Risks to auto sector recovery: bankruptcies of auto suppliers in East Asia and the USA
| DOI | https://doi.org/10.1108/JABS-02-2013-0010 |
| Published date | 02 August 2013 |
| Date | 02 August 2013 |
| Pages | 231-243 |
| Author | Harlan Platt,Marjorie Platt |
| Subject Matter | Strategy |
Risks to auto sector recovery: bankruptcies
of auto suppliers in East Asia and the USA
Harlan Platt and Marjorie Platt
Abstract
Purpose – Early warning models are a widely employed development in modern finance. A good early
warning model predicts with a high degree of accuracy the likelihood that a healthy company will either
go bankrupt or become financially distressed. Now that B2B companies supply products worldwide, the
risk of disruptions to business continuity due to supplier failure is international. This paper aims to focus
on early warning models.
Design/methodology/approach – This paper extends the research comparing indicators of financial
health to the subject of how industrial globalization affects early warning models. In specific, it considers
models developed across two continents: North America and East Asia. The targets of the research are
global auto suppliers, companies that deliver parts and equipment to original equipment auto
manufacturers.
Findings – The findings are particularly important because of the collapse and resurrection of US
original equipment manufacturers (OEMs). The modeling effort tested the ability of a single global model
of financial distress to capture the determinants of auto supplier health on the two continents. Individual
models for each continent proved to be superior to a single model.
Originality/value – This paper is the first to compare bankruptcy models for auto suppliers between
China and the USA.
Keywords China, United States of America, Automotive components industry, Globalization,
Bankruptcy, Financial distress, Early warning model, Global business
Paper type Research paper
Introduction
Due to the symbiotic relationship between automotive original equipment manufacturers
(OEMs) and their automotive supply chain, the bankruptcy of the US automobile industry in
early 2009 has placed enormous pressure on auto suppliers’ solvency. Not long ago, there
were reports that auto suppliers, with their 587,000 employees and $139 billion in annual
sales, were at risk of joining the flight to bankruptcy[1]. As GM and Chrysler (Fiat) work their
way out of severe financial problems, the impact of these OEM decisions may have
substantial impact on auto suppliers’ financial condition in the short- and long-run, which
may in turn affect the OEMs’ ability to produce and deliver cars to meet customer demand.
Further complicating the sector’s path to recovery is the move to source many auto
components internationally, especially from China and South Korea where the auto supplier
industry has grown exponentially in the past few years.
Automotive OEMs and their purchasing departments are justifiably concerned about the
financial health and well-being of suppliers. With many OEMs sole sourcing product or
depending on international deliveries, entire production lines can be shut by a failure in the
supply chain. Among the techniques available to manufacturers to assess the health of
suppliers the most common are:
DOI 10.1108/JABS-02-2013-0010 VOL. 7 NO. 3 2013, pp. 231-243, QEmerald Group Publishing Limited, ISSN 1558-7894
j
JOURNAL OF ASIA BUSINESS STUDIES
j
PAGE 231
Harlan Platt is based at
Finance and Insurance
Group, Northeastern
University, Boston,
Massachusetts, USA,
Marjorie Platt is based at
Accounting Group,
Northeastern University,
Boston, Massachusetts,
USA
Many suppliers in the US have
manufacturing plants in Mexico
and elsewhere in Latin and
South America. For that reason
we ignore companies in the
southern hemisphere.
Received 27 February 2013
Accepted 6 March 2013
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