob Roth are counting on a return to work by
May.
    In March, Roth and his staff at RoMan Manufacturing took
swift action as the COVID-19 crisis intensified. The Wyoming,
Michigan, maker of transformers for automotive and other
industries is classed as an essential business, so it remains
busy as demand for robots that use their transformers remains
high.
    But staying open has come at a cost. Roth, co-owner and CEO
of RoMan, had to raise pay for many of his 150 workers by $7 an
hour to compete against enhanced unemployment benefits included
in the recently passed federal relief package. 
    He is also providing health insurance to workers staying at
home to take care of their children or cope with other health
issues.
    One of Roth's critical suppliers in Pennsylvania is under
lockdown due to the COVID-19 pandemic. Roth has just four to six
weeks' supply of that product and his team has figured out a way
to make it in-house. But the part would cost $50 versus the $10
he pays his supplier - money he cannot recoup from customers.
    "We're willing to take the margin hit now to keep the
business moving forward," Roth said. "But at some point in time,
we won't be able to support higher wages or healthcare benefits
for people who aren’t working."
    
    'WATCHING OUR SUPPLY BASE CAREFULLY'
    The global auto supply chain is robust, but automakers can
still rely on a single supplier for a key part. Automakers and
big top-tier suppliers will need to use some of their cash to
prop up small but critical suppliers, industry executives and
consultants said.
    Last week transmission maker Delphi Technologies Plc
 DLPH.N  identified up to 40 suppliers now experiencing
financial difficulties, CEO Rick Dauch said. 
    "In two cases we've gone in and given them some financial
assistance, either by buying their raw materials for them or
expediting payment to them so they can pay their bills," Dauch
said. 
     BorgWarner Inc  BWA.N  last week threatened to walk away
from a $951 million deal to buy Delphi, after Delphi tapped its
$500 million revolving credit facility to help weather the
pandemic without its acquirer's approval.  urn:newsml:reuters.com:*:nL4N2BO4BJ
    Scott Turpin, CEO of North America for Aisin Seiki Co Ltd
 7259.T , the world's largest transmission maker, said one of
his main concerns is how well suppliers farther down the chain
conserve cash. 
    "Unfortunately there will be some suppliers that cannot
survive this," Turpin said. "So we've all got to watch that very
closely."


 (Reporting by Nick Carey and Ben Klayman in Detroit
Editing by Joseph White and Matthew Lewis)
 ((nick.carey@thomsonreuters.com
+1 312 636 8837;))