Canadian suppliers are sounding the alarm that the road ahead will be rocky — even make-or-break — as vehicle production continues to resume amid the COVID-19 pandemic.
Some warned of a financial crunch after months without work, while others say their backs have been put against the wall by automakers unwilling to bend rigid timelines.
Linamar Corp., the second-largest Canada-based supplier by annual sales volume to automakers, is monitoring the health of Tier 2 and 3 companies, as well as tool-and-die makers. The coming months are “going to be the most critical” for suppliers as they manage their cash flow, said CEO Linda Hasenfratz.
“It’s something we’re keeping a very close eye on. Obviously, the next couple of months for a lot of suppliers are going to be very tough from a cash-flow perspective,” she said.
Tim Galbraith, sales manager at mold maker Cavalier Tool & Manufacturing in Windsor, Ont., agrees.
“We’re fortunate enough to be one of the companies that’s doing well, but my concern is the last two quarters of this year, with programs in the automotive industry that have been postponed and canceled,” he said. “It’s going to have a devastating impact on the industry, probably in the third and fourth quarter this year.”
During a May 28 podcast by sibling publication Automotive News, Magna International Inc. CEO Don Walker said the supply sector faces a “liquidity crunch” as payments from customers dry up.
“When you shut down, you get payments from our customers for parts delivered up to 60 days after we delivered them. So, you have cash coming in the door. When you start up, that cash is no longer coming in the door, and the supply base has to pay everything to get their operations started again.”
Magna, based in Aurora, Ont., is the world’s third-largest supplier of parts to automakers based on annual sales.
Just how vulnerable is the supply chain? Over the last four weeks, Laurie Harbour, president of Harbour Results, a Michigan-based consultancy primarily for small and medium-size companies, began working with six suppliers, including two in Canada, in need of restructuring plans.
“If you’re a company that was significantly in debt and not performing well to start the calendar year, which there were many of those companies, then this pandemic is going to be very challenging, and for some people they likely won’t make it.”
Tier 2 and Tier 3 suppliers are the greatest concern, said Harbour.
“Many of them are very weak financially, and to go down for eight weeks has really devastated them. There’s federal funding to help these guys; however, all that does is put a Band-Aid on the probem.”
Over the next two to five months, Harbour expects to see bankruptcies and consolidations partially because “banks aren’t being as forgiving as they may have been.”
Some automakers have thrown lifelines to suppliers facing such challenges. Ford Motor Co. instituted a program to pay invoices earlier than usual, according to Bloomberg News.
General Motors also created a program that “enables suppliers to obtain early payment” from the company “in exchange for a discount,” said GM Canada spokeswoman Jennifer Wright.
GM said 17 suppliers have signed up for the program, which was created in August 2019, and another 24 were “in discussions” to join the program amid the pandemic, as of May 28. Wright declined to say if any Canadian suppliers were among those that have signed up.
Fiat Chrysler Automobiles Canada was “using a myriad of approaches to support our distressed suppliers,” and “continue adapting [its] efforts as unique scenarios arise,” said spokeswoman Lou Ann Gosselin, although she would not elaborate.
Jonathon Azzopardi, president of Windsor-based mold maker Laval Tool, said some automakers, which he did not identify, have allowed suppliers “no leeway” on timing and costs, despite challenges in sourcing certain components during the pandemic. Azzopardi singled out Japanese automakers as being generally more “cognizant of the fact that there’s a cost related to this pandemic.”
If a critical supplier has to shut down because of the pandemic or another problem, it can be difficult to meet customers’ demands, Azzopardi said, citing his company’s decision to bring in workers over the Victoria Day May 16-18 long weekend to fulfill orders.
“I had people that should’ve been off that weren’t off,” he said. “We were paying 2.5 times salary just to try and maintain what we could for the customer.”
Galbraith echoed Azzopardi, saying some automakers are more flexible on fulfilling orders than others.
“We’ve got everything from cooperative customers who understand that we’ve had to reduce staff and that the supply chain is broke and it’s hard to get some things— they understand, and they’re very willing to work with you.”
“And then you have some customers who are just pounding their fists on the desk and saying they won’t take any excuses: ‘You will meet your deadlines.’”
A ‘DELICATE’ IMBALANCE
The pandemic is showing “how delicate the automotive space really is,” Azzopardi said. “The lack of profitability, the lack of forgiveness in time and lead time, the justin-time deliveries — all of these things have made our industry so delicate and so susceptible. We have so many things that make us strong, but there are certain aspects that make it very delicate.”
Rob Wildeboer, chairman of Ontario-based Martinrea International Inc., said automakers are likely to reward suppliers that demonstrate flexibility and emerge from the pandemic in a strong financial position. Martinrea is Canada’s third-largest supplier of parts to automakers by annual sales.
“I think coming out of this, the [automaker] is going to need to appreciate the financially strong and technologically advanced supplier because the industry needs them,” he said.