Why U.S. Taxpayers Will Bail Out Foreign Automotive Suppliers

CIO — Today we take for granted the remarkable and resilient interconnected world of global commerce and the nearly invisible supply chains that allow for a mind-boggling movement of goods: From Wal-Mart's major-league logistics and demand-sensing applications, to Kimberly-Clark's RFID tags on its Kleenex and Huggies products, to your local grocer's everpresent display of tulips from Holland and bananas from South America.

The fruits of this seamless global supply chain are obvious and important: cheaper prices and a wider selection of products to choose from.

Kevin O'Marah, chief strategy officer at AMR Research, says today's global supply chains operate so robustly and efficiently because they are all connected by real-time information—production, logistics and pricing data, to name but a few.

"You can get a bid to build a machine part from a little foundry in India as well as a foundry in Indiana, and you can get that in 20 minutes," O'Marah says. "So you can connect yourself in completely unimaginable ways from even 10 years ago, let alone 20 or 30 years when the supply chain started to really emerge from the old factory work."

But as a result of this interconnectedness, really bad things can happen to nearly everyone. Ripples in one country can wind up being tsunamis in another located half a world away.

When news broke last week that the U.S. Treasury Department would provide $5 billion in financing to cash-strapped automotive suppliers, the overall message was clear: The government is trying to prevent the collapse of the domestic auto industry and the Big Three automakers (GM, Ford and Chrysler) by ensuring that their top (or Tier 1) suppliers will receive the billions in payments owed to them by the Big Three.

The automotive suppliers, which employ more than 500,000 U.S. workers, are suffering mightily from the global economic recession. They're "teetering on the brink of insolvency," according to one auto-supplier executive quoted in a Detnews.com article. (The $5 billion revolving line of credit for auto suppliers will come from the U.S. government's $700 billion Troubled Asset Relief Program, or TARP.)

But the American public should remember that in this globalized economy, U.S. taxpayer dollars will likely be spent elsewhere. In the worldwide automotive supply chain, for example, some of these TARP funds will eventually wind up at auto-parts suppliers in China, Europe, Indonesia, Thailand and elsewhere, according to data from supply chain researcher Panjiva.

Panjiva data shows that 132 of the Big Three's overseas suppliers wound up on Panjiva's watch list at the end of January 2009, "as a result of suffering a 50 percent decline in volume shipped to U.S. customers in the most recent three month period versus the same period a year ago," noted CEO Josh Green on his Panjiva blog. In other words, those overseas suppliers are in just as much trouble as domestic auto suppliers and the automobile sellers they serve.

Panjiva technology also analyzed the U.S. Customs data of three of the biggest U.S. auto suppliers: Lear Corp., Visteon Corp. and American Axle & Manufacturing Holdings Inc. Panjiva found that, in the last three months, Lear had 51 overseas suppliers, Visteon had 39, and American Axle had four.

It remains to be seen whether U.S. tax dollars headed to auto-parts manufacturers in Taiwan will spark the same sort of public outrage as did the AIG executive bonus saga.

Panjiva's Green writes that the future of the global supply chain is most important right now.

"Those charged with assisting the auto industry are right to worry about the health of [The Big Three] suppliers," he writes. "Even if consumer demand picks up, the Big Three will not survive if their supply chains disappear. However, it's not just domestic suppliers that are in trouble right now—overseas suppliers are in trouble, too."