Suppliers’ debt can be fatal in COVID-19 crunch

Industry

We can say this about the COVID-19 pandemic: It has taught us to identify waves of illness and trained us to look for patterns of causality.

Case in point: the acute fiscal distress roiling balance sheets across much of the North American automotive supplier network.

Chapter 11 bankruptcies — the business equivalent of intubating a patient who might otherwise die — are increasing at an alarming rate across this industry’s vital supply chain, including some formerly powerful and well-known industry names now struggling to hang on.

To be sure, this tumult is a direct result of the COVID-19 pandemic and what it has done to manufacturing and the industry as a whole this year. But as with COVID-19, there are comorbidities that make some cases more dire. In the case of struggling auto suppliers, debt looks to be the hidden killer.

Many suppliers spent the decade after the Great Recession doing precisely what their customers, the automakers, asked them to do: consolidate to drive down costs, and expand their R&D operations.

Automakers reaped the benefits of those actions through both lower pricing and the shifting of their own in-house R&D efforts, and suppliers profited as well, at least when times were good.

But those supplier moves also drove up debt dramatically, a consequence of the industry expectations heaped upon the supply chain by their automaker customers. That wasn’t a big deal while U.S. sales were humming at 17 million new vehicles a year. But when COVID-19 hit, supplier revenue stopped while debt service obligations soldiered on unperturbed. For some debt-afflicted suppliers, the conflict became inevitable.

To be sure, any fault here probably rests with those suppliers that sought to live large and may have mistaken a long stretch of prosperity as a permanent condition. Suppliers that proceeded more cautiously — that didn’t encumber their books with mountains of debt — now find their cash accounts more flush than those of their aggressive peers.

Neither the coronavirus nor the recession it sparked are done taking casualties. For suppliers, the bill for yesterday’s excesses has come due.

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