Government action to avoid historic cash crunch in auto manufacturing

Manufacturers throughout the automotive supply chain face the prospect of no revenue and continued payables. Getty Images

As of Tuesday afternoon, out of 44 automotive OEM manufacturing facilities in the U.S., two remained open. Every OEM plant in Canada is shut down. Overall, North American automobile manufacturing capacity is down more than 87 percent this week.

Those dizzying, unbelievable stats came from John Bozzella, president and CEO of the Washington, D.C.-based Alliance for Automotive Innovation, a new trade group that launched in January whose members include most automotive OEMs with a North American presence and their upper-tier suppliers. Bozzella spoke yesterday during a webcast, hosted by the Center for Automotive Research, about how the industry is navigating the COVID-19 pandemic.

“For the health and safety of us all, we have a temporary suspension,” he said. “Now, the government is effectively shutting down the economy. We have closures and shelter-in-place orders, which has created a demand cliff.

“This is an impossible scenario for the automotive industry over a long period of time,” he continued, “to have no revenue and to continue to have payables. This is why large players, as well as medium and small players—everyone, really—need access to liquidity while the economy is shut down. We need to focus on liquidity in order to ramp back up.”

Liquidity has been the central focus of government response. Earlier this week the Fed announced strong actions to prop up the corporate bond market. A just-passed $2 trillion aid package, about $500 billion of which could be used to support the auto sector, has components involving extensive loans and loan guarantees.

“It’s a major aid package,” Bozzella said. “And with all the loan guaranties, there’s a multiplier effect. We’ve really never seen this before.”

Overall, the auto industry is in a very different financial place than it was in 2008. “Balance sheets are much stronger,” Bozzella said. But when you turn the whole machine off and have no sales, the working capital model just doesn’t work. It’s never good to have no revenue and continued payables. [To solve this problem] is the purpose of the government’s focus on liquidity and the action the Fed is taking.”

Moving forward, Bozzella explained, the auto industry has two priorities. The first, again, is liquidity. The second is the need for the auto industry to be deemed an “essential” business.

“Every company has to make an assessment how their processes within their facilities can assure the public health and safety of company employees and their communities. That has to be first. After that, we need alignment between the federal government’s guidance on the transportation industry being part of critical infrastructure … and the state and local orders about what needs to close and what can remain open.

“I don’t think we need to choose between public health and the economy,” Bozzella continued. “I think we can do both together.”