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Getting Credit Flowing Again

Getting Credit Flowing Again

Paul Freedenberg

We are living through unprecedented times. A combination of the credit crunch and the automobile industry’s shaky financial condition is making it extremely difficult for many companies to survive in the manufacturing technology sector. A recent survey revealed that fully two-thirds of the companies in this market segment are exposed to the auto industry. Those companies are particularly vulnerable to credit reductions or even cut-offs from their lenders.

The U.S. Dept. of Treasury’s allocation of $5 billion from the Troubled Asset Relief Program (TARP) to the Auto Suppliers Support Program was intended to offer some liquidity to the auto supply chain. Only $3.5 billion of that money has been disbursed, but that is not the problem. Rather, the Treasury Dept. decided that disbursal under this new relief program would be delegated entirely to the troubled automakers themselves, and for their part, General Motors and Chrysler have decided to provide the cash only to their Tier 1 flow auto suppliers. That leaves everyone else, including the manufacturing technology sector, to fend for themselves.

It is understandable that the two troubled auto giants would worry first about their immediate parts suppliers. Three and a half-billion dollars is not a huge amount of capital to disburse, particularly when one remembers that the auto supply chain employs approximately eight times the number of people working at the Big Three.

Nevertheless, the company executives that I interact with every day at AMT - The Association For Manufacturing Technology tell me that the market for capital equipment has never looked bleaker. Most AMT members have seen their business drop off 40 to 70 percent. Some have seen no orders at all for months. It is not all the result of the drop-off in auto sales. Much of it is attributable to the overall credit crunch that began last fall.

This is a situation that needs to be addressed if there is to be any substantial manufacturing technology industry at all after the credit crunch and auto crisis have passed. Apart from the $17 billion for GM and Chrysler (plus the additional $3.5 billion so far for auto suppliers), the TARP program seems to have done little to induce capital to flow to the manufacturing sector. Indeed, a significant majority of AMT members tell me that their lenders have either reduced their credit line or threatened to cut it off entirely.

Unfortunately, the American Recovery & Reinvestment Act of 2009 (ARRA) enacted in February did little to address the immediate problem. Many of the infrastructure improvements planned can be done with equipment currently in inventory, and many of the new “green” projects won’t even be up for bid until sometime in mid-autumn.

It would be expected that small companies could turn to the Small Business Administration (SBA) to get them through the credit crunch. Unfortunately, Congress dropped the SBA direct-loan program that was in the House version of the ARRA, and despite the allocation of $730 million in new authority given to SBA, the criteria for SBA support emphasizes cash flow for applicant companies. That alone disqualifies many AMT companies who have seen their business drop off the table. If Congress were serious about helping companies through the current crisis, it would have directed SBA to change its loans qualifications to more reasonable criteria such as backlogs, assets, employment levels, and historic performance.

There are other, existing government programs that could be tailored to help the manufacturing sector. In an earlier column, I discussed the Defense Production Act’s (DPA) authority to guarantee loans to companies that could be considered to be a critical part of our nation’s defense industrial base. That program could be enhanced and billions in new credit could flow from the DPA if Congress determined that saving the manufacturing technology industry, in particular, and American manufacturing, in general, were important enough.

Whatever Congress decides, the decision must come quickly. The normal deliberative legislative process just won’t do. Credit needs to be pumped into the manufacturing sector as quickly as possible, or the next set of hearings on the subject will be a postmortem review of what led to the failure of so many companies.

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