Chrysler’s Suppliers Stung by Auto Firm’s Bankruptcy

This story appears in the May 11 print edition of Transport Topics.

Chrysler’s filing for Chapter 11 protection is spilling over into the trucking industry as suppliers adjust to a bankruptcy process that has shut down the company’s auto production for at least 30 days.

Among the affected suppliers that serve both trucking and auto manufacturers are engine maker Cummins Inc. and ArvinMeritor Inc., which makes a wide range of components including axles, brakes and drivetrains.

“Chrysler’s shutting down on Day 1 of the bankruptcy has thrown a lot of suppliers for a loop,” said Mike Wall, director of global financial services for CSM Worldwide, an automotive consulting firm. “On top of the GM production shutdown that was already announced, that is probably the biggest question mark for the suppliers.”

Cummins Inc. — listed in Chrysler’s April 30 bankruptcy filing as its fifth-largest unsecured creditor at $43.9 million — will temporarily close its manufacturing plant that makes engines for Dodge Ram pickups on May 15 until the automaker resumes production of that vehicle. To reassure investors, Cummins said on April 30 that payment of its receivables was protected by a government program to help suppliers.

ArvinMeritor Inc. said on May 5 that a 30- to 60-day shutdown would reduce its earnings before interest, taxes, depreciation and amortization, or EBITDA, by $2 million to $5 million, and the effect could be greater if the shutdown lasted longer.

”There’s also the bankruptcy proceeding itself,” Wall said. “If they don’t figure out the critical vendor payment process and assure companies that they are going to get paid, that will be a problem because

the supply chain is interrelated. Because many of these supply companies make parts for others, failing to pay the suppliers could cripple other automakers.”

Chrysler asked the bankruptcy court on April 30 to pay key vendors in an effort to stave off failures among suppliers, who were paid  $5.7 billion last year. At press time, there was no ruling on the motion.

Last month, Chrysler reported sales of nearly 77,000 vehicles, a year-to-year drop of nearly half. The company isn’t alone in its struggles, as annualized U.S. auto industry sales fell to 9.3 million in April, 36% below the same month of 2008.

As Chrysler works with Italy’s Fiat SpA and government officials from the United States and Canada to emerge from bankruptcy, General Motors Corp. is facing a May 31 deadline for completing its restructuring.

Car haulers are feeling the ef-fects, too.

“Unless you have a big mix of customers, this is tough,” Robert Farrell, executive director of the Automobile Carriers Conference of American Trucking Associations, told TT. “This industry survives on cash flow.”

He said, however, that car haulers are familiar with the monthlong shutdowns in recent months.

One ray of hope for Chrysler suppliers is a $1.5 billion federal program to ensure that the automaker pays its vendors, either by allowing suppliers access to cash through factoring or by giving immediate payment for a 3% discount.

Cummins makes engines for Dodge Ram pickups, a business that Tim Solso, CEO of Cummins, said on April 30 that the business of making 6.7-liter engines for the Dodge pickups “is a very important one for us. We’ve dealt with customers in this kind of situation before.”

President Tom Linebarger said Cummins is part of the federal supplier support program, to which it submitted all but $8 million of its receivables.

ArvinMeritor had $7 million in receivables from Chrysler, though about half of those were incurred in the past 20 days and could qualify for reimbursement, even though ArvinMeritor chose not to participate in the supplier program at Chrysler, the company’s earnings statement said.

At ArvinMeritor, losing up to $5 million in EBITDA represents about 15% of $36 million earned in the fiscal second quarter, excluding special items. In the 2008 period, EBITDA was $68 million, excluding items.

From the fleet perspective, there is concern as well, though some companies have not been heavily affected by Chrysler’s difficulties.

Kevin Burch, president of Jet Express Inc., Dayton, Ohio, said he was fortunate because his company doesn’t do any business with Chrysler, even though about three-fourths of his fleet’s business is auto-related.

“It is important to focus the attention first on the people who are making the widgets, parts and suspensions,” he said.

Jet Express has tried to adjust to the overall downturn in the auto business by attracting business from non-automotive customers.

“It’s been a challenge, but we are doing better than we thought,” he said.

Another company that is relatively fortunate, United Road Vehicle Transport, Romulus, Mich., hauls new vehicles for Chrysler but is not among its top 10 customers, CEO Michael Wysocki said.

“We are continuing to support Chrysler,” he told TT on May 6. “We are going to redistribute our workforce to balance our other lanes. We have the ability to move our resources around the country.”

He said only about 40% of United Road’s business comes from hauling new vehicles.

“The auto industry is in an era of unprecedented change,” Charles “Chip” McClure, CEO of ArvinMeritor, said in a May 5 earnings call. “Chrysler’s bankruptcy filing . . . brought that into sharper focus, but it was just one element of the transformation that has been unfolding.”