Auto component makers apprehensive after US bailout efforts fall through

In the wake of the $14-billion bail-out package for US auto makers General Motors and Chrysler not getting cleared by the Senate, Indian auto-component makers have raised apprehensions that their money for exports to US in November might get blocked due to the uncertainty on the future of the car makers.

“Settlements in this case are arbitrary, with vendors mostly coming last to receive payments. Even the quantum of payments could vary,” said a Gurgaon-based executive engaged in the auto parts exports.

However, auto-component manufacturers say they have no option but to continue to supply to them as payments are made after 45 days and there has been no delay from the US car makers and their tier-I companies till now. “We have received payments on time so far and our US clients have asked us to continue supplying. There has been no indications either from Ford, GMor Chrysler to stop supplies in the future,” says a leading supplier of auto components to GM based in Chennai.

Despite reports of auto parts vendors in the US asking General Motors to pay an advance before taking delivery, which the manufacturer of the

Cheverolet brand has refused, Indian auto component majors say they have to continue to supply without an advance as it is stipulated in their contracts. “ The contract signed with the US car majors stipulates that if we stop suppply the car companies could haul us to the courts,as long as there has not been any default in their payments ” says an automobile analyst who tracks vendor companies.

Typically, the Big 3 car majors source components from India not just for use in the US but also for its subsidiaries spread across the globe.

“Should these car majors file for Chapter 11 the expectation is that the bankruptcy filing ringfences the US operations only. The international subsidiaries of these car majors are profitable,” says Rakesh Batra, Automotive Sector Leader of Ernst & Young.

Auto component majors say that bankruptcy procedures might only delay payments but they hope that their money will come in. These companies site the example of Delphi - which used to be owned by GM, and filed for Chapter 11 in 2005. “Despite the Chapter 11 proceeding taking time our payments were safe. It took about a year to receive our payment its,” says a supplier of high tensile fasteners to Delphi at that time .

About 20 per cent of the total output of Indian auto component manufacturer are exported-which is around Rs 18,000 crores. Ou of that 27 per cent is exported to the North American markets in which about 70 per cent is supplied to the Big 3 car companies and their Tier 1 & 2 vendor companies. About 100 companies currently serve Detroit’s car companies.