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US auto sector must immediately perform a critical path supply chain risk review



US automakers must immediately perform a critical path supply chain risk review of what interrupts first, why, and how can the effects be attenuated. To not do so - for auto OEMs and individual suppliers - is grounds for fiduciary breach. Arguments, often uninformed, over the merits of bailout versus bankruptcy, obscure this need for a supply chain risk review that becomes an operating document. The contingency analyses of such a review will be needed regardless of which path all or some of the OEMs embark.


Failure to see systemic impacts of a networked, interdependent supply base


Automotive OEMs and their suppliers form a tightly woven industrial supply network in which many suppliers provide parts to multiple OEMs. The failure of one OEM - and even a few large Tier One suppliers - will have a cascading effect on the network that will take out the suppliers that service other OEMs, furthere accellerating the industry's decline. This unraveling will affect both commercial and defense capacity.


US suppliers are already verbalizing, albeit anonymously, that as GM takes three months to pay, parts shipped now may never be paid for. I have heard many things from suppliers but this anonymous voicing of refusing to ship parts under the rising certainty that they will not be paid is breathtaking. It is easy to see multiple supply chain breaches that halt production before GM runs out of cash or into Chapter 11 or all of the above.


While US suppliers largely operate without credit insurance, the credit insurers of Europe and Canada have acted:

Euler Hermes, Atradius or Coface, which control more than 80 per cent of the world's credit insurance market, are refusing to write policies for suppliers trading with GM or Ford on credit. GM and Ford are two of the biggest groups ever to be blacklisted. The cut-off of cover will primarily affect the companies' large operations in Europe, where the insurers do the bulk of their business...


The withdrawal of credit insurance - which covered suppliers against the risk of the car companies' failing - has previously hastened the demise of a string of European companies, with suppliers to retailers and construction companies finding cover increasingly hard to come by... Ford and GM will be two of the largest companies to have seen their coverage terminated this way. Euler Hermes has gradually reduced cover for suppliers trading with the two companies over the past three to six months... Without credit cover, suppliers can choose to trade uninsured, cease trading, or demand payment up front - none of them appealing scenarios...

The situation must be dire as the European insurers have "risk assessors working closely with the companies and are party to details not released to the market" and insurance cover withdrawal is a late stage event, "done because a company has stopped providing insurers with enough information to analyse their credit risk, or because their risk profile has deteriorated."


The problem in Europe is such that Opel has appealed to the German government for a 500 mil euro guarantee in the event that GM fails. Payment risk, it should be noted, also extends beyond automotive, e.g., Atradius reduced credit insurance for companies supplying some UK retailers. Canada has voted against the weakest of the US Big Three:

Export Development Canada is no longer taking requests from auto parts makers for insurance against receivables due from Chrysler LLC... EDC is owned by the government of Canada and backstops mainly small and medium-sized businesses by providing insurance covering up to 90 percent of losses if a customer refuses to pay. That includes when a customer goes bankrupt, declares insolvency, or cancels a contract... [For the moment, the] EDC said it's business as usual for suppliers wanting to insure receivables with Ford and GM...

Uninformed bailout comments obscures impact of auto sector on US economy


Uninformed comment on the virtue of a bailout obscures the fundamental contribution of the US auto industry to US infrastructure, employment, technology and R&D. Center for Automotive Research (CAR) recently addressed the impact of two contraction scenarios on US industry: 

  • 100 percent contraction in which the Detroit Three cease all US operations.
  • 50 percent contraction "in overall Detroit Three employment and production" of its US operations.

The 100 percent scenario assumes that Detroit Three and international makers production falls "to zero in the first year." CAR assumes, I think correctly, that US domestic production by international auto makers will be seriously affected by a Detroit Three contraction due to the high likelihood that many US suppliers supplying both domestic and international badges would become insolvent.


The 50 percent scenario assumes that "Detroit Three production and employment falls by 100 percent in the first year but recovers to 50 percent in the second and third years." CAR assumes that "surviving Detroit companies would restore production to 50 percent of the former combined level by the second year and maintain this level in the third year." CAR assumes that domestic production by the internationals will "fall about 50 percent in the first and second years [but] would recover fully by the third year."


