Smaller suppliers still at risk as industry ramps up after UAW strike

The return of auto parts production after the UAW strike will test the financial viability of smaller suppliers in the coming months, industry experts said.

Many small to midsize manufacturers, which have been hit hard in recent years by higher material costs and uneven new-vehicle production schedules, will struggle to quickly ramp their factory lines back to full production because of the financial strain they find themselves under after the strike, said Zainab Hazimi, attorney in the Detroit office of Warner Norcross + Judd, which represents several suppliers.

As a result, many companies are planning to extend job furloughs, four-day workweeks or periods of unpaid vacation time over the next few months as cost-saving measures, she said.

"The issue now as we ramp up is that we can't afford to go back up to 100 percent just yet," Hazimi said. "We don't have the capacity and we don't have the money. The furloughs that everyone was so worried about before— They're actually going to continue utilizing them just to save costs and recover from the financial hit."

The worst-case scenarios that many in the supply base feared of a monthslong strike that would shut down virtually all U.S. Detroit 3 vehicle production did not come to pass,. But the precarious financial state many Tier 2 and Tier 3 suppliers find themselves in is unlikely to change soon, analysts said. Even one supplier shutting down or being unable to produce parts could have massive ripple effects on the supply chain and potentially impact new-vehicle production.

The interconnected nature of the supply chain was on display earlier this month when Stellantis and Tier 1 suppliers Adient and Yanfeng Automotive Interior Systems were granted permission to take over tooling from the bankrupt supplier Unique Fabricating NA Inc., an Auburn Hills, Mich., maker of plastic, rubber and foam components.

"It's been a huge scramble to try to get the tooling out," said Dan Rustmann, co-chair of the global automotive practice at Butzel, which represents some of Unique's customers. "All the customers are frantically trying to get the tooling out, to get any finished goods out and to line up new suppliers to take it all over and hoping that everybody has enough inventory so there's not a shutdown of assembly lines in the meantime."

It's an example of the fragility and complexity of the supply chain — and the costly lengths some automakers and suppliers might be willing to go to ensure production continues even if a supplier in financial trouble fails.

"Customers, whether it's Tier 1s or an OEM, will typically step in and ensure supply continues by taking it over or forcing a sale or going through the bankruptcy process to make sure the plants are still running," said Mark Wakefield, global co-leader of the automotive and industrial practice at AlixPartners LLP.

The health of smaller suppliers has been a key topic of discussion between trade associations including the Motor and Equipment Manufacturers Association and the White House, including during a Tuesday, Nov. 14, meeting between Biden administration officials and representatives of small and midsize parts makers. The administration "shared information about specific resources" available to suppliers, including loan guarantee programs, hardship accommodation plans, work force development and other federal programs, it said in a statement.

During the strike, MEMA and other industry groups urged the White House to implement emergency programs designed specifically to help small suppliers stay afloat through the work stoppage and beyond.

Concerns about supplier finances could be amplified moving forward because of lower capacity utilization, said Michael Robinet, executive director of automotive advisory services at S&P Global Mobility. Capacity at assembly plants and parts factories is likely to be lower over the next several years as companies feel out how quickly (or not) customers buy electric vehicles.

While automakers and large suppliers should be able to weather that, smaller suppliers could have a tougher time, he said.

"They can't devote all that floor space [to EV parts production] and wait for companies to figure out how to sell that vehicle," Robinet said earlier this month at a MEMA supplier conference in suburban Detroit. "Capacity utilization is going to be a key issue, which means that operational efficiency at the supply level is going to be critical to profitability and longevity."

Lisa Clark, vice president of supplier diversity, supplier risk and relations at Stellantis, said the automaker's restart is "going very smoothly, all things considered." She said the company learned valuable lessons about how to ramp up in 2020 following COVID-related plant shutdowns. But the health of lower-tier suppliers is a major concern for the automaker, she said.

"It keeps me up every night," she said at the MEMA conference. "The best way that we're going to get through it is to make sure that we're having those open dialogues and bringing up the revenues and deliveries as stable and as quickly as possible." Crain's Detroit Business contributed to this report.