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Suppliers to Confront Challenges Posed by Q1 Production Cuts, GM Exec Predicts

U.S. auto makers recently shaved their combined first-quarter output schedules to 2,407,000 cars and trucks, from the 2,710,700 pegged just prior to the year-end holiday shutdown.

DETROIT – A top General Motors Corp. executive expects some suppliers to face difficulties when the auto maker ramps up production following an extended holiday shutdown at many of its U.S. manufacturing sites.

“I think (suppliers) are going to see challenges in February and March,” GM Chief Operating Officer Fritz Henderson says during a roundtable discussion with journalists at the North American International Auto Show here.

“As (suppliers) start to bring (their) plants back up, if there will be pressures, that is one point you’ll see them. They’ll have to order parts. They’ll have to get up and running. And whether or not they have issues, you’ll find out then.”

With vehicle sales plummeting to record lows last year and GM and rival Chrysler LLC seeking government loans to stave off bankruptcy, much focus has been placed on the OEMs’ production cuts.

U.S. auto makers recently shaved their combined first-quarter output schedules to 2,407,000 cars and trucks, from the 2,710,700 pegged just prior to the year-end holiday shutdown, for a 32.7% reduction compared with year-ago, Ward’s data shows.

GM will trim first-quarter builds by 172,500 units, after taking 19,600 out of the schedule in December, according to Ward’s data.

Suppliers are starting to feel the pain. A recent PricewaterhouseCoopers study found more suppliers are living day-to-day this year, compared with like-2007. The industry consultant predicts bankruptcies and workouts, where an auto maker steps in to recapitalize and restructure the supplier, will grow in frequency.

Henderson suggests a similarly grim scenario, citing suppliers’ plunging market capitalizations, earnings warnings and growing debt levels.

“In the U.S., our suppliers have been excellent to work with in a tough situation, very supportive of what we are trying to do. But you have to be realistic,” he says.

“Our approach has been to be transparent with our suppliers: Talk to them about what we’re trying to do in the business, encourage them to talk to us about what their challenges are and perhaps we can work together. But I would say it is a challenge for our suppliers.”

Henderson says he expects more consolidation among suppliers, which GM typically supports if it creates value. “We’re really pragmatists on this. Working with the suppliers we think, over time, will be competitive.

“With our volumes down, we realize that causes pressure on suppliers. So we need to try and concentrate our business on perhaps fewer suppliers, which means some must go and others will be healthy.”

Lower volumes also suggest the need for consolidation at the OEM level, but Henderson admits auto maker combinations historically have not been successful.

“In the history of our industry, it has destroyed value,” he says. “So, I’d certainly say less volume points to the need for consolidation, but it is not necessarily the answer.”

Henderson declines to speculate on the possibility GM may restart talks with Chrysler, after the auto makers regain their financial footing in the next few year.

The companies shelved discussions to concentrate on their liquidity issues, although GM Chairman and CEO Rick Wagoner told Washington lawmakers in December the two auto makers would combine as a stipulation of loans to get them through the downturn.

“They’re set aside,” Henderson says of the talks. “We just have so much work to do in order to accomplish what we need to get done in the first quarter that I can’t even imagine putting that on top of the challenges we have.”

Henderson also reports GM has not taken action on obtaining financial support from the Canadian government through its subsidiary. The Canadian government has extended up to $4 billion in loans to GM and Chrysler. GM will talk with Canada this month about the support.

“My view is everything comes back to this question of viability,” he says. “And from my perspective, just simply adding debt onto a balance sheet doesn’t help viability. It sometimes detracts from viability, unless you accomplish something with it.

“That’s why we need to have some dialogue with Canada about how it might help. We are very appreciative of the steps taken to provide support.”

Meanwhile, GM continues to pursue money from the $25 billion in loans baked into last year’s energy bill to help U.S. manufacturers retool factories for the production of alternative-propulsion vehicles.

“We’ve been availing ourselves of that plan,” Henderson says, noting the auto maker has yet to receive any funding although it has applied for “billions of dollars.”

Last year, the U.S. Dept. of Energy returned GM’s loan applications asking for additional information.

Says Henderson: “We’re sitting down with the DOE and going over every detail.”

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