Auto suppliers at breaking point amid downturn

DETROIT (Reuters) - The number of U.S. auto suppliers may shrink by nearly a third as automakers, battling for survival, scramble to break ties with troubled supply companies in a bid to eliminate a major financial drag.

Bruised by billions of dollars spent to shore up liquidity at failing suppliers, General Motors Corp GM.N, Ford Motor Co (F.N) and Chrysler LLC look to buy from a smaller number of healthier suppliers and back away from a history of bailouts.

That raises the prospect more financially distressed suppliers will be squeezed out of the market under the double pressures of higher raw material costs and declining vehicle production in North America, analysts say.

They also expect a growing number of legal battles as relations deteriorate.

Automakers, concerned about potential supply disruptions, have filed several lawsuits against suppliers this year, seeking to take back their equipment from those struggling companies.

Suppliers too have gone hard-line. In August, Dana Holding Corp (DAN.N) sued Chrysler CBS.UL, saying it is losing money by supplying the automaker and demanding both sides share the pressure of increased commodity prices.

"I'm not looking to kill suppliers. That's the last thing that I want to do. But there are some I can't save," said John Campi, Chrysler executive vice president of procurement, on the sidelines of an industry forum in August in Traverse City, Michigan.

"I'm sorry," said Campi. "We don't have the wherewithal to go out and prop up a supplier to simply keep them running."

In February, Chrysler sought court authority to seize tools from Plastech Engineered Products in a dispute that briefly shut down five Chrysler plants. That request was denied.

In July, GM, Ford and Chrysler withdrew their businesses from Progressive Molded Products, derailing the supplier's plan to reorganize under Chapter 11 bankruptcy protection and forcing it to close operations.

Parts suppliers restructured intensively earlier this decade with financial aid from automakers and private equity investors. It would be hard to expect similar lifelines this time around.

Automakers are saddled with their own liquidity issues. Wall Street analysts say GM will need to raise as much as $15 billion to shore up liquidity, while Ford would need to tap capital markets even after borrowing $23 billion in late 2006.

The deepening downturn and tight credit markets have also scared away private equity firms.

"Historically the automakers have tried to, if you will, be the bank for the bankrupt companies," said Jim Mallak, former chief financial officer of parts maker Tower Automotive, which was taken private by Cerberus Capital Management last year.

"They have to basically watch out for their own short-term needs and they do not have the liquidity cushion any more to help the supply base out," said Mallak, managing director at restructuring advisory Alvarez & Marsal.

BREAKING POINT

Parts makers were caught unprepared this year to cope with runaway commodity costs, tumbling production from their automaker customers and a consumer exodus from large trucks and SUVs to passenger cars.

Auto consultancy Grant Thornton estimates one-third of all auto suppliers in North America are at risk for bankruptcy.

Consulting firm A.T. Kearney Inc believes North American suppliers will need $38 billion over the next five years to keep afloat, but says it is unclear where funding of that magnitude will come from.

"We are really at a bit of a breaking point here actually with the supplier base," said Grant Thornton analyst Kimberly Rodriguez.

"You can't pass on the raw material costs (to customers) as an automaker," Rodriguez said. "So you can say the automakers should pay the suppliers, but out of what?"

That means only bigger suppliers that can afford to absorb the increases in raw material costs and have significant revenue outside North America, such as Johnson Controls (JCI.N) or Magna International (MGa.TO), would survive the deep industry downturn.

"I think (automakers) will be very quickly working to source the parts to someone else rather than trying to save a bankrupt company," Alvarez & Marsal's Mallak said.

Desperate times are prompting unprecedented moves.

More suppliers are expected to resort to costly legal actions as a last avenue to win concessions from automakers.

"Historically, suppliers have never taken automakers to court, and now they are beginning to do that because they cannot continue to absorb these high material costs with low volumes," Mallak said.

"They're going to use that as an avenue of last resort if they cannot get to any resolution," he said.

(Editing by Brian Moss)