To save the Big Three save their suppliers – a trade credit solution for the North American auto industry

By Ron Doyle

As occurred in the history of the airline industry, the best option for the Big Three automakers is to let them file and take the necessary steps to reorganize, including plant closings, wage and benefit renegotiations and reduction of the legacy costs (wages against future benefits). From a real-world credit perspective, as reported in Bloomberg.com, the American Treasury has now committed $6 billion to support GMAC LLC, the financing arm of General Motors Corp., in addition to the $13.4 billion the Treasury had already agreed to lend GM and Chrysler LLC earlier in December.

It is my opinion that in order to keep the North American auto industry viable, financial support must be directed at the supply chain of parts manufacturers and other essential suppliers. These suppliers are already starting to die because they cannot get credit. Recently PPI Holdings, in the USA, filed for Chapter 11 and Burlington Technologies, in Canada, filed under the Companies Creditors’ Arrangement Act.

It’s essential to understand that the Big Three automakers run only the assembly plants. All of the components that go into North America’s cars and trucks are manufactured by the second and third tier parts suppliers. These smaller companies have been taking all of the trade risk and have been squeezed for every nickel by the assemblers. They are the companies that need the cash flow and the protection. For example, the 2010 Chevrolet Camaro may be delayed due to a lawsuit against bankrupt Cadence Innovation, the auto parts supplier used in the past by General Motors to manufacture interior pieces for the Camaro.

For years auto parts suppliers have been unable to buy credit insurance on their receivables because of the credit poor credit risk of the Big Three. When governments lower interest rates and bail out banks, unfortunately, the money is not going to the parts plants where the real value is created. Governments should be supporting credit insurers so that they can provide coverage on the receivables of the Big Three or in fact, buying the receivables from the parts suppliers. This would improve their cash positions and allow them to continue to provide payment terms to the Big Three, making the wheels of trade turn as they should.

The Big Three can file for protection with minimal impact, if the Governments buy up the receivables of parts suppliers. But if more suppliers go out of business, the industry will be destroyed, period. Let’s hope American and Canadian governments do the right things so this doesn’t happen.

(Ron Doyle is a founder of Millennium CreditRisk Management – credit and political risk insurance specialists – www.mcm.ca. ICBA is the world’s largest team of independently-owned, specialist trade credit insurance brokerages. Partners combine local service with global coordination to provide credit and political risk insurance solutions for multinational companies.)