Fighting the dragons of bankruptcy

While China celebrated the dragon boat festival, the world’s parts makers fought their own dragons. “Harmony” definitely was not the central theme. There was a lot of disaster. And a little hope.

As colorful boats raced on China’s lakes and rivers, Ford's largest supplier, Visteon, filed for Chapter 11 protection in U.S. Bankruptcy Court in Delaware. In the nine years since Ford spun off its vehicle climate systems, interior parts, lighting and electronic systems maker, Visteon has never posted an annual profit. After losing $663 million last year, Visteon warned a few weeks ago that they may have to file if the creditors would not agree to concessions. Nobody conceded. Visteon filed along with some of its US subsidiaries in the US bankruptcy court in Delaware. None of its overseas subsidiaries or joint ventures outside the US are part of the filing. Not that they need any help with it: In March, Visteon’s main UK subsidiary filed for reorganization. This is the Visteon of Ford, the company that had proudly maintained that they don’t need any government help. As we are well aware of, Visteon maintains a large footprint in China. You may be one of their suppliers. Let’s be careful out there.

The day before Visteon declared bankruptcy, Japanese Ashai Tec let its US subsidiary Metaldyne go bankrupt. Metaldyne had accumulated $929 million in liabilities as of Dec. 31, 2008. Metaldyne, which makes chassis and powertrain components, has about 4,500 employees globally and about 2,500 in the U.S.

These bankruptcies come with regularity. Last year, about 40 American suppliers sought bankruptcy protection, according to the U.S. Motor and Equipment Manufacturers Association. At least 20 filed in the first four months of this year.

“Visteon and Metaldyne are just the beginning," said Ann Wilson, senior vice president of government affairs for the Motor and Equipment Manufacturers Association. "We're talking 50 to 60 suppliers that will probably file in the next few months. Some will go straight to liquidation. Small companies will just close. But a number will enter the bankruptcy process, and it's important it's done with the same thought and care that's been afforded to GM and Chrysler.”

Speaking of GM: General Motors, will by all accounts declare bankruptcy around the time this column appears on Gasgoo. This is expected to cause a bloodbath amongst its supplier base. GM has 1500 suppliers in North America, and thousands more around the world – many of them in China. Many of their first tier suppliers have business relationships with other suppliers in China.

"You'll have a tough time finding a supplier that isn't touched by GM," CSM auto analyst Mike Wall said.

For years, GM had been wrestling with its home-grown dragon, spun-off supplier Delphi. Delphi filed for Chapter 11 in 2005. Despite many attempts for revival, Delphi never emerged from bankruptcy. GM needs Delphi’s parts for its own survival. Without Delphi, GM can close its doors in a few months. Delphi continues to work with its lenders, GM and the U.S. president's auto task force to resolve the remaining elements of its Chapter 11 case, but said it could default on its bankruptcy loans this week if it does not reach an agreement with the Treasury Department and GM by the time you are reading this.

In the meantime, Japanese automakers, also previously a big consumer of Chinese parts, slammed hard on their brakes in April. The Wall Street Journal reports that “Toyota, the world's biggest car maker by volume, said it reduced domestic output by 56.1% in April from a year earlier, compared with a 58.4% drop in March. Honda said it cut production in Japan by 37.5% in the month, narrower than a reduction of 40.3% in March, while Nissan made 49.8% fewer vehicles in April, compared with a 55.6% output cut in March.” Nothing harmonious will come out of this.

A whole different situation in Europe. It’s not that the European parts makers are not hurting. The worldwide production reduction causes pain amongst all. The European auto industry is not at all as hard hit as the American, and by extension the Japanese car makers. Even Continental-Schaeffler is still alive. Many had written them off. Now Continental is buying Schaeffler, the company that tried to take over Continental, and bit off too much it can chew.

The most amazing thing happened last Friday night. Magna, the world’s third largest parts supplier after Denso and Bosch, received the nod from the German government to take over General Motor’s Opel and Vauxhall, in an attempt to save the auto maker from death by GM bankruptcy. Sure, the takeover comes with a lot of financial help by the German government and Russia’s Sperbank, which is part of the deal. But if a parts supplier can take over Opel, one of Germany’s largest auto manufacturers, and one with a 90 year history, then the parts business can’t be all that bad. None of the big auto makers that were interested in Opel, neither Italy’s Fiat nor China’s BAIC, succeeded in getting the deal. A parts manufacturer did. The dragon boat festival was successful in driving away evil spirits, at least as far as Magna is concerned.

Smart parts makers such as Magna can thrive in this climate. Others, like Delphi, Visteon and the hundreds or thousands of suppliers that hitched their future too close to OEMs in trouble, are finding themselves in the mouth of the dragon.

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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.