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Grant Thornton LLP Predicts a Collapse of Automotive Supply Chain

March 16, 2009

DETROIT — The economic impact of a General Motors or Chrysler bankruptcy is being debated across the country. But the most immediate and pervasive risk is a wholesale collapse of the automotive supply base, according to Grant Thornton LLP partner Laura Marcero.

Marcero, part of the firm's Corporate Advisory and Restructuring Services team based in Southfield, Mich., believes some 500 Tier-One suppliers may be at high risk due to the cascading effect of reduced volumes and uncertainty around government support in the near term. But damage can be mitigated if key suppliers form a coalition with automakers, banks and the government to drive an orderly consolidation of the supply base.

"Suppliers struggled to make money when industry volumes were almost double what they are today, and consolidation has been happening mostly among smaller companies at the lower tiers," Marcero said. "Now, we are near a tipping point where the scale and scope of supplier failures at all levels will increase dramatically.

"To right-size capacity levels and promote a viable industry, we believe 30 to 40 percent of all suppliers are at risk due to the necessary alignment of capacity with demand, which should stabilize in the 12 to 14 million-unit range by 2010-2011," she added. "But if the scenario plays out in an uncontrolled fashion, every automaker will almost certainly lose production and incur steep financial losses. Without a structured approach of consolidation to the benefit of the entire supply chain, the industry may lose critical partners with the technology, scale and geographic footprint that are linchpins in the viability equation.

"Suppliers need to proactively determine whether they are a consolidator or a consolidatee," she said. "For those that are best suited to operate as consolidators, they need to step forth and provide solutions."

Marcero addresses how suppliers, the government, banks and the automakers can mitigate the automotive industry’s dire situation.

Suppliers can right-size their operations, evaluate industry trends for its particular commodity and the competitive landscape, and develop a strategic plan. They must win the active support of stakeholders, including the automakers, bank and government.

Marcero suggests the government can greatly increase chances for a successful industry consolidation by taking immediate steps to spur confidence among lenders, stimulate consumer demand for vehicles and give some measure of regulatory relief.

• Provide a government guarantee of the OEM receivables and inventory with the assurance from the lenders that incremental funding will flow to the suppliers.

• Stimulate demand and take more aggressive action to move sales into the 12 to 14 million-unit range as quickly as possible to help inject liquidity into the system.

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