Scores of auto suppliers could follow Chrysler into bankruptcy as massive production cuts wipe out revenues to an already stressed and highly integrated industry, analysts said.
Problems with suppliers could also impact on production at the US plants of other major automakers such as Ford, Toyota and Honda, which have been working for months to ensure supply stability.
“We believe potential systemic risks could arise because of the interconnectedness of the North American supply base,” rating agency Standard and Poor’s (S&P) warned, as it placed six major US suppliers on credit watch in the wake of Chrysler’s bankruptcy.
Under a plan announced on Thursday by US President Barack Obama, Chrysler aims for a “surgical” bankruptcy to wipe out a portion of its debts, allowing the creation of a new firm tied to Fiat to put the Detroit firm on the road to profitability.
Chrysler said it would idle most plants during the bankruptcy process, which it anticipates will take 30 to 60 days. But analysts warned the process could take significantly longer.
And suppliers were already smarting from news that General Motors (GM) — which has until June 1 to present a viability plan to the US Treasury — plans to shut most of its assembly plants from this month through July to control inventory and avoid difficulties with parts shortages.
US auto sales, which collapsed last fall amid a deepening economic crisis, were down 34 percent last month and are not expected to improve for months.
“A number of smaller, Tier II suppliers could fail because of the Chrysler bankruptcy filing or the extended assembly plant shutdowns being planned by GM for the next several months, even if GM avoids a bankruptcy filing,” S&P wrote.
“This could pose a problem for suppliers that purchase parts from these smaller suppliers, or even indirectly force automakers to temporarily idle some plants,” it said.
Ford responded to the news of Chrysler’s bankruptcy by issuing a statement on Thursday saying it did not expect its supply base to be affected to the point where operations would be disrupted.
“Our teams are monitoring the situation and have been working hard for months to ensure that the external environment and industry restructuring do not slow progress on our Ford transformation plan, which remains solid and unchanged,” Ford said.
Toyota on Friday announced plans to increase North American production of both the Camry sedan and RAV4 sport utility vehicle even though the Japanese automaker’s sales dropped 42 percent last month. Toyota sales vice president Robert Carter said the automaker had brought down inventories and the time seemed auspicious for raising production.
“Dealers were asking us for more products,” he said in a conference call.
But there is no doubt Chrysler’s bankruptcy will be “devastating” to the supply base, independent industry analyst Laurie Harbour-Felax said.
“Unfortunately, we will be seeing many supplier bankruptcies following this announcement,” said Harbour-Felax, who is president of the Society of Automotive Analysts.
Some 40 major suppliers filed for bankruptcy protection last year and scores more were at risk of collapse even before Chrysler and GM announced plans to idle their plants.
Two major trade organizations asked the US Treasury for US$25.5 billion in emergency aid and suppliers received US$5 billion last month.
They warned in their submission that as many as 1 million jobs could be lost should the supplier base not be supported.
David Allardice, an economist at Walsh College outside of Detroit, said suppliers were already bracing for the worst.
“Regarding General Motors, others took the view that they could ‘see the train coming’ with the announcement of nine weeks of plant shutdowns,” Allardice said.
Surveys show suppliers are under heavy pressure and do not expect things to improve any time soon, Allardice said.
One bright spot was a 10-point drop in commodity prices — aluminum, wire, stainless steel and related products — which helped relieve some of the financial pressure, Allardice said.
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