GM Wants 100s of Suppliers Listed as "Critical Vendors" in C11

by Robert Farago

Published: April 17th, 2009

gm wants 100s of suppliers listed as critical vendors in c11

The preparations for GM’s June 1 Chapter 11 filing continue apace. The Financial Times reports that the ailing American automaker wants [to use federal funds] to pay hundreds of “key” suppliers while it’s dividing itself into Michael (good) and Garth (bad) GM. The FT’s experts reckon The General will get permission to do so to maintain its status as a going concern, as the artist formerly known as the world’s most profitable corporation enters the court’s protection. (No mention was made of political considerations, but they’re there too.) But no matter how you slice it, this is gonna be a cluster-you-know-what of epic proportions. To wit: “A judge could also force GM to prove that individual suppliers would stop operating or shipping goods if they were not paid, rather than letting GM use the money as it sees fit. The critical vendor legal doctrine can be ‘subject to abuse and unfairness’, one attorney said. Roughly two-thirds of GM’s suppliers also sell parts to Ford or Chrysler, and some may be able to absorb late or reduced payments. ‘It’s a game of chicken,’ one attorney said. ‘How do you figure out which suppliers really will stop supplying tomorrow and which won’t?'”

Robert Farago

More by Robert Farago

Comments

Join the conversation

4 of 57 comments

Rix on Apr 17, 2009

If GM doesn't pay, none of the suppliers will be in business for long. Even tier 1 suppliers. So it will go like this GM: "Spot me another 100k brake assemblies" Tier 1 Supplier: "Pay me for the last two months you owe me and we can talk about it."

Like Reply
Paris-dakar on Apr 17, 2009
Why are so many D3 suppliers in terrible shape and dependent on D3 business for their very survival? Only an idiot would blissfully rely on three or fewer customers. Only an idiot would be unaware that your customer has been shrinking for decades. First, it's nearly impossible to break into the Japanese Transplants based on price alone. You can't simply buy the business from the current supplier by being 10% cheaper (as opposed to the Big Three who will whore their business out to anyone). The Japanese are very loyal with their established suppliers. Second, the Japanese like to grow their suppliers gradually, usually with simple lower value components first and gradually increase their business as they gain trust in your capabilities. This is anathema to the typical American Business mentality which wants to book the revenue immediately, not nurture a small account for 5, 7 or 10 years before real growth is seen. The American v. Japanese model of supply base management is adversarial v. partnership. GM in particular never valued partnership with their suppliers, so it's ironic to see them waving their arms about over 'distressed suppliers'.

Like Reply
Anonymous on Apr 18, 2009

The whole economy is going down the toilet. GM is just the canary in the coal mine. The government has the same problems as GM. Lots of overhead and decreasing revenues. Just on a much larger scale. Now the government is loaning money to themselves but at some point they are going to set off inflation. And then the big government bubble is going to burst. This GM stuff is small potatoes.

Like Reply
Cardeveloper on Apr 18, 2009
OK, here’s a question on topic. Why are so many D3 suppliers in terrible shape and dependent on D3 business for their very survival? Only an idiot would blissfully rely on three or fewer customers. Only an idiot would be unaware that your customer has been shrinking for decades. So shouldn’t a prudent CEO have started long ago diversifying the product line and expanding the customer base? Shouldn’t a prudent CEO have realized long ago that D3 contracts aren’t profitable enough for long-term viability? Are D3 suppliers like those proverbial frogs that will stay in a pot of gradually-warming water until they’re cooked? All very good questions. Capital costs to set up an assembly line for an OEM is very expensive, and requires a support system. Much of the parts going into an OEM car can not be used anywhere else, so they become dependent on the OEM's generosity to pay a less then fair price sometime later then you need it paid. Remember, GM/Chry/Ford ruled the manufacturing world. You were either with them or you were out of business. Kinda like England being the ruler of the world, but their influence became less and less... hmmm something like our own govt. Unfortunately the suppliers are so deep into the OEM's, both from a production facility and financial sense. A CEO may wake up one day and say "Oh Crap, we're going broke producing these parts". But, the OEM would rather let the supplier go under then pay $0.001 more per part, because they will find another supplier to do it for $0.03 less. This is where the stuff really falls apart for the OEM. That new supplier will come into the business and say, yeah we quoted that price, but you failed to tell me the tooling was wore out, the assembly line is junk, and btw, the prior supplier was not producing the product to spec, we need $0.39 more per part. BUT, purchasing takes the credit for the $0.031 savings and reports back to their management the success. Engineering and supplier quality are left fighting with the supplier to get a good part from an organization who is understaffed, underfunded, and likely going to fail themselves. This happens over and over and over again. Contrast with the Japanese Kaizen way of doing business. Pick a supplier and slowly work with them to develop the best product at the best price. Honesty and openness rule the relationship. The one part of the whole let them all go bankrupt equation, is the impact on the mega suppliers, who do sell to most of the OEM's around the world, like Delphi, JCI, Magna, etc. Delphi has not been able to get out of C11, and dependent on the GM money just to stay in business. Their product line especially may shut down all the worlds auto producers. They sell to almost everybody, and the product lines are very difficult to move. Take the main wire harness in a vehicle, it is carefully designed to avoid {EE's please forgive my simplifying :)} interaction between parallel wires. Takes a lot of testing, engineering, and the ass'y lines are fairly complicated due to the OEM's literally wanting the wire harnesses built in exact sequence to the cars. The complexity issue is a killer, because producing multiple wire harnesses for each line of vehicles is cheaper then producing one for the entire line of vehicles.. or so say the MBA's. Side note, I don't necessarily believe that, but it's been studied to death and the numbers support that process. As I've said a dozen time, the unintended consequences are going to be ugly. this isn't as simple as just filing bankruptcy and being done with it. As the OEM's file and stop payments to the suppliers, they will have to file C11/7 because now they can't pay their bills either. This will cascade through the system for a very long time.

Like Reply