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Reading headlines from the early days of the financial crisis, the dollar amounts of federal aid and economic stimulus then seen as a solution to the US economy’s problems seem positively quaint. Just as the Treasury has added an extra zero to those figures, it should have been clear from the start that the initial $13.4bn instalment of government loans to General Motors and Chrysler would only be the tip of the iceberg.
Economists have put the total tab for rescuing the Big Three as high as $125bn. Yet even this figure ignores the collateral damage caused by the carmakers themselves as they try to stem the bleeding from their balance sheets. Car parts makers, which employ twice as many people as GM, Chrysler and Ford combined and produce $14,000 or more than half the end value of each vehicle, are being squeezed. By sharply curbing car production in January and extending payment terms, the Big Three are conserving cash largely at the suppliers’ expense. Output in January of cars and trucks was down by half and, as suppliers are paid 50 days after billing, they face a potential cash crunch in coming weeks.
Suppliers are now lobbying for tens of billions in aid or loan guarantees to forestall a wave of bankruptcies in their ranks. Yet a rescue is more complicated to arrange with such a diffuse group. About 500 suppliers produce 80 per cent of the parts by value but an additional 4,500 companies, some two or three stages removed in the payment chain, are also in potentially serious trouble. In addition to direct loans, the suppliers have asked for federal guarantees on receivables from the Big Three, estimated in December to be $13bn.
After warning of “collapse” if a big car company went bankrupt, Detroit’s web of companies is now collapsing in slow motion anyway as annualised sales slip below 10m vehicles, the lowest in 27 years. Taxpayers face a far larger bill than they imagined back in December.
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