Supplier Spin-Offs Dragging Detroit Down

Delphi and Visteon were spun off from GM and Ford respectively at the turn of the millennium, in hopes of cutting costs and improving efficiency. But rather than creating healthy, solid companies they could rely on as major suppliers, the Detroit OEMs used the spin-offs to dump unwanted assets, UAW workers and fixed-cost obligations on their new partners. And now GM and Ford are reaping the bitter harvest of their ill-advised spin-offs. Visteon, which has never turned a profit, just had its stock delisted last week after losing $663M in 2008. Delphi has been in Bankruptcy since October 2005, and, having lost $1.48B last year, it is barely surviving on cash infusions from the General, which really could have used the dough. And both suppliers are threatening to take down America’s two largest automakers.

“Visteon is a really important supplier to us and we will continue to work with them, but we have no plans to change our relationship,” Ford’s Alan Mulally tells Automotive News [sub]. Ford has already intervened to save Visteon (in 2005). “With the industry being down, our biggest concern is the health of the suppliers. The actions that are being taken to free up the credit, to make sure they have credit, is the most important thing for the suppliers right now,” says Mulally.

Delphi, which supplies GM with $5.57 billion in parts annually is even worse off, having languished in bankruptcy for years. Delphi needs $3.75B in capital to exit bankruptcy protection, and a slowing in international business which kept the supplier afloat for years casts new doubts about the overall health of the firm, reports Automotive News [sub]. And, “if Delphi runs out of money and has to shut down, GM shuts down, too,” says Kirk Ludtke of CRT Capital Group. The news isn’t improving, as Delphi retirees are fighting the firm’s attempts to cut over $1B in retiree benefits.

And so it all comes back to the inevitable conclusion: more bailout money. GM’s recent “going concern” notices have suppliers like Delphi concerned that the General won’t make payments on time. GM, reports Automotive News [sub], is asking the PTFOA for $4.5B in federal backing for a “payment-assurance program.” This would be in addition to the $18.5B that the supplier industry has requested, which includes $10.5B for credit insurance, a “quick pay” arrangement to speed payments to suppliers and a guarantee for loans arranged by suppliers with commercial lenders. GM expects the $4.5B to carry its supplier relations through 2011, although it’s not clear if that estimate accounts for the seperate supplier bailout package.