2nd UPDATE: Chrysler Shutdown Pushes Suppliers Closer To Brink

Troubled U.S. auto-parts suppliers were dealt a new blow Thursday when Chrysler LLC said it will temporarily idle most of its manufacturing during the bankruptcy process starting Monday.

The move, which appeared to take the supply industry by surprise, intensifies pressure on parts makers already reeling from General Motors Corp.'s (GM) announcement last week that it also would idle most assembly plans this summer. Along with lost production, suppliers are at risk of having their payments from Chrysler disrupted as the auto maker's finances are managed in bankruptcy court.

To keep its supplier base from collapsing, Chrysler is seeking approval from the U.S. Bankruptcy Court in Manhattan to extend up to a total of $550 million in financing to its troubled suppliers.

The auto maker is also asking the court for permission to continue participating in the U.S. government's Troubled Supplier Program, through which Chrysler identifies suppliers that need federal assistance.

"Many suppliers may simply lack the financial wherewithal to continue in operation after a precipitous and unplanned period of nonpayment, particularly in light of the extraordinary economic pressures facing the automotive sector," Chrysler said in court papers.

Two suppliers on Thursday refused to ship parts to Chrysler, forcing the auto maker to close a Warren, Mich., factory ahead of the planned shutdown, President Tom LaSorda said in a conference call with reporters.

Chrysler and GM factories could be down for up to nine weeks, an unprecedented slowdown for the U.S. auto industry. Standard & Poor's Ratings Services on Thursday threatened to downgrade its ratings on six parts suppliers, noting the impact of production cuts in the wake of the Chrysler bankruptcy.

Chrysler's move threatens to push many suppliers closer to bankruptcy, and could ultimately lead to disruption in the flow of parts to healthier auto makers, such as Ford Motor Co. (F), which plans to continue operating through the summer, said Dave Andrea, vice president of industry analysis and economics for the Original Equipment Suppliers Association.

"With a tremendous amount of effort and cost, the system has been able to hold together," Andrea said. "But with every piece of news like this, that becomes more difficult. This is where we could see disruptions at Ford and other auto makers that are still running."

Ford spokesman Todd Nissen said the auto maker doesn't anticipate a production disruption, but is monitoring the situation.

The Chrysler shutdown will likely lower U.S. auto production to 8 million cars and trucks for 2009, Andrea said, which would be less than half what it was in 2000. He said about half of U.S. suppliers will likely be in "significant distress" as a result of the cuts, up from 35% to 40% at the end of the first quarter.

GM's summer shutdowns will cut output by 190,000 vehicles, or 25%.

Around 400, or about one-fifth, of top-tier parts makers have enrolled in a U.S. Treasury program launched this month to guarantee receivables in case of an auto maker bankruptcy, said Craig Fitzgerald, an auto analyst with Plante & Moran in Southfield, Mich.

"That assistance took a little bit of the sting out of a bankruptcy," he said. "But it doesn't solve the problem" of production cuts.

Fitzgerald said more government aid will likely be required to avoid a "cascading and devastating " effect on the U.S. auto industry.

Suppliers' ability to survive the shutdown will largely depend on the willingness of banks to continue financing the companies through the impending revenue shortage, OESA's Andrea said.

"The most significant indicator as to whether a supplier will see the other side of this is if they have a banking relationship that is willing to stick with them," he said.

S&P said Thursday it put Harman International Industries Inc. (HAR), Johnson Controls Inc. (JCI), Magna International Inc. (MGA), Shiloh Industries Inc. (SHLO), Stoneridge Inc. (SRI), and TRW Automotive Inc. (TRW) on CreditWatch with negative implications. The rating firm said "potential systemic risks could arise because of the interconnectedness of the North American supply base." Many smaller suppliers could fail because of the Chrysler bankruptcy and the extended shutdown at GM, which would pose a problem for suppliers that purchase parts from their smaller counterparts, which could force auto makers to idle production.

-By Sharon Terlep, Dow Jones Newswires; 248-204-5532; [e-mail]

(Eric Morath contributed to this story)