How will thousands of auto parts makers stay in business when major American carmakers are struggling to survive? The answer from the federal government: a $5 billion program to ensure the suppliers get paid for the parts shipped.
The U.S. Department of Treasury announced the program Thursday as part of an effort to help the industry that puts more than 500,000 to work in the country. The program will guarantee payments to suppliers if their customers, the automakers, can't pay. The suppliers will have to meet certain requirements and pay a "modest fee" in order to benefit from the program (see program summary).
"The Supplier Support Program will help stabilize a critical component of the American auto industry during the difficult period of restructuring the lies ahead, " said Treasury Secretary Tim Geithner in a statement. "The program will provide supply companies with much needed access to liquidity to assist them in meeting payrolls and covering their expenses, while giving the domestic auto companies reliable access to the parts they need."
The program could benefit the myriad of companies that provide engine parts, batteries and other components for energy-efficient cars. If the pot of money lasts long enough, it might help out those who will be supplying the parts to General Motors' highly touted Chevy Volt, a plug-in hybrid that is scheduled to go on sale in November 2010. GM provided an update of its plans for Volt this week, saying that it already is working on new battery technologies for future Volt models (see CNET post).
The program from the treasuring department will only be open to American-based suppliers, however. That rule will exclude companies such as South Korea-based LG Chem, which is supplying the battery cells to GM for its first Volt model.
But it could benefit companies such Austin-based Freescale Semiconductor, which makes microcontrollers that go into the drive trains for GM's hybrid Chevy Tahoe and GMC Yukon. Or maybe Watertown, Mass.-based A123 Systems, which has worked with Chrysler in developing the all-electric Dodge sports car.
The federal government is offering help at a time when many car parts makers are hurting because their key customers are ailing and the economy is sinking.
In general, car parts suppliers get paid about 45 to 60 days after they've shipped the products. Some of them would then use the payment agreements from their customers, called receivables, to get loans from banks in order to pay their employees and other business expenses. They could also sell those receivables to raise money.
But some banks aren't so wiling to loan money these days because they are concerned that the automakers wouldn't be able to pay. GM and Chrysler have received billions of dollars from the federal government to restructure their businesses, and have indicated they might need an additional $21.6 billion.
With the $5 billion program, the federal government will back those receivables. The suppliers can even sell their receivables to the government in order to get a quicker access to cash.
The program will only be eligible to suppliers who sell to American carmakers, and only if those carmakers who are willing to participate in the program. GM and Chrysler have agreed to do so, the treasury department said. The participating carmakers will have to work closely with their suppliers who want to take advantage of the program. In fact, the carmakers will get to decide which receivables will get the federal government's backing, the treasury department said.