Both scenarios marked contributions (losses) from direct, indirect and spin-off employment:

  • Direct employment: "fall in the number of people employed at the Detroit Three companies reduces the earnings of those employees and the tax revenues derived directly from their income and spending."
  • Indirect employment, AKA the "supplier effect": "changes in employment, compensation and tax revenues [resulting from] cancellation of purchased inputs to automotive production (any employment, compensation or personal income taxes related to firms that sell commodities, products or services directly and indirectly to the Detroit Three automakers). The supplier effect includes both manufacturing and non-manufacturing suppliers to the industry as well as suppliers to suppliers."
  • Spin-off employment: "expenditure-induced effects in the general economy [due to] reduced spending of employees of the Detroit Three and their suppliers in the U.S. economy."

The employment multiplier of the auto sector on the US economy is profound. One of the better estimates (confirmed by phone with CAR's Deb Menk) of the auto sector's economic multiplier on the US economy is 5.7, i.e., every 1 job in autopart manufacturing and assembly spawned an additional 4.7 jobs in business/professional; retail/wholesale trade, transportation; health, education; and raw matierals and construction. We discussed an earlier CAR item that used a mulitplier of 7.5 (which included 2.5 for new vehicle dealers); Menk noted that multipliers could range higher depending upon the factors included but that she was comfortable with the 5.7 figure.


Spending even a modest amount of time with this CAR report (also here, here, here, and here) will make most readers far less cavalier in their presumed prescriptions for the auto sector. The potential loss of up to 3 million Detroit Three jobs and $150 billion USD in tax revenues over three years becomes a walkable equation. Considering a US base of 138 million jobs, Menk noted that a 2.5 milion impact is 1.8% of the nationally employed while 3.0 million is 2.2%. [phone conversation, 18 November] Both legislators and regulators should pay heed before they tinker, or refuse to tinker. Once the cascading supply chain interruptions commence, the interlocking system will begin to fail, taking down those firms that might otherwise be able to continue operations.


Uninformed bailout comments obscures genuine improvement


In a panel discussion, CAR's Dave Cole summarized some real improvements in the US auto sector price structure that are not getting sufficient coverage:

  • Satisfying pentup demand following any turnaround, even stabilization.
  • US union labor contracts negotiated last year, and to be implemented in 2009, significantly lower US labor costs.
  • US union labor health care costs have been reduced by virtue of a union-run health care trust (voluntary employee benefit association, or VEBA) into which OEMs cap their exposure with early pay-ins.
  • Excess manufacturing capacity is being removed from the market. (Yes, there is more to be removed, but the process has begun.)
  • Lower costs in concert with pent-up demand could reduce or eliminate recent rebates of one to two thousand USD per vehicle.

These points made by Cole are soundly based (and are flagged in the five citations immediately above as well as the bibliography at end). It should be noted that Cole used a higher industry multiplier of 10 for the value of each automotive manufacturing job, a figure that may rise from a 2003 CAR report that is now seen as overly broad.


wRatings performs competitive advantage analysis on a quarterly basis drawn from a blend of a firm's economic profits and consumer advantages. wRatings' 2008 survey notes three drivers for a potential uptick in auto sales:

  • Expectations for consumers have increased for the past 3 years as innovation drives more and more purchases.
  • Consumers are willing to pay more if auto companies could meet their expectations, indicating that pricing power exists but the current models and business framework are unable to deliver enough for consumers to open up their wallets.
  • As consumers delay their auto purchases yet expectations for more cost efficient and better design continue to rise, a flood of opportunity is coming over the next few years. Existing players are likely to fold or merge, and new players will emerge that can meet consumer demand. The winners will have visionary CEOs that can transform the industry similar to how Steve Jobs did with the iPod.

Resistance to OEM automotive overtures to congress obscures need for immediate short-term steps to quantify risk, preclude rolling shutdowns


AIG missteps have further spoiled public, even congressional, receptivity to automotive OEM overtures to congress for assistance. Just as there is blame for AIG, regulators and congress, there will be similar blame for whatever is, or is not, done for the Detroit Three. We have the elements of political paralysis before us as no one can tell if they have a British Leyland or a Renault on their hands.


Yes, there are ample grounds for accusing both OEM and UAW management for not having moved faster; these are large organizations with legacy drag at both the facility and personnel level. State and federal government supported the auto sector in opposition to trends seen clearly outside the automotive sector.


(I would note that UAW's Gettelfinger understands the threat to his union and the nation rather well but has to move along a constituency that retains troglodytes. We have worked with both US and foreign auto plants; the difference in acceptance and employment of lean metrics and kaizan between US and foreign badges could not be more stark. Yes, some plant labor understands the need better than others and embraces lean methods; yes, improvements in lean and manning flexibility have been made, but resistance remains far too high overall in US plants.


