Companies cut ties with risky customers

[RedEarth]

.....from naked capitalism

Companies Paring Exposures to Risky Counterparts


As much as some optimists would like to find evidence of recovery, it is far more likely that the US will see a further deterioration in economic activity. We have not yet seen much in the way of bankrupticies and debt restructuring. Until this sort of thing becomes sadly routine, the bottom is not yet nigh.

One sign that conditions are worsening is that major companies are cutting their exposures to business partners they deem to be in peril. This is a corporate version of the paradox of thrift. While this activity may seem laudable as far as each actor is concerned, it will have the effect of pushing some enterprises over the edge. And those failures feed the downspiral of activity and psychology.

From the Financial Times:

The world’s biggest companies are terminating contracts with customers they fear will collapse, a report will show on Monday in a sign of the turmoil spreading through global supply chains.

Of the 337 international corporates surveyed by accountancy firm Ernst & Young, most of which turn over more than $10bn a year, the majority said important customers were in financial distress and were taking longer to pay than usual.

A quarter said one or more key customers had gone into bankruptcy while almost on in ten said suppliers had gone out of business. As a result, a third of the companies surveyed have stopped trading with customers they perceived as high risk.

John Murphy, global managing partner of markets at Ernst & Young, said managers would have to scrutinise the health of even ultra-safe trading partners very carefully. “A company’s risk profile can change almost overnight,” he said.

http://www.nakedcapitalism.com/2009/02/companies-paring-exposures-to-risky.html