Failing Auto Industry Has Domino Effect On Suppliers

GM it has been reported is burning through billions each month. But the woes of the auto industry suppliers have yet to be addressed. Some of the same problems are facing suppliers and if Washington doesn’t address the auto industry dilemma, a domino effect of cataclysmic proportions could become reality.

Auto supplier sales have fallen because of the decrease in demand for new vehicles. In order to stay in business, auto suppliers have had to cut costs while spending more money. Unfortunately the auto industry has been of no help. Job cuts and plant closings have led to a faltering auto industry that is taking auto suppliers down with it.

Because of the heavy dependence on the auto industry, the companies who tow the rope of the supply chain have a difficult time even getting financing needed to stay in business. Banks and other credit providers don’t want to get in bed with auto suppliers whose longevity is shaky at best. The negative effect from the dying auto industry has a long reach for the suppliers who provide key automotive parts.

The bad news to all of this that if the auto industry fails, then auto suppliers will be forced to liquidate. If that happens, then auto parts shortages will no doubt make its way to the assembly lines. Major disruptions to the Big 3 like this will not look favorable to the government—just when an auto industry bailout could become reality. The domino effect will be if and when auto parts shortages occur and the chain of indirect suppliers also start to feel the pinch of a failing auto industry.

"The fragility of the whole thing is very much like a house of cards," said Bob Viswanathan, an assistant professor of operations management at the University at Buffalo School of Management. "Everybody knows that the finance markets are so interconnected, but the auto industry is worse."

Many Americans believe the auto industry got itself into this situation by manufacturing inferior vehicles that couldn’t compare with their foreign counterparts. GM reports that 6 out of 10 of its car sales come from foreign countries. Yet there is also the myth that U.S. auto makers have been reactive in an aggressively forward market. Not keeping up with the design and quality offerings of Toyota, Honda, et al may have hurt the Big 3. And auto suppliers are on the tail end of the auto industry failing pain.

Leading Republicans, however, have said the bailout money should not be used for the auto industry and would only postpone its eventual demise. Sen. Richard Shelby of Alabama on Sunday called the industry "a dinosaur."