I also note that blame is being directed at OEM senior management without attention to an often obdurate, risk averse middle management that were rising when economic and technological challenges were more remote. Such tools that they learned are now ineffective in the current competitive atmosphere. Their response has been reduced risk taking. One particular OEM virtually denies that risk exists in its program management process; everything is on track, is coded green, until shortly before delivery when there is a flurry of yellow and red flags that are rebundled into new delivery dates. This is not a recipe for adaptability, much less success.)


The Detroit Three are burdened by the inability to negotiate from a position of strength. Returning to wRatings, their 2008-2007 auto comparison shows the Detroit Three brands ranked against other OEMs. (Firms that do not report financials, such as Porsche and BMW, are not ranked.)


wRatings looks at KPIs such as stable or increasing market share within their industry, and high returns on invested capital (ROIC). A "W Score" or "Company Worth" rankings is performed by measuring categories of Trust, Fair-Price, Leader, Unique, Durable. The company is then summarized individually and ranked against Category and Industry by National Rank, Pricing Power, Expectations, Company Delivery, Consumer Strength and Financial Strength.


Note the Moats scores in the following table. "Total Moat" scores are wRatings' leading indicator of a company's long term economic profit. Moats are a wRating process measurement of a company's ability to "create and build competitive advantage to protects profits and grow revenue" by erecting barriers to entry or "moats" in three business areas: supply chain, products, and delivery chain.  (wRatings tracks "three unique moats" in each area for a total of nine measurables for competitive advantage.):



Low Worth and Moat scores coupled with an economic downturn that robs the Detroit Three of operating capital makes it more likely that without external assistance other badges will profit at the expense of the Detroit Three. Here are snippets from the 2008 Chevrolet company worth and summary rankings:



Companies in this condition have difficulty in matching the willingness of top tier firms, for example, in Europe that are offering cash to stricken suppliers, even considering purchasing the supplier. The top tier conversation about their supply base has shifted from their suppliers' ability to match demand to their suppliers' ability to remain solvent. (The top tiers are also reaping the result of leaning their supply base, thinning their suppliers' margin and extending payment terms.)


In the defense sector, VT Group (formerly Vosper Thornycroft) in the UK and Safran and EADS in France are telling suppliers to contact them rather than banks before the suppliers reach a supply breach. Safran has established a "crisis cell" to monitor the group's 4,000 suppliers in "a preventative manner". In the automotive sector, Daimler and BMW are already "helping some suppliers with cash".


Counterparty risk - the risk of default of a party to an agreement - has leapt out of the financial sphere and into the operational world. Global supply chain risk analysis is now mandatory; on the high end remediation is bridging a supplier, on the low end remediation is attempting an orderly shutdown (which is a contradiction in terms in the auto sector).


US automakers and individual suppliers must immediately perform critical path supply chain risk reviews so that they can either smooth or attenuate in a preemptive rather than reactive manner. Available monies can then be allocated. The distractions of bailout versus bankruptcy cannot interfere with this timely risk analysis, otherwise we have a reactive cascade of defaults across the industry.


Part 2: Ejecting executive automotive management may or may not help; energizing the usually inert and risk averse middle management can


Detroit Chiefs Plead for Aid, to Little Avail


New York Times

November 19, 2008


Advantage of Corporate Bankruptcy Is Dwindling


New York Times

November 19, 2008


A British Lesson on Auto Bailouts


New York Times

November 18, 2008


Clout Has Plunged for Automakers and Union, Too


New York Times

November 18, 2008


A Bridge Loan? U.S. Should Guide G.M. in a Chapter 11


New York Times

November 18, 2008


The Fate of the Auto Industry

Diane Rehm

Guests: James Politi, David Cole, David Shepardson, Paul Ingrassia

November 17, 2008



EDC to stop insuring Chrysler receivables: paper


Nov 17, 2008 8:54am EST


Failure of the Big Three would impact defense supply chains

By Chad Halcom

Crain's Detroit Business

1:25 p.m., Nov. 17, 2008


How Many Jobs Depend on the Big Three?

