Automotive parts suppliers can now take their turn at the bailout trough. The Treasury Department has opened the spigot to the tune of $5 billion. Companies rejoiced. The backdrop, however, is much darker; more like a game of musical chairs with the lights turned off.

A week before the parts maker bailout was announced, an analyst with Grant Thornton warned that 500 auto suppliers were at serious risk of failing, and with them much of the supply chain.

Laura Marcero, who works in the firm’s Corporate Advisory and Restructuring Services group in suburban Detroit, said survival is dependent not only on bailout funds, but also cooperation among suppliers, automakers, banks and the Feds.

The parts makers must look seriously at mergers as part of a survival strategy, she said. “Suppliers struggled to make money when industry volumes were almost double what they are today, and the consolidation that has occurred has been happening mostly among smaller companies at the lower tiers,” Ms. Marcero said.

Now with large suppliers, such as American Axle and Manufacturing, Lear and Visteon facing the possibility of bankruptcy, the situation is “near a tipping point where the scale and scope of supplier failures at all levels will increase dramatically.”

The banks need to realize that turning away from the industry isn’t in the best interests of either party.

“One of the great ironies of the economic crisis is that TARP-supported banks are reducing their exposure to the TARP-supported auto industry, thereby increasing the likelihood that more TARP money may be injected into both industries,” Ms. Marcero said. “Lenders need to be assured that committing a share of their existing and future TARP funds to immediately increase advance rates and/or loosen covenants to allow funds to flow to automotive suppliers is in the best interest of both parties.”

Ms. Marcero doesn’t simply recommend more TARP money to keep the industry afloat. A guarantee of automaker receivables with incremental funding flowing to suppliers will buy some time for the parts makers to come up with consolidation plans.

She also recommends removing the automatic stay of payments provision from the bankruptcy code so that large automotive cases can continue paying for debts incurred before