Lear Becomes Latest Automotive Tier Supplier to File for Bankruptcy

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Researched by Industrial Info Resources (Sugar Land, Texas)--For the past several months, the majority of the media attention within the automotive sector has been pointed in the direction of General Motors Corporation (OTC:GMGMQ) (GM) (Detroit, Michigan) and The Chrysler Group LLC (Auburn Hills, Michigan). As two of the three American automakers, the bankruptcy proceedings of these companies have warranted significant exposure. However, at the same time, the supply chains of each company have been largely overlooked, at least from a national media standpoint. Several major tier suppliers, which provide necessary parts to both GM and Chrysler, have been forced into Chapter 11 bankruptcy proceedings themselves because of the sluggish automotive market and the major changes taking place at both automakers. The latest of these tier suppliers to take the bankruptcy plunge is Lear Corporation (OTC:LEARQ) (Southfield, Michigan).

Lear was forced to seek bankruptcy protection from the Southern District of New York earlier this month after missing an interest payment on its bond debt. Faced with assets of only $1.27 billion while burdened with $4.54 billion in liabilities, bankruptcy appeared to be the only solution for the supplier. Lear is the eleventh-largest global automotive parts supplier in the world and plays several key roles within the North American automotive sector, supplying all of the Detroit Three, as well as numerous foreign automakers.

Lear's bankruptcy comes only weeks after the bankruptcy filings of both Visteon Corporation (OTC:VSTN) (Van Buren Township, Michigan) and Metaldyne Corporation (Plymouth, Michigan), also significant tier suppliers within the automotive sector. The bankruptcy of these three suppliers shines some additional light on the problems facing the automotive sector's supplier network. Despite the federal government's attempts to show that it is being proactive about the plight of the tier suppliers, these suppliers continue to be forced into bankruptcy proceedings month in and month out.

There are currently 1,800 tier-one suppliers who provide parts to GM and Chrysler. To date, only 430 of GM and Chrysler's direct suppliers have received aid as part of the federal government's Auto Supplier Support Program. This program was funded with $5 billion of bailout money and was intended to help suppliers avoid bankruptcy. However, given the volume of red tape involved with the program, as well as the significantly large fees for joining, many suppliers have opted to try and survive without government aid.

Current estimates call for a 30-40% reduction in the total supplier chain within the U.S. in the coming months. This reduction is dictated by the state of the automotive sector, which is, in all honesty and despite both GM and Chrysler's emerging from bankruptcy protection, still not all that good. Consumer confidence in the automotive sector is at an all-time low, and this is reflected in the buying habits of the consumer. Sales continue to drop, which forces the automakers to reduce output, which once again puts pressure on the supply chain to find ways to stay in operation while limiting the products they can produce and ship.

All indications are that the automotive sector is not in for a rapid recovery. Both GM and Chrysler need some time to rebuild their respective images with the automotive buyers. The companies need to make decisions regarding their own infrastructure and have to find methods to simply sell vehicles. As the U.S. recovers from the recession, we should see some of the pressure on the automotive sector lightening up--both at the top with automakers, as well as down the supply chain. However, this will not save many of the tier supply companies from bankruptcy. By the time the sector as a whole recovers, many of these firms, much like Lear, will be forced into the courts and be sold off to pay off their debts. A correction within the massive automotive supply chain was inevitable, but the changes that the combination of a down economy and slumping automotive sales are forcing are massive, rapid and, in many cases, bloody.

Industrial Info Resources (IIR) is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy related markets. For more than 26 years, Industrial Info has provided plant and project opportunity databases, market forecasts, high resolution maps, and daily industry news.