Bankruptcy is pervasive in the North American automotive supply chain, as it grows increasingly common to continue doing business while under the protective legal shelter of Chapter 11.

Half of supplier respondents and more than 68% of OEM respondents to Ward’s Supplier Survey say their companies do business with parts makers that now are or recently were in bankruptcy.

Auto industry analysts have identified more than 30 bankruptcies filed on behalf of suppliers they track. The latest Ward’s survey, however, suggests the number is much higher, perhaps when including smaller Tier 2 and 3 suppliers that draw less attention.

Responding to the question were 157 supplier representatives and 181 OEM employees.

Chapter 11 is a court-supervised process that allows a company whose debts exceed its assets to stay in business while it reorganizes, with an eye toward restoring long-term profitability.

The goal is to create an orderly procedure that allows for employees and lower-tier suppliers to continue being paid, while parts shipments to customers go on uninterrupted.

In reality, however, the term “bankruptcy” is so emotionally charged that it feeds suspicion about corporate mismanagement, job security and a company’s viability. Assurances from a bankruptcy judge only go so far.

For instance, nearly a third of supplier respondents to this year’s survey say their companies are finding it difficult to get paid by supplier customers that are bankrupt.

Likewise, more than 22% of OEM respondents say their companies are finding it difficult to get components delivered from bankrupt suppliers.

“Last year was a loss due to customers’ bankruptcies,” a supplier respondent writes.

Delphi Corp., the No.1 supplier in the U.S., filed for bankruptcy last October, while Federal-Mogul Corp. has been in Chapter 11 for nearly five years. The impact of those two bankruptcies is enormous, a supplier respondent writes.

“Banks are not willing to provide a line of credit to suppliers who are too heavily exposed to Delphi, Federal-Mogul and others,” he says.

As bankruptcies heighten anxiety within the supply community, change is inevitable.

“People adjust – even customers,” a supplier respondent writes. “Organizations only change with failure or inspired leadership. The latter is rare. Forced rebirth is preferable to slow death.”

One supplier participant says his plant is closing this summer due to bankruptcy, and another writes his company emerged from Chapter 11 a year ago. “Now we need to turn a profit.”

The customer mix also is changing for a number of suppliers as they seek more stable – and in some cases more profitable – business.

“Our sales have shifted from 80% OEM and 20% aftermarket to 20% OEM and 80% aftermarket,” a supplier respondent writes. “We will survive.”

The possibility that one or more of Detroit’s auto makers also could end up in bankruptcy is stirring fear within the industry as well.

Some 22% of OEM respondents say they fear their own company may declare Chapter 11 in the near future, and half of supplier respondents agree a Detroit auto maker in bankruptcy would be devastating for their companies.

“Our biggest customers are Ford and GM. If they stopped paying us…” a supplier respondent writes, apparently afraid to finish his thought.

An OEM participant says auto makers and suppliers depend on each other. “We can’t survive without our suppliers, and they need us,” he writes. “If we outsource too much, then all cars would technically be imports.”

tmurphy@wardsauto.com