The aftermath of the smallest of the big 3 going bang

Its the day after. Detroit has had a 20+% unemployment rate for a while, exacerbated by many factors. It would be fair, and accurate to state that the city has been in a depression for a while.

Well, the little “surgical” bankruptcy is having the ripple effects we knew it would. And it will likely take down several additional companies with it, that were under pressure, but not in terrible shape.

This article in the freep indicates what has happened thus far, 24 hours later. Its not the end. By any stretch.

While the political leadership in Washington was hell bent to deliver a kick in the shins to the lenders, some others got caught in the wake.

While Obama billed it as a “surgical” bankruptcy, stamping plants in Sterling Heights and Warren shut down Thursday afternoon because suppliers stopped shipping parts out of fear they won’t be paid.

“Suppliers have decided not to ship product,” said Tom LaSorda, a Chrysler vice chairman and former chief executive officer who announced Thursday that he would retire. “It’s not in every facility. It was going to happen on Monday anyway.”

In the auto industry, it has been common to demand net-45 to net-75 terms. For the forseeable future, I see transactions with companies outside of this industry selling to them as demanding cash up front. It is idiotic to consider lending any of them money. You have a very strong chance of not getting it back. And this means that it is a risk to deal with them. If you must do net terms, you need to buy insurance, and add the cost of the insurance to the cost. They won’t like that, but hey, its a risk to deal with them. That risk has to be priced in.

JCI, Yazaki (just down the street from us in Canton), and many others have been screwed pretty hard by the political echelons effort to screw Chryslers debt holders. Maybe they look at this as collateral damage.

I look at this as a bunch of hard working companies who, after picking their jaws up from the floor, will not likely provide net terms anymore. And they will have to cut people to deal with this loss.

HPC is used by all of them. Less HPC will now be used by all of them.

FWIW: Most of our customers are not in this industry. Most are outside. I saw this coming years ago, and made sure we didn’t have a significant exposure to this.

Ugh.

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