The supply base couldn’t be prepared
By Purchasing Staff -- Purchasing, 6/5/2009 9:36:00 AM
Managing Editor Dave Hannon interviews John Campi, president Genesis Consulting, former CPO of Chrysler
Q: Do you think the supply base was any better prepared for GM’s filing in the wake of Chrysler’s?
A. I don’t think the supply base could really be prepared. The biggest companies like Magna, JCI will survive this. It might pinch them, but they will survive it. If you take the overall supply base, though, they weren’t in any better position to handle this a year ago than they were today.
Many of these suppliers have made big investments in tooling and equipment to make the parts for these automobiles. And those payments take place only through the volume of product shipped. As volume deteriorates, the risk that they won’t be able to pay off the debt they incurred in that investment increases. And when their customers go into bankruptcy, it’s not just the volume that concerns them, it’s the question of whether those payments are getting made at all.
So you’re going to see an increasing number of bankruptcies in the supply base as a result of this.
Here’s an example from my time at Chrysler. Over $1 billion was invested in developing the Dodge Ram truck, much of it incurred by the supply base committing to expenditures related to this vehicle, which would be funded by the payment by Chrysler on every vehicle produced. Now that volume went away in a hurry. And when volumes fell off, the suppliers began suggesting that we need a new model for payments because the old rules don’t apply. Or we’re going to stop shipping. And I told them we can’t change the rules in the middle of the game. We told them that we would look at a change at the end of the platform run.
And this is the tragedy that has yet to play out in the automotive market. Most people think you can just provide the automakers with bailout funding and everything will be fine. I read that the estimate is $100 billion to bail out the OEMs, but I wouldn’t be surprised if it were three times that. This is going to play out for years in the taxpayers paying off the debt the government incurs by bailing out this industry.
If (only) we had simply said we’d give them loans with scheduled paybacks and had the government really help automakers by making more credit available to buyers to spur volumes. Instead of giving the money to the carmakers or suppliers, you should give the money to the car buyers to keep volumes up. Volume is the only solution that will help the automotive industry. A collapse to their current volume is going force cutbacks right down the supply chain that will impact far beyond automotive parts suppliers. It will impact suppliers like Cisco and HP and the ad agencies.
Anyone who thinks the bailout has solved the problem, they’re wrong.
Q: What’s the supplier’s biggest concern right now? Payment for their parts and services or the future volumes they won’t be seeing?
A. I see them both as symptoms of the bigger problem. Suppliers have to figure out how they plan to manage through the debt structure they have now that volume is gone and the payments are not being made. The lack of payments is an accelerant, but the lack of volume will kill them either way.
This is the largest manufacturing industry in the U.S. and we’ve just halved it because of the credit crunch.
This is an ugly situation because I worry that the government is going to take the auto industry and run it like they did the rail industry and I’m depressed over what I see. This is truly putting lipstick on a pig.
What’s happening to the dealerships is nothing compared to the suppliers. The real issue is not the OEMs, it’s the supply base. Even the big guys. For example, Johnson Controls spent a huge amount of money—nearly $100 million to develop a seat structure for the Dodge Ram-- that they will never see returned.
And the government doesn’t understand how inter-related it is and what the rolling impact is going to be. I think we’re going to see 12% unemployment within six months.
Q: How important is it to suppliers that the OEM emerge quickly from bankruptcy?
A. Well in the Chrysler situation, the government dictated Chysler’s emergence from bankruptcy by the end of May so it could take GM in by June 1. That was decided three or four weeks ago. They haven’t fixed Chrysler, but the government wanted to make it appear that a quick turnaround is possible.
I don’t think the quick emergence from bankruptcy matters to suppliers if the company is not fixed. It helps maybe in the sense that a judge will rule on what does and does not get paid, so suppliers will know where they stand. But it’s more what the judge rules than when it happens that matters most to suppliers.
For example, there are huge amounts of money that Chrysler will never pay its suppliers and now that its bankruptcy has been ruled on, those suppliers are starting to learn that now and evaluate that impact. And in the next 90-120 days the suppliers will see the impact of that.
There’s a lot worse going on than executives losing pensions. How do you shut down 17 plants and not see the impact on local towns and cities? How will that impact unemployment?
It’s not often you see the group that causes the problem—Congress, in this case—coming to play the White Knight and save an industry. The problems we’re in now are a credit-driven set of problems. If this market had not collapsed, I can tell you that Chrysler would have come through much better.
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