Suppliers: The Other Catastrophe In The Auto Sector

If the federal government puts $15 billion into the car companies, it will have made a start at fixing The Big Three. It may take another $100 billion to finish the job, and, if the recession runs on and the Japanese keep making better cars, the whole rescue could fall apart.

The piece of the car industry puzzle which is not being addressed is what happens if a substantial number of the auto supply firms go under?

According to The Wall Street Journal, "Many suppliers were financially weak going into this crisis and they now face an extended period of extremely slow sales."

The problem is a great example of how the federal government can fix the head of the problem while allowing the body to die. In the end, the two pieces rely on one another for survival. That seems to have been lost in the process.

Two things happen as suppliers disappear. The first is that when they cannot operate, the supply chain is broken and, in many cases, the big auto firms have a lock-up in production. Pieces go into the assembly line, but, lacking some of the critical parts, the finished product does not come out.

The more insidious issue is that with fewer parts companies, the leverage of those left over becomes greater as each day passes. Without the ability to conduct competitive bidding, the car companies are trapped into paying higher prices than the might have in a robust supplier economy. The idea of building vehicles are lower prices gets undermined. One of the essential ingredients of the rescue never takes hold.

If the rescue of America’s car companies gets a promising start, it won’t last long if the related parts of the larger system begin to dissolve.

Douglas A. McIntyre