Two manufacturing executives, both also representing AMT—the Assn. for Manufacturing Technology (www.amtonline.org), testified before Congress in May.
Carl Reed, president and CEO of Manhattan, Kan.-based Abbott Workholding Products (www.abbottworkholding.com), told the U.S. House Committee on Small Business that unless auto industry suppliers get help immediately, many of them will “take their last breaths.” Eugene Haffely, Jr., chief operating officer of Dayton, Ohio-based Assembly and Test Worldwide (www.assembly-testww.com) and a member of AMT’s board of directors, testified on restoring available credit to support the nation’s defense industrial base before the U.S. Senate Banking Committee’s Economic Policy Subcommittee.
Strategic Research
AMT’s Patrick McGibbon says bankruptcies of Tier 1 suppliers cause Tier-2-supplier bankruptcies, which creates a domino effect.
Reed warned that if a high number of technology suppliers to the auto industry suddenly cease operations, it would set off a “domino effect” that will go well beyond the automakers and could affect aerospace and other industries.
Despite the U.S. Treasury Department’s auto supplier support program, “inexplicably, AMT Tier 1 suppliers have been left out of the program,” said Reed. “The car companies have interpreted the program as protection for companies who supply them on a flow basis rather than on a transaction basis. This leaves out AMT suppliers, whose commitments come one transaction at a time, amounting to essentially an all-or-nothing agreement with the auto companies. There’s no opportunity to adjust shipments based on health of customers or payment integrity as with the flow suppliers.”
A few weeks after the testimonies before Congress, Patrick McGibbon, vice president—strategic information and research at AMT, elaborated.
Current resources are focused on a few large companies with the theory that the stimulus will trickle down, explains McGibbon. “That strategy would work and has worked in recessions where the decline has happened in annual rates of 30-40% in a year,” he says. “The current situation is punctuated with January’s 70% decline in manufacturing technology orders and a first-quarter decline of 68%. That type of fall will result in the exit of a majority of this industry’s domestic producers before the first dollar of the stimulus initiative reaches our small manufacturers.”
The danger for auto companies and others at the top of the manufacturing food chain is that they will lose their important suppliers and then not have access to key technology for crucial projects at the point when they need it most, explains McGibbon. “Over the past nine months, domestic automakers drastically reduced orders and shut down manufacturing operations,” he says. “This has disrupted payments to the automakers’ Tier 1 suppliers. With less money to conduct their businesses, the Tier 1 suppliers are not using the assistance they are receiving to make orders. By the time we work our way down to the bottom of the production chain, none of the money injected into the top of the supply chain has trickled down to the bottom. Tier 1 suppliers go bankrupt, causing the Tier 2 companies to go bankrupt, and on down the line.”
Small businesses make up the overwhelming majority of the manufacturing technology industry, explains McGibbon. “They rely on the ability to obtain working capital in order to stay in business,” he says. “Many have gone months without a single order, so credit has become unavailable to them. Their ties to the auto industry have all but dried up access to the capital they need to manufacture their products. Manufacturing technology companies typically have low turns in their inventory, including work in process, so credit is essential to maintaining a flow of work through the factory, where machinery is produced in 10 to 270 days.”
