Auto Suppliers’ Pain Spotlights Ripple Effects Of Trade Credit Gaps

The old saying goes that chains are only as strong as their weakest link. That applies, of course, to supply chains and to liquidity.

Name the vertical, and where there’s a breakdown at one part of the supply chain along the continuum from raw goods to finished products, perhaps due to unforeseen circumstances, the ripple effects can be significant.

Perhaps this time, the ripple effects will start a broad conversation about how liquidity can and should be improved across industries that rely on an interconnected web of firms for survival.

The auto industry offers a compelling case study.

Production has been brought to a standstill due to the pandemic — and vehicle sales, of course, have suffered amid a huge falloff in consumer demand.

Results at large automakers underscore the scramble to conserve cash as they wait for a rebound in top lines. Ford has said it expects a net loss of $5 billion in the current quarter, while revenues slipped nearly 15 percent year over year to $34.3 billion. The firm said it has $35 billion in cash on its books, which could help it make it through the end of the year even if production were to remain paused. Fiat Chrysler lost roughly $1.8 billion.

With sales plunging, orders declining, and production idled — and just starting to come online this month for some firms — the suppliers have been feeling the pain.

In one example, as reported by the Financial Times, Continental, which makes parts for the automakers spanning brakes to radios, has said dozens of its more than 2,300 automotive suppliers are nearing collapse. If those firms do indeed go bankrupt, the implications can be huge.

The FT reports that auto parts makers employ more people than do the automakers that churn out the finished vehicles, with a respective 592,000 workers vs. 403,000.

This week, members of the congressional delegation from Michigan — ground zero for the auto industry here in the states — wrote to Treasury Secretary Steven Mnuchin to move COVID-19 relief funds to auto suppliers who are facing a cash crunch.

As the group of 14 lawmakers wrote in their letter:

“Parts suppliers usually receive payment from auto manufacturers 45 days after the delivery of goods. As you know, vehicle production has been at a stand-still since late March. With vehicle manufacturers scheduled to ramp up production as soon as May 18th, most suppliers will have had no receivables for at least 6 weeks,” they said in the letter.

The representatives went on to add in the letter that “thus no access to working capital for start-up costs. Since component and parts manufacturers provide two-thirds of the value of every vehicle, auto manufacturing needs a healthy and functioning supply base in order to efficiently restart automotive manufacturing.”

As to possible solutions, the lawmakers proposed the creation of a “special purpose vehicle” for suppliers would allow funding to be stretched further — perhaps through receivables factoring or through a broader loan program.

And here lies a stark illumination of how, when industries operate less than optimally from a payments perspective when things are functioning normally … disaster looms when new and unforeseen circumstances hit supply chains.

We note that the requests of Mnuchin detailed in that letter may take some time to move from concept to reality. In the meantime, small and medium-sized business (SMB) loans extended through various tranches of Paycheck Protection Program (PPP) or Main Street lending efforts have had their own logistical issues. Receivables factoring may depend on a third party that needs to be willing to take on the debt or have good credit history (which becomes harder to maintain the longer economies face pressures).

As noted by a PYMNTS/Fundbox collaboration, the Trade Credit Dilemma Report, a survey of more than 1,000 firms across a variety of industries showed that $3.1 trillion is the net amount these firms are owed in accounts receivable on any given day.

Unlocking that cash, of course, could help these smaller firms grow in healthier economic climates and conserve cash, keep workers paid, and avoid having to seek bailouts during rockier periods. Faster, or even immediate payments, facilitated through online platforms (killing the paper check) — and used by only 14 percent of firms surveyed — could keep cash flows healthier and supply chains stronger.