News of the Collins & Aikman bankruptcy rattled the car industry two months ago, or at least it should have; 9 out of 10 cars produced in North America use parts from the component supplier. Recently bailed-out by its customers who are keeping it afloat with loans and price increases, C&A will stay in business until at least Oct. 1st, at which point all hell may break loose. Of all the messes uncovered in their recent bankruptcy filing, the one getting the most attention seems to be the number of contracts that were entered where C&A knew it would lose money.

The price for a component that?s negotiated during the initial procurement phase is rarely the final selling price for the part. During the development process, there?s a give-and-take that occurs as changes are made, with the supplier hoping to end up with a higher sell price and more profit than they originally bid the business at (often agreeing to take the job at a loss with the hopes of recovering money later), and the automaker attempting to get a better part than they originally specified and at a price less than the going market value. To outsiders, it?s quite a screwed-up way to do business, and has resulted in financial troubles for suppliers and gripes about component price and quality from some automakers (certain manufacturers continue to wonder why they don?t get preferential treatment from suppliers).

If a supplier knows how to play the game, they can make some money. But with competition having driven down prices to a barely-profitable level, it doesn?t take many screw-ups to find one?s financials in the red. C&A currently has at least 35 contracts on which they lose money. Adding to the problems is a defective accounting system that makes it difficult to pinpoint money leaks.

But even though C&A was cutting shaky deals, automakers still kept coming back for more, even though they surely knew that they were getting parts at a price below a profitable level. Why? The lure of a good deal, of course.

A few things are certain. First, automakers that use C&A parts will be looking to move that business into a more stable supplier. Two, the automakers will incur some financial pain in that process; deparation always costs money. Three, one can bet that the memory of this debacle fades quickly and the same mistakes will be repeated again, for this is not the first time such a story has played itself out in the auto industry.

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