Auto Suppliers: Fixing Car Companies While Breaking The System

The novel approach that the federal government is taking to fixing the American car industry is that it will bail out the manufacturers while letting their suppliers fail. Car parts firms asked the Administration for $10 billions to keep many of them from folding or falling into bankruptcy. Many will not be able to find debtor-in-possession because the prospects of the domestic auto market are so bleak. Those firms will be liquidated.

It should be clear that Chrysler and GM (GM), which are receiving tens of billions of dollars of aid, cannot build their 2010 models without parts. Neither can more healthy companies such as Toyota (TM), Ford (F), and Honda (HMC). Mayhem among the component suppliers will probably cause the shutdown of the plants that the auto companies have not already closed in an attempt to be more efficient.

Cars that aren’t built can’t be sold. There may be a very short term value to having some suppliers close. Without production, bloated inventories will be sold off. But, older vehicles will not bring premium prices. New models are typically where the margins are. A crippled parts industry means a crippled auto sector.

The government is trying to save the economy in bites. It cannot bite everything that is in trouble, so it picks and chooses as best it can. In the case of the car industry fixing one segment and breaking another means breaking it all. An investment of $10 billion in the components operators is a means of insuring the much larger use of taxpayers dollars meant to resurrect the No.1 and No.3 American car companies.

If the parts companies do not get government money, the part of Detroit that taxpayers own will not be worth much at the end of the year.

Douglas A. McIntyre