Yesterday’s report that the Treasury is extending $5 billion in financing from the Troubled Assets Relief Fund to automotive suppliers indicates that the government fully understands the complex interaction between OEMs and their supply base. The news also underscores today’s comments by Steve Rattner of the Auto Task Force who said the administration will produce some kind of framework for considering additional help for General Motors and Chrysler before the end of the month.
Under the new program, the OEMs would designate suppliers who require financing to support deliveries to the OEMs. The current liquidity crisis has made it difficult for suppliers to find working capital as conventional financing sources are hesitant to lend against receivables from the OEMs.
General Motors and Chrysler have said they will use the program. Ford has declined stating that it expects “no issue with continued payments to our suppliers,” according to the Associated Press. Of course, the issue is not whether suppliers are being paid, presumably General Motors and Chrysler are paying their suppliers as well. The issue is whether banks will extend credit to suppliers against the OEM receivables and at what price. One thing is clear, however, as this lifeline to suppliers will assist all of the domestics, including Ford to the extent it avoids supplier failures that will disrupt the industry supply chain.
As noted, this development augers well for the industry. One, the Treasury clearly understand the importance of supply base integrity and two, this move is a clear signal that help is on the way to alleviate the effects of our unprecedented demand collapse.