COVID-19’s Impact on Suppliers: Bankruptcy and Restructuring

COVID-19 has swept the globe in ways we could never have imagined, and the automotive industry is no exception. The crisis of COVID-19 is exposing structural issues that were already under pressure from the looming juggernauts of electrification, autonomy, shared mobility and connectedness. And automotive companies are being forced to deal with these issues in an intense and compressed time frame.

Existing Structure Already Weakened

Before the spread of COVID-19, many companies were already feeling the pressure of significant shifts in the industry. For example, the industry has already been primed for a dramatic change from mechanical capital structures and associated employee skill sets to electronic-related capital and software competencies for electric, autonomous and connected vehicles.

Advancements in technology impact everything from the supply chain to the workforce to the consumer. Most companies should have seen the writing on the wall by now. Those who previously started to pivot have some clarity to their future; those who didn’t make a move earlier are currently dealing with an accelerated time frame within which to answer the strategic questions raised by the changing structure in the industry.

The Industry Brought to Its Knees

When many governments around the globe enforced shelter-in-place orders and closed non-essential businesses, there was a complete halt of automotive production. Surviving the crisis required suppliers to live off of receivables collected before the chaos of the pandemic even set in. Since most automakers have suppliers on 60-day terms, time and cash rapidly run out; things like payroll, fixed costs, and debt are measured in weeks. As production ramps up, one-time inventory and start-up expenses along with the day-to-day like payroll and fixed cost will need to be covered with the balance sheet until receivables are replenished in 60 days. 

During the time that production was shut down in North America, automotive suppliers had to take drastic measures to bolster balance sheets and maintain financial and strategic flexibility. This included taking steps to conserve cash, including slowing capital expenditures, drawing down working capital, along with salary reductions, lay-offs, unpaid furloughs and bonus eliminations. The gravity of the situation was evident as several automotive companies started to dip into their revolvers (revolving credit) to be able to pay on-going obligations. Companies who have notably done so include Ford, GM, Fiat Chrysler, American Axle, Lear and Delphi Technologies. Given that many suppliers started drawing from their credit revolvers early into the shutdown indicated that they were not healthy.

During the Great Recession of 2007-09, only General Motors and Chrysler got bailouts—this time, many expect suppliers will once again be denied bailouts and could be forced to deal with these issues through bankruptcy.

The Options Moving Forward Are Few

In this market, the companies that will control their destiny are those who can convince banks, investors, and customers that they are worthwhile investments. In a COVID-19 world of short-term uncertainty, smart investors, banks, and customers will focus on longer-term prospects as a guidepost for sound decisions.  Those who have the most attractive long-term opportunities and who can articulate why they are a better investment than competitors or other suppliers will secure this much needed and scarce capital.    

Time Is Running Out

The COVID-19 induced liquidity crisis will lead to massive bankruptcies and restructuring. The vast majority of suppliers will not be able to weather this liquidity crisis without infusions of working capital.  But the supply of money will be limited.  The companies that can make a case for their strategic viability in a restructured market are the ones that will be most able to secure these lifelines. This means framing and articulating your strategic differentiation in a compact and compelling case—and doing it fast.  Only those who can make the strategic case will be able to compete for that capital.