By Catherine Rampell


November 17, 2008, 8:57 pm


'Meet the Press' transcript for Nov. 16, 2008

Sen. Carl Levin (D-MI), Sen. Richard Shelby (R-AL), T. Boone Pickens, Tom Friedman, Katty Kay, Andrea Mitchell, Tavis Smiley


updated 12:19 p.m. ET, Sun., Nov. 16, 2008



Sum of the parts

By Richard Milne


Published: November 16 2008 19:58 | Last updated: November 16 2008 19:58


European companies launch supply chain rescues

By Richard Milne in London


Published: November 16 2008 18:16 | Last updated: November 16 2008 18:16


A Power Duo, Dingells Battle on Two Fronts


New York Times

November 16, 2008


Opel wappnet sich gegen GM-Pleite

Bitte um Staatsbürgschaft

14.11.2008, 16:58 Uhr


UPDATE 2-Insurers pull cover from suppliers to GM, Ford -FT


11.14.08, 01:20 PM EST


Insurers pull cover from suppliers to GM, Ford: report


Fri Nov 14, 2008 7:09am EST


Insurers pull cover from GM and Ford suppliers

By Kiran Stacey, John Reed and Jonathan Guthrie in London


Published: November 13 2008 21:11 | Last updated: November 13 2008 21:11


Industry Risk - Auto Industry Poised for Turnaround While Utilities Could Reach Profits of Their Oil & Gas Peers

Beth Green/GARP

Date: 2008-11-10

November 10, 2008:


2008 Ranks: Auto, Gas & Utilities


November 2008


Help Steve Jobs (Or GM) Design The iCar

Posted by Tom Steinert-Threlkeld @ 10:33 am


November 13, 2008


Steve Jobs for President. Of GM?

Posted by Tom Steinert-Threlkeld @ 8:33 am


November 12, 2008


Steve Jobs, the iCar, Barack Obama, and John Doerr

Posted by smoothspan


November 12, 2008


How to Fix a Flat


New York Times

November 12, 2008


G.M.'s Troubles Stir Question of Bankruptcy vs. a Bailout


New York Times

Published: November 12, 2008


Failure of auto industry could set off catastrophe

Advocates: Collapse of US auto industry could set off catastrophic chain reaction

Tom Krisher and Ken Thomas, Associated Press Writers

Wednesday November 12, 2008, 6:30 pm EST

MIRROR WaPo, 12 Nov



Obama asks Bush to provide help for automakers

By Jackie Calmes


Published: November 11, 2008


Aides: Obama suggested more help for auto industry



Nov 11, 2008 8:17 AM (ET)


Help wanted: Skilled auto workers

With carmakers in trouble, auto industry jobs in Michigan are scarce. But for some, there are opportunities elsewhere.

By Jessica Dickler, staff writer

Last Updated: November 7, 2008: 12:56 PM ET


CAR Research Memorandum: The Impact on the U.S. Economy of a Major Contraction of the Detroit Three Automakers

Authors: David Cole, Sean McAlinden, Kristin Dziczek, Debra Maranger Menk

Center for Automotive Research (CAR)

November 4, 2008


The Big Leave the Future of Automotive: Presentation February 2008

The Program for Automotive Labor and Education

"Beyond the Big Leave"

2008 Automotive Management Briefing MBS 2008

Aug 15, 2008


Beyond the Big Leave: The Future of U.S. Automotive Human Resources

Authors: Sean McAlinden, Kristin Dziczek, Bernard Swiecki and Yen Chen.

A Report to the Charles Stewart Mott Foundation and the Mid-Michigan Innovation Team/U.S. Department of Labor Workforce Innovation for Regional Economic Development (WIRED) Initiative



Steering Through Discontinuous Change

Automotive - The Road Ahead

Wednesday Morning and Afternoon and Thursday Morning, August   8 & 9

David E. Cole

Chairman, Center for Automotive Research (CAR)

2007 Automotive Management Briefing MBS 2007


Obscure Health-Benefit Scheme Is Central Issue in Auto Talks

By Catherine Rampell

Washington Post

September 22, 2007


Issues facing the Auto Industry: Alternative Fuels, Technologies, and Policies

ACP Meeting

Eagle Crest Conference Center

June 20, 2007


The Future Auto World: Round or Flat?

David E. Cole, Chairman

Center for Automotive Research (CAR)

13thAnnual Automotive Outlook Symposium

Federal Reserve Bank of Chicago

Detroit, Michigan

June 2, 2006


Economic Contribution of the Automotive Industry to the U.S. Economy - An Update

A Study Prepared for the Alliance of Automobile Manufacturers

Sean P. McAlinden, Kim Hill, Bernard Swiecki

Economics and Business Group

Center for Automotive Research

Fall 2003


Gordon Housworth

InfoT Public  Risk Containment and Pricing Public  Strategic Risk Public  


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