More than a fixer upper

GM and Chrysler will receive $13.4 billion in Treasury loans, which could be followed by an additional $4 billion in March. This will require compromise from the automakers, shown through reductions to their debt obligations and an agreement with the automakers' union to cut wages and benefits.

A relief package will offer a "psychological advantage," says Joe Catalano, chief operating officer for Autobacs Strauss. "I do think that there's a tremendous psychological effect on the whole economy, which will once again bring an increase in consumer confidence that will help the aftermarket in the short term," he said before the bailout was approved.

"Automakers have to renegotiate contracts with the unions and adjust labor cost to make cars to compete in the global market. Politicians don’t want to talk about that too much. Benefits and labor costs must come down. As for the collision market, it continues to shrink," says Gary Bell, president and co-owner of Northside Collision in Cicero, N.Y.

And any help from the government will lead to a more robust aftermarket in the long-term, say aftermarket executives. Overall, 2009 should be a better year for the aftermarket than some expect. People are keeping their vehicles longer, and many of these vehicles have reached their "sweet spot," the point at which it's prime for replacement parts. Deferred maintenance also is leading to bigger-ticket items, estimate a number of industry leaders.

"This has certainly been a volatile year for the global economy," says Steve Handschuh, president and COO of the Automotive Aftermarket Suppliers Association (AASA). However, "there are definitely bright spots in our industry and opportunities ahead."

For one, Handschuh notes "vehicles eight years old or older fail at a rate double that of vehicles less than eight years old. At present, 56 percent of all vehicles on the road are more than eight years old. This bodes well for the future of our industry."

The road ahead for OEMs and their suppliers will be more difficult. They will be forced to rethink the way they go to market, their product lines and overall operations, while unions will need to retool salaries, job structures and their future with vehicle manufacturing. This will likely involve adopting the business model of Asian carmakers that build vehicles and parts in the U.S.

What happened?

Right at press time, the White House passed the $13.4 billion short-term loan package to get GM and Chrysler through the end of the year using part of the $700 billion from the Troubled Asset Relief Program (TARP) funds, which were set aside for the financial bailout last fall. ($9.4 billion is slated for GM and $4 billion for Chrysler. For now, Ford will not receive any federal assistance.)

Another $4 billion would be made available to the companies in March, provided they can demonstrate financial viability. If not, the loans will be recalled, most likely leading the companies directly to bankruptcy.

The relief sought by automakers was initially estimated at $15 billion, but ballooned to $34 billion when the Big Three each pleaded their case individually to Congress. The result was a proposal for an amended $14 billion, just enough to stop financial losses until a new administration and different Congress could take over. Passed in the House, it was then was killed in the Senate when parties could not agree on items like reduced worker salaries and the shifting of health care to a government fund.

But unwilling to let the U.S. economy suffer another blow, the Bush administration approved the loans without Congress' consent, though the loan package did include many of the restrictions and concessions addressed in the failed legislation.

And though costly, the bailout's price tag is cheap compared to what bankruptcy could cost taxpayers — up to four times more than the bridge loan proposal, with no chance of repayment — according to a study by Anderson Economic Group and BBK.

What's in store?

If bankruptcy is ahead for the Big Three, it could lead to more supplier consolidation and disruption in the supply chain, says Rebecca Lindland, a market researcher for Global Insight, in Lexington, Mass.

"Once the supply chain is interrupted, it takes weeks and months to recover. When you think of all the people getting their cars serviced, it could be a week to 10 days before we can get a part, or even longer," she says.

Aftermarket parts distributors should diversify their supplier base and rethink their customer base, say those we spoke with.

"The industry isn't going away," says consultant Angelo Onello. "It may expand, contract, twist or turn. The ones who are going to survive are the ones that adapt."

But a domino effect is imminent for the aftermarket, so industry executives are closely watching domestic automakers. Almost 4 percent of U.S. gross domestic product is auto-related, and the U.S.-based auto industry is second only to the semiconductor industry in R&D spending, according to the Engine of Democracy, a site created for advocacy of the auto relief package.

"The impact of the failure of even a single U.S. carmaker would be devastating," says Handschuh. "More than two million jobs would be lost and more than $100 billion drained from our nation's economy, according to a recently released study by the Center for Automotive Research (CAR)."

What changes will we see?

In exchange for the loan, GM and Chrysler must accept limits on executive pay, give the government access to financial records and not issue dividends until the debt is repaid.

The automakers must also cut their debt by two thirds in an equity exchange, make half of the payments to a union retirement fund in equity, eliminate a program that pays union workers when they don't have work and have union costs and rules competitive with foreign automakers by Dec. 31, 2009.

The government rejected letting the companies go bankrupt, much to the relief of suppliers.

"It is true that many large and well-known corporations across all industry sectors have successfully entered Chapter 11 and emerged strong and healthy," says AASA's Handschuh. "But we believe this option would put suppliers at particular risk."

Nancy McLean of ACDelco, a company owned by GM, says the loan will help the auto industry weather a storm that's not particularly of its own making. "The U.S. credit freeze and essentially closed capital markets have resulted in a liquidity squeeze at a time when manufacturers' cash flow from operations are devastated by plummeting consumer demand," she adds.

But the industry is not completely innocent. At press time, overall industry sales were down 36 percent, with American automakers hardest hit because of a decades-long focus on larger vehicle lines — SUVs and trucks — while import marques like Toyota and Honda have embraced hybrids and alternative fuel technology.

"The catastrophic decline in new car sales this year will have repercussions throughout the automotive industry," says Bruce Hartin, president of Allpart Supply and Haweka USA, companies that sell garage equipment repair parts. "One can only assume that this will ultimately increase repairs on existing cars since new cars are not replacing older vehicles. However, fears about the economy and recent job losses will probably slow repair and maintenance cycles."

The domestic auto industry and the automotive aftermarket will eventually recover, but the current situation leaves one to wonder which industry will step up and ask for help next. N

Krista McNamara and Mike Seuffert contributed to this article.