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Advice to auto suppliers who face the threat of their customers going bankru

Advice to auto Automotive Industries spoke to Tom Manganello, president of MICHauto and partner who chairs the Automotive Industry Group at Warner Norcross & Judd LLP

Everyone’s watching the US automotive industry breathlessly – how many auto giants will survive the current crisis? The impact of the auto industry slowdown is huge. Especially in areas like Detroit, the heartland of the US automotive industry. Particularly at risk are the thousands of suppliers to the auto industry. Law firm Warner Norcross & Judd LLP or WNJ is the largest law firm that focuses on the auto industry. The firm has an Automotive Industry Group, headquartered in Detroit that serves auto manufacturers across the globe.

WNJ says its client list include Fortune 500 companies to family-owned Tier 2 firms and small startups. WNJ is a founding member of the MICHauto industry association that is committed to strengthening the automotive industry in Michigan. MICHauto was started a few years ago and its mandate is to help Michigan grow its position as a global leader in automotive research, development and manufacturing. Attorneys from the Automotive Industry Group at the WNJ develop and launch the trade association.

“Since the birth of the automotive industry, Michigan has been its undisputed global hub. For decades Michigan needed little more than its own momentum to maintain that position, but global competition has changed the equation. The focus of MICHauto is to help grow the industry in Michigan by tapping into the immense wealth of knowledge and creativity that is already at work here. While there are other trade associations that focus on one aspect of the industry, such as OESA or SAE, our aim is to embrace the automotive industry as a whole – and Michigan as its proper home,” said Tom Manganello, a partner at WNJ who chairs the Automotive Industry Group. 

Today, the challenges for the automotive industry are far more complex. Suppliers are keeping a close watch on potential bankruptcies among vehicle manufacturers. WNJ offers advice to these suppliers in order to minimize the impact. “Our attorneys keep pace with the rapidly changing legal, regulatory, environmental, sourcing, manufacturing and distribution issues that shape the complicated business relationships between OEMs and global suppliers. We regularly provide counsel on highly specialized issues unique to the industry, such as product liability, supplier contracts, automotive recalls and labor disputes. We also offer broad experience in general business areas, such as real estate and construction, intellectual property, litigation, M&A, bankruptcy, environmental law and others,” says WNJ.

WNJ also has extensive experience overseas in countries like China, Mexico, Europe and Japan. The firm helps US companies locate operations in these regions as well as advising overseas companies in setting up shop in the US. Some of the work WNJ’s Automotive Industry Group has done includes helping a Japanese company sell its automotive parts stamping facilities in Alabama. It helped a US company’s international expansion in Japan, China and Mexico – this included joint venture negotiations and it helped a US company handle disputes in India and Korea.

Automotive Industries spoke to Tom Manganello, president of MICHauto and partner who chairs the Automotive Industry Group at Warner Norcross & Judd LLP.

AI: What kind of advice do you give auto suppliers who face the threat of their customers going bankrupt?

Auto suppliers should be prepared and consider the following steps:

• In advance of any Chap 11 filings conduct an inventory of purchase orders and other contracts you may have.

• Make sure you know which corporate entity in your customer family you’re doing business with. A bankruptcy may put all or part of the corporate entity you’re dealing with into Chapter 11 or an equivalent status, depending on the laws governing the particular corporate entity.

• Watch your customers closely. Make sure that they are conforming to the contracts you have signed with them. The minute they violate a contract, take steps to put them on COD. Carefully watch for public statements or filings that they are not able to meet their financial obligations.

• If you decide to take action against a customer make sure you present them with a well drafted UCC 2609 or “adequate assurance” letter. This letter provides legal protection for businesses , ensuring that if you decide you no longer want to do business with a customer, or you wish to change the way you conduct business with a customer who has repudiated a contract , you are not deemed to be is not in breach of contract.

• Once a customer does go into Chapter 11, make sure that you meet all bankruptcy deadlines, and immediately convert that customer to pay in advance or COD terms.

• Keep careful records of every part you ship to the customer to ensure that you will, indeed, be paid for it.

AI: What are some of the biggest changes you see in the way the US auto industry today? How is the industry adapting to the current crisis?

In the past, a customer and his supplier would arrive at an understanding of what parts to ship and at what price, then a purchase order would follow often well after the relationship was underway. Those days are gone. If you don’t have a purchase order in place before you begin a project for making parts, you don’t do business. If you don’t have the details of the legal obligations nailed down, you don’t do business.

At this point, the industry is not adapting as well it should , but the better run companies are being very diligent in terms of how they are managing their relationship with their customers and customers and are keeping track of their customers /supplier financial position on a daily basis.

That said, the global auto industry has slowed so dramatically that a lot of otherwise healthy suppliers will be harmed, some irreparably. According to a recent survey from OESA /MEMA, one-third of the supply base is currently distressed and one-third is going to be in this coming year. The current distressed supply base – which equates to hundreds of companies – likely won’t make it through 2009 without seeking bankruptcy protection or just folding up shop. The good news is that those suppliers who make it through the next two years should be healthy and enjoy better market share and profits.

AI: How has MICHauto helped auto manufacturers and suppliers face the current crisis?

Organizations such as OESA /MEMA are taking the leadership role in guiding suppliers through the day-to-day ins and outs of this current crisis. MICHauto, which is an automotive accelerator focused on promotion Michigan as a destination, has focused on forging collaborations between industry, education and government to make the auto industry stronger and healthier here in the long run. We are not involved in helping individual companies. Instead, we have been working on ways to recruit, retain and retrain “knowledge base” employees in the industry. For example, we have held two engineering summits with Universities, OEMs, the Department of Labor, Energy and Economic Growth which focused on retraining opportunities related to green, hybrid and diesel technologies.

AI: Do you think overseas investors could potentially bail out Detroit auto companies?

Bailout has such negative connotation .I believe mutually beneficial relationships can be forged between the right foreign investors, particularly those who make small, fuel-efficient vehicles and traditional North American OEMs that build functional products that serve a needed purposes, such as pick-up trucks, some SUVs and minivans.

AI: In your experience, how bad is the current crisis facing the autoindustry? And what can the industry do to tide over the next few months?

The current situation is critical, and the problem isn’t just with the industry. The industry has been in change mode for the past several years. The problem is with the financial crisis that has brought cash flow to a halt. That’s why all global manufacturers, including iconic Japanese companies, have seen their sales drop precipitously.

Right now, the industry must cut spending. There is no way to get around that while we wait for the government to develop a plan to assist appropriately.

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