>> Tuesday, February 17, 2009
Following the failure of the auto industry aid bill in the Senate, Chrysler's suppliers are demanding payment before any parts hit the assembly line in what is a major blow to the already embattled automaker.
A little known part of the auto business is the contractual payment agreements between the end customer (Chrysler) and the supplier. Because parts may not conform to quality requirements, may fail in testing or may become damaged in transit, payment for parts is not done on arrival. Instead, payment is done after an agreed upon delay, normally anywhere between 30 and 90 days. Some of the more abusive customers stretch the delay all the way out to 180 days. This is great for the customer as it allows them to improve the balance sheets and free up revenue to do other things. It is not great for the supplier as they have a delayed return on investment and get to sit on their hands risking non-payment if the customer goes out of business.
With Chrysler teetering on the brink of bankruptcy and the government appearing indifferent to collapse, the suppliers are no longer interested in trusting Chrysler to pay on those orders. It makes a lot more sense to demand payment on delivery than trust in Chrysler's survival. If Chrysler defaults on payment the suppliers will be up a creek without a paddle. By withholding parts they're hedging their bets, either Chrysler pays for them now, or they'll be able to sell the parts to distributors for maintenance duty.
This is a major issues for Chrysler as they don't appear to have planned for a shift of budget in this manner. Typically, revenue flows in and becomes payment for contracts in the past, not in the present. If the supplier sentiment spreads, Chrysler's lines will starve for parts, and the Carpocalypse chain reaction will begin in earnest. [AutoNews Subs. Required]