June 16, 2011
Contacts in the U.S. automotive parts sector, as well as those in technological products, have been lining up to report disruptions to the supply line in the aftermath of the Japanese earthquake, tsunami and nuclear crises. But the impact on parts suppliers and their credit departments should be limited to a short-term phenomenon, says one auto analyst, and should not affect their ability to make payments to their creditors.
This month's release of the Federal Reserve's Beige Book featured reports from several of its 12 districts that productivity in the automotive parts manufacturing sector has been thrown off by Japanese supply-line disruptions. Among those feeling the biggest impact are the Cleveland, Atlanta and St. Louis districts. There have also been disruptions for producers of high-tech products, which are highly dependent on small Japanese components, in the Boston and Dallas districts, the Fed noted.
Auto analyst Jim Gillette, of IHS Automotive told NACM that disruptions were already occurring before the disaster because capacity was taken out of the system as a response to the economic downturn and its slow rebound. The Japan tragedy more exacerbated business problems that were already in play than created them, Gillette contended.
However, Gillette said previous increased global demand—in part because of booming emerging economies in Brazil, India and China—means suppliers, for the most part, should have strong enough cash flow positions to not be imperiled by the disruptions. Additionally, he believes the disruptions will be short term in nature, and that supply-line conditions should return to normal by year's end.
"It doesn't look like the suppliers have experienced anything that will make them severely delinquent in their payments," he said.
Gillette said suppliers also got a bit of luck, during the recovery period anyway. Toyota's production ability rebounded much faster than anyone predicted, even the company itself. Also, there was a temporary slowdown in U.S. auto demand because the Big Three domestic companies pulled many car-buying incentive programs shortly before the tragic disaster, and demand fell quickly from consumers unwilling to buy without price breaks or other throw-ins.
Perhaps the biggest impact of the Japanese disaster will be a self-imposed increase of costs on the part of suppliers to have some sort of sourcing backup to ensure production won't grind to a halt during future unexpected events.
"Suppliers have been scrambling over the last two decades to find the lowest priced source which, very often, meant one location geographically; that's a risky strategy that left many getting burned," said Gillette. "The result will be a larger amount of cost in the system to cover backup sourcing. As such, suppliers have to understand what their real cost in the future will be and make sure they don't underbid their pricing."
Brian Shappell, NACM staff writer
Newest Beige Book Released
Though the Federal Reserve's newly released Beige Book economic summary found an economy still slowly growing on aggregate over the last six weeks, the pace continues to decelerate in key bank regions including New York, Philadelphia and Chicago. Even the once mighty manufacturing sector, responsible for much of the growth measured in the last year, is starting to see its expansion rate slip in several areas and as concern creeps in, according to Beige Book. Check out NACM's online blog for our popular breakdown of the 12 Fed regions highlighted in the latest Beige Book.
A change to the Bankruptcy Code's venue provisions has long been a part of NACM's legislative position.
Currently, the vagueness of the statutes, which govern the jurisdiction in which a debtor can file a bankruptcy petition, allows filers to essentially choose where they'd like to conduct their reorganization. This has led to a glut of larger bankruptcies being filed in only two of the nation's many bankruptcy venues: the U.S. Bankruptcy Court for the District of Delaware and the U.S. Bankruptcy Court for the Southern District of New York.
These two districts are generally believed to have the savviest staffs and the ability to handle the most complex cases. While each district has its own set of characteristics, both are generally considered to be fairly debtor-friendly.
This raises fundamental questions of fairness when it comes to the process of actually filing a case: why should a debtor be allowed to choose where it files simply because it has a small subsidiary, or is incorporated, in Delaware or New York? Why shouldn't the debtor be forced to file where their principal place of business is located, or where their headquarters are? But in addition to these concerns, there are also some tangible negative effects that can often come up as a result of a debtor's decision to file in one of these two districts.
"Where a case is filed can have significant impact on the outcome," said NACM in its last legislative issue brief. "Filing the case in a jurisdiction other than that of the main offices of the debtor creates a roadblock for participation by trade creditors and employees." Indeed, smaller creditors may lack the travel budget necessary to participate effectively in a case filed in New York or Delaware, thereby limiting their ability to maximize their recovery. "Selecting a venue outside of the debtor's location increases the cost of participation by the debtor when travel and housing costs are added to the case. It also takes the debtor away from the business location to participate in activities related to the case," NACM added. "The courts in the local jurisdiction typically have a better understanding of the debtor's business and the local labor and financial environment."
Currently, NACM and its Government Affairs Committee are hoping to work with lawmakers on making the Bankruptcy Code's venue statutes fairer and more well balanced among the needs of debtors, creditors and the courts themselves. If you have any experiences dealing with a debtor who chose to file in a distant district, we'd like to hear from you. Send your story to email@example.com.
Jacob Barron, NACM staff writer
The first five months of 2011 were quite active with respect to weather disasters in the United States as significant tornados hit areas including Missouri and Massachusetts, among many others, as well as the presence of Mississippi River flooding that forced many out of their homes and businesses. And that doesn't even take into account potential man-made problems and that the annual hurricane season, predicted to be more active than normal this year, hasn't even gotten started. These factors will equate to problems for some U.S. businesses keeping up with paying their debts.
So, what does a credit manager do once disaster strikes and leaves a business vulnerable? If they're a long-term client or even a newer one that shows a lot of potential, either as a business itself or as a future reputable partner, the answer is simply "work with them," said David Osburn, David Osburn & Associates LLC. Osburn said disasters, while tragic from a human toll standpoint, are often a hiccup from the business side for companies that operate in a solid way.
"It is temporary; the bottom line is when you see they're real people and have a bright future, we want to be with them," Osburn said during his Credit Congress educational session "How to Collect the Debt and Keep the Customer."
Maria Ortego, credit and billing manager of Louisiana-based Acme Truck Line, Inc., told NACM her company had to make the decision repeatedly regarding whether to work with and be flexible with its debtors in the fallout of Hurricane Katrina and the BP oil spill, two of the largest disruptions to the flow of domestic business in recent memory. Ortego said Acme was slightly more lenient on terms than usual.
"These were long-term customers and we knew that things would work their way out," said Ortego, who noted Acme itself had to make some business changes after Katrina because nearby post offices were completely flooded, resulting in lost checks and invoices. "Mail was sitting in containers between here and Houston for a month and a half. For a time, we didn't know who was paying and who wasn't because we couldn't get our mail." Ortego added that the company does not believe any of its customers took advantage of the situation or purposefully perpetrated fraud against Acme. However, there are many out there who will and do use disasters to undeservingly get relaxed terms or flexibility not in their agreements, claimed Osburn.
"Will companies play off the natural disasters? Yes they will, even though it's morally reprehensible," Osburn said. "People may have lost their lives, but they'll play off those events anyway, big time. Morals have been challenged for more than five years now. A lot more credit professionals are being lied to."
That's why Osburn, even though he takes the "work with them" stance regarding those recovering for disaster, notes it's critical to know your customers. By doing so, it helps credit professionals spot inconsistencies and abnormalities in information from the debtor.
"You've got to be able to smell a rat," he said. "The word is g-u-t. Use your gut!"
Brian Shappell, NACM staff writer
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Colombia, party to one of the three pending free trade agreements (FTAs) in the United States, has completed a series of labor rights commitments, clearing yet another hurdle on its way to FTA approval.
The Latin American country completed, ahead of schedule, the second stage of its Colombian Labor Rights Action Plan, which was agreed to between U.S. President Barack Obama and Colombian President Juan Manuel Santos in April. The plan committed Colombia to strengthening enforcement of its country's core labor rights, increasing protection of labor activists from violence and reducing impunity for perpetrators of violence against union members.
All of this makes it increasingly likely that the long dormant Colombia FTA will be submitted for Congress' approval before the end of the year. "Today's labor action plan commitments are an important step forward in our efforts to pass the job-creating Colombia free trade agreement and build on Colombia's progress strengthening labor rights and safety," said Senate Finance Committee Chairman Max Baucus (D-MT), whose committee's jurisdiction includes international trade. "These steps forward on the labor action plan will continue to enhance Colombia's work to improve labor rights, reduce violence and punish violent offenders. We're working together to move this trade agreement forward along with crucial assistance to help American workers meet the challenge of global competition."
Cheers came from the other side of the aisle as well, via House Ways and Means Committee Chairman Dave Camp (R-MI). "Colombia has again met its commitments, and it is time for the U.S. to meet its commitment by moving forward with the long-pending trade agreement with this critical ally. I urge the administration to do its part and submit the Colombia trade agreement for Congressional consideration. We cannot afford to delay any further," said Camp, who has repeatedly criticized the administration for taking too long to submit the nation's trio of pending FTAs that also include Panama and South Korea. "U.S. workers, farmers, ranchers and businesses will continue to lose market share to competitors from countries that have ratified trade agreements with Colombia while we let our own agreement languish. The time for U.S. action is now."
Jacob Barron, NACM staff writer
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Though overall business optimism has appeared to remain on a small upswing, or at least level, that of small businesses continues to wane as the slow economic recovery has repeatedly failed to demonstrate signs of acceleration. Meanwhile, some of those same small business owners take issue with more recent mainstream media and analysts' suggestions that credit has been easier to come by for companies.
This week, the National Federation of Independent Business' (NFIB) Small Business Optimism Index slipped for the third straight month in May by a slight 0.3 points. NFIB characterized the present index reading (90.9) as that of a "recessional-level reading."
"Corporate profits may be at a record high, but businesses on Main Street are still scraping by," said NFIB Chief Economist Bill Dunkelberg. "Washington is throwing misdirected policies at the problem...The failure to understand why small business owners are not hiring or investing has resulted in a set of policies that have not been very effective."
The results corresponded with the decline found in the Wells Fargo/Gallup Small Business Index for the first-quarter, released earlier this spring, which found small business owners' positions shifting from slightly-to-moderately positive to neutral.
Wells Fargo followed that up this week with a report that small businesses are still finding it exceedingly difficult to access credit with any kind of favorable, or even perceivably fair, terms. The firm's study found that at least 30% of responding company representatives found credit hard to come by during the last year, and 36% believe it will be increasingly difficult to do so in the next 12 months. Despite economic growth, albeit tepid, conditions changed little in the Wells Fargo study from the first quarter to the second quarter. The peak in actual difficulty was slightly more than 35%, reported in Q1 2010, according to Wells Fargo statistics.
Businesses did, however, get at least one piece of somewhat good news this week...sort of. The Producer Price Index (PPI) statistics for May showed a 0.9% increase, mostly tied to increases in food and energy costs. The good news was that experts had expected the PPI to increase at a much higher rate.
Brian Shappell, NACM staff writer
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An amendment that would've required agencies to more closely consider the potential economic impact of regulations on small businesses has failed in the Senate. Originally proposed by Senators Olympia Snowe (R-ME) and Tom Coburn (R-OK), the amendment garnered support from a majority of members on the committee with jurisdiction over the legislation, but fell victim to a parliamentary maneuver that required it to meet a 60-vote threshold.
Newly named the Freedom from Restrictive Excessive Executive Demands and Onerous Mandates Act, or FREEDOM Act, the amendment had previously been submitted, and rejected, as a tag-on to a bill reauthorizing the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs. Those, ultimately, failed anyway. Specifically, it would've required agencies to consider indirect economic impacts in small business analyses, enforce existing periodic rule review requirements and penalize agencies that refuse to conduct these reviews.
"In meetings and Main Street tours, a top concern I continue to hear from small businesses is the stifling effect of onerous federal regulations. The failure of agencies to regularly review regulations with an eye toward reducing needless burden stifles a small business' ability to grow, plan for the future and create jobs," said Snowe. "It is critical the effect of federal regulations on small businesses be taken into greater consideration throughout the entire regulatory process."
Democratic support for the bill was scarce due to what was considered a lack of congressional review, which was cited by Sen. Mary Landrieu (D-LA), chair of the Committee on Small Business and Entrepreneurship, of which Snowe is the ranking member, in her decision to vote against the amendment. "Every day, small business owners come to my office asking for regulatory relief, and I am committed to removing unnecessary burdens that get in the way of the day-to-day operations of businesses," said Landrieu. "This amendment, however, has yet to have a single congressional hearing. Because Senator Snowe's amendment reaches so far outside of the realm of small business, it seems irresponsible for us to move forward unless it goes through the entire process."
"I recognize that some federal regulations are a burden on small businesses. I agree it is important to streamline them, but there is a time and a place to deal with that issue," she added.
Jacob Barron, NACM staff writer
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