Ohio Manufacturers Fear Chain Reaction if GM or Chrysler Seeks Bankruptcy
Published by The Akron Beacon Journal
April 19, 2009
By Jim McKinnon
Count Lee Combs among the business owners in Northeast Ohio wondering how possible bankruptcy filings by either General Motors or Chrysler will affect this already economically pummeled region.
''It's all interrelated,'' said Combs, owner of SC Manufacturing, an Akron machining company. And because of that, in order to survive, businesses can't tie themselves to just one big customer or industry, he said.
''You've got to diversify. And by design,'' he said.
The global recession and credit crisis that caused a dramatic plunge in new vehicle sales to a rate of just more than 9 million a year from what regularly had been 15 million-plus has devastated automakers, their suppliers and dealer networks.
Now, large companies such as tire giant Goodyear and Fairlawn polymer company A. Schulman Inc. and small businesses such as SC Manufacturing are trying to figure out how much pain they might endure if the federal government forces GM and Chrysler to reorganize under Chapter 11 bankruptcy.
Among the stakes are all of the dollars that the automakers owe suppliers and filter through the network. A bankruptcy filing could mean an already struggling business gets paid less than what it is owed.
How this plays out locally remains to be seen. But Summit County's unemployment rate hit 9.5 percent in February, with labor analysts saying the rise in large part is attributable to layoffs at auto-related employers.
GM's new chief executive, Fritz Henderson, said last week it is ''probable'' that the company will file for bankruptcy by June 1. Chrysler, meanwhile, faces a May 1 government-imposed deadline to stay solvent by restructuring its debt and teaming up with Italian carmaker Fiat.
Ford has yet to accept any federal assistance and is the financially healthiest of the domestics.
The future of the so-called Detroit Three is of utmost importance to Ohio and its manufacturing base, which heavily relies on the auto industry. Besides factories owned by the automakers, the state has 397 of the large so-called Tier 1 suppliers that, in turn, count hundreds more smaller businesses here as customers and vendors. The state estimates that 15 percent of Ohio's economic output is automotive related.
Suppliers in Ohio
The latest information from the trade group Original Equipment Suppliers Association in Troy, Mich., estimates that more than 97,000 people were directly employed by automobile suppliers in Ohio. Indirect expenditures contributed to employing more than 440,000 Ohioans.
GM faces bankruptcy as a condition for receiving billions-more dollars in federal aid. The consensus is that a new General Motors would be much smaller — and that would affect the companies that make a living supplying the automaker.
The federal government is creating a $5 billion financing package to help out the nation's largest auto suppliers, leaving smaller businesses fearing that they largely must fend for themselves. Suppliers had been seeking $18.5 billion in aid.
Bankruptcy is probably the best option for the automakers to restructure and return to profitability, said Robert R. Ebert, Buckhorn Professor of Economics at Baldwin-Wallace College in Berea, who studies the industry. But suppliers are as important to Ohio as the automakers are, he said.
''Bankruptcy leaves a big question mark for the suppliers,'' he said. The companies already are operating under very thin profit margins because of cost-cutting pressure from the automakers, he said.
''The suppliers are really victims,'' Ebert said. ''They've been hammered by the industry for years.''
The federal government needs to ensure that if any of the automakers files for bankruptcy, their suppliers are paid dollar for dollar for legitimate bills, he said. If suppliers instead are reimbursed at 60 percent to 70 percent of what they are owed, that will ''deep-six many of them,'' he said.
A bankruptcy filing is a ''huge concern'' of the auto suppliers, said Rick Fedorovich, chief executive of Fairlawn-based accounting firm Bober Markey Fedorovich.
In addition to years of rocky relationships with the automakers themselves, the suppliers now are having tough times with their banks, he said.
''The financial institutions that lend to the companies that supply the auto industry have taken an extremely strong position against the auto industry,'' he said.
That basically means it is a lot tougher even for suppliers in good standing to get needed financing, he said.
''If you are in the wrong industry, you have significant problems with your banker. That's if you're good,'' he said. ''The bank doesn't want you if you are supplying the auto industry.
''I am really concerned that there will be a significant cascading effect.''
While the federal government, media and others have paid considerable attention to the automakers and their largest suppliers, ''nobody is looking at the plight of everybody beneath. That's a considerable bucket,'' he said.
Fedorovich said he has been recommending that clients speak with bankruptcy lawyers now so they know what they might be getting into if an automaker files for Chapter 11.
''It's wise to have those discussions,'' he said. ''That's well worth the expenditure of $1,000 in legal fees.''
Goodyear sales
Goodyear Tire & Rubber Co. in recent years undertook a strategy to de-emphasize lower-profit original equipment tire sales and instead focus more strongly on higher margin consumer replacement tires.
In 2007, Goodyear's original equipment tire sales to the Detroit Three amounted to less than 8 percent of its global sales, spokesman Keith Price said.
Original equipment tires — those on vehicles coming off the assembly lines — remain important to Goodyear even at lower volumes, Price said. But the Akron company has tried to be pickier on which new vehicles get its brands.
Goodyear's North American Tire division sales have been hurt by the deep production cuts in North American vehicles, Price said. North American original equipment tire sales were down by about 5.9 million units, or 23 percent, in 2008 compared to 2007, he said.
Goodyear's finances will not be greatly affected if an automaker files for bankruptcy, Robert Keegan, Goodyear's chairman and chief executive, said at the company's 2009 shareholders meeting.
Marc Merklin, a lawyer who specializes in corporate issues and bankruptcies for the Akron law firm Brouse McDowell, said bankruptcy might not be a bad thing for the automakers themselves.
''It may be the best thing that can happen for GM or Chrysler,'' he said.
The automakers are too big and encumbered by overhead, have significant ''legacy costs'' to retirees and high debt so that they are no longer competitive, he said.
A breakup of GM, for instance, into smaller companies could have the same benefit as the breakup of Standard Oil at the early part of the 20th century or when AT&T was forced to split up in the 1980s, he said. The progeny of those actions became competitive and innovative, Merklin said.
It is probably inevitable that GM goes into bankruptcy, he said.
''It's got huge repercussions locally,'' Merklin said.
Smaller businesses
Smaller suppliers here already are being hurt by tightening bank credit standards, he said. Those companies need to borrow money to operate, and the needs are based on projections of how much money they expect to bring in from their customers, he said.
Problem is, projecting those accounts receivables is increasingly difficult, he said.
''A lot of them are in negotiations with the banks,'' Merklin said. ''The banks have to exercise a little more caution and a little more patience.''
The economic climate remains uncertain, said Joe Gingo, chairman and chief executive of A. Schulman Inc., which makes resins and plastic compounds, some of which find their way to the automotive industry.
It is inevitable that there will be a smaller domestic automobile industry and fewer new vehicles sold annually, Gingo said.
That means, for instance, a supplier that was selling 5,000 parts a week to General Motors will have to make significant changes, he said.
''If I'm lucky, I will sell 2,500 parts. I have to cut capacity, cut my work force,'' Gingo said. ''I've got to guess you will have a permanent downsize in demand.''
He has already taken those kinds of steps since taking the reins at Schulman in January 2008, coming over from a senior executive job at Goodyear. Schulman got about 16 percent of global revenue a year ago from the automobile industry; it now gets about 10 percent of its revenue from that sector.
If a domestic automaker files for bankruptcy, ''that means everyone has overcapacity,'' unless they've already made the kind of cuts that Schulman has, Gingo said.
John Johnston, head of the Summit County Machine Shop Group, an association of local small businesses, said he and others who make up the group regularly talk about the future of the domestic automakers.
''We're not directly tied to the automobile industry,'' he said. ''But it's amazing how tied you can be. It's a domino effect.''
The automobile industry affects steel makers, tire makers and all of the customers and vendors of those businesses, including machine shops, he said.
Combs at SC Manufacturing calls himself an optimist — adding that's typical of a small-business owner.
At one point years ago, he got about 30 percent of his business from the larger Tier 1 and Tier 2 suppliers.
Fortunately, Combs said, the business he has been a part of for some 31 years is no longer heavily dependent on the nation's domestic automakers.
''That business is way down,'' he said. ''I have many, many different types of customers. I'm a job shop. That's how you see everything is so interrelated.''
He believes in the kinds of work he and other shops do, and founded a school, Akron CNC Training Center, at one of his plants to turn out skilled machinists. The four-month-long classes are largely booked.
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