By John W. Schoen Senior producer
updated 3/3/2006 3:10:59 PM ET 2006-03-03T20:10:59

U.S. auto parts maker Dana Corp.'s decision to file for Chapter 11 bankruptcy protection Friday is going to throw sand in the gears of the already ailing U.S. auto industry.

Hit by higher costs and a slowdown in trucks sales at its two biggest customers, Ford and General Motors, Dana has been unable to stop bleeding red ink. Now, the financial meltdown of one of the world’s biggest suppliers will likely drive parts prices higher, putting further pressure on Ford and GM.

Though the bankruptcy filing was not entirely unexpected, some Wall Street analysts were advising clients as recently as last week that the company would be able to avoid it. Dana had been in talks with its lenders and had hoped to negotiate new credit lines to stay afloat. But this week, after Dana missed an interest payment on outstanding debt, the company ran out of options.

"The general financial condition of the industry, together with Dana's inability to renew or expand its credit facilities in a timely manner, has significantly constrained Dana's liquidity," the company said in a statement.

Like much of the U.S. auto parts industry, Dana has been caught in a downward spiral that shows no signs of easing. Higher energy and raw materials costs have taken a bigger bite out of its revenues. A steep drop in vehicle sales – especially SUVs and light trucks – means fewer parts orders for the company, which makes brakes, axles and other vehicle parts.

And auto makers, looking to ease their own financial pain, continue to pound their suppliers for lower prices. Parts customers like GM and Ford are increasingly demanding the so-called “China price,” according to Efraim Levy, an auto industry analyst at Standard & Poor’s.

“Parts companies used to be able to get a premium because they did the best job and their technology was better,” he said Levy. “Now (their customers) just say, ‘We can get this done in China at a substantially lower price. So either match it or we’ll take the business away, and forget the quality issue.’”

The result is mounting losses for the auto parts industry. In October, Delphi Corp., the biggest U.S. supplier, also filed for Chapter 11 bankruptcy protection. Visteon Corp., the second biggest, has announced plans to close three plants and put another six up for sale.

Last year, Dana said it would cut 5 percent of its work force of 46,000, close three plants in North America and Australia and sell parts of its business to sharply reduce costs. But those measures haven’t been enough to get the company back on track. In January, Dana said it lost nearly $1.3 billion in the third quarter of last year.

Not all of Dana’s problems are beyond its control. The company admitted last October that its bookkeeping was so bad it had to re-do six quarters worth of financial statements. In December, the company cut $44 million from profits already reported for the period starting in 2000 and ending in June, 2005. The company said it didn’t properly account for some customer price increases and supplier reimbursement costs. The Securities and Exchange Commission is looking into whether Dana violated federal securities laws.

Wanted: Better cars
Much of the analysis of the U.S. auto industry's financial woes has focused on the relatively higher labor costs borne by domestic auto makers compared to their foreign rivals. Japanese companies building cars in U.S.-based plants typically face lower pension and benefit costs for retirees, for example. As a result, some industry observers point to the next round of contract talks in 2007 as a possible solution to the industry’s mounting losses.

But while U.S. car makers have foundered, foreign competitors have fared relatively well, picking up market share even as Ford and GM have slipped. Levy estimates that from 1990-2005, auto sales rose 22 percent. But “transplant” brands accounted for some 90 percent of that growth, while domestic brands captured less than 10 percent.

The reason? “It’s the vehicles themselves,” said Levy. “You have to have products that people are excited about buying. And you also have to make sure they’re happy with the ownership process and they’re not taking them to the shop more often for a domestic brand than you are for a foreign brand.”

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