Watch your relationships with US partners

On Monday, the US government has rendered its Determination of Viability Determination on Chrysler and on General Motors. The verdict is scathing. Before the announcement, CEO Rick Wagoner had to resign. Chrysler CEO Bob Nardelli was allowed to stay - most likely because installing a new Chrysler CEO for just a few weeks makes little sense. Chrysler was assigned the mission impossible to bring their house in order and to merge with Fiat within 30 days - if not, the US government will cut off all money and let Chrysler go under. GM has received a 60 day stay. If GM will not do in two months which it was unable to do over several years, namely reorganize their business, it will be a pre-packaged bankruptcy for GM. The current consensus in the USA is that Chrysler will close, and that GM will rapidly downsize to a much smaller company. GM Shanghai issued an optimistic statement that business "in China will proceed as usual and the change at the company's headquarters won't have any impact on its Chinese division." Whether this will still be true in two months remains to be seen.

There is however, another issue that may have been buried in the mass of GM/Chrysler news. It is of high importance to any manufacturer who is a supplier to parts companies doing business with Chrysler or General Motors.

According to Automotive News, the U.S. government has allocated a package of $5 billion in federal aid to the U.S. parts industry. However, who receives money out of that fund is in the hands of purchasing chiefs Bo Andersson of General Motors and Scott Garberding of Chrysler. With these new powers, the purchasing chiefs can seek revenge from suppliers who sought faster payment than the standard 45 days, or who argued that the law allows them to break contracts because of doubts about an automaker's solvency.

According to Automotive News, "suppliers increasingly have been doing both to protect themselves in the event of a GM or Chrysler bankruptcy."

Stephen Gross, a Detroit-area lawyer with McDonald Hopkins LLC who represents suppliers estimates that hundreds of suppliers have notified GM and Chrysler in recent months that in light of the automakers' precarious finances, prior contracts are no longer valid. Some have forced new payment terms on the automakers. GM and Chrysler now can bar those suppliers from the federal loans, Gross says.

Manufacturers are worried about bankruptcies at either the automaker or at Tier 1 level suppliers. In a few cases, suppliers have extracted payments faster than the conventional 45 days to avoid having their receivables locked up in court in the event of a GM or Chrysler bankruptcy. At GM, at least 10 of its 1,500 Tier 1 suppliers have received quicker pay, according to suppliers briefed last week by Andersson.

Since November, about 20 of Gross' supplier clients have sent letters to GM and Chrysler demanding assurances under the code that the automakers can continue to make payments for parts. Failure to provide adequate assurances - for example, with a bank letter of credit - would allow a supplier to repudiate its contract and continue shipping parts on a voluntary basis, Gross says.

Having sent those letters will diminish the chances of the suppliers to get money out of the federal aid program. However, the letters will have great value if (or rather when) GM or Chrysler declares bankruptcy.

A bankruptcy court can order suppliers with valid contracts to continue shipping to a bankrupt company under prior payment terms, even without payment for parts already shipped. Gross says suppliers who repudiated their contracts will argue that they don't have to ship unless the bankrupt automaker pays them in whole for parts already delivered.

Ford Motor Co. has chosen not to participate in the federal aid program and is not affected.

Parts manufacturers who do business with Chrysler, GM, or their suppliers should closely scrutinize their contracts and their possible exposure to these developments.

About the author: Bertel Schmitt, Gasgoo's columnist, is CEO of Hong Kong based parts sourcing company Sinamotive. Before founding Sinamotive, with the assistance of U.S. venture capital, Mr. Schmitt was a marketing consultant to Volkswagen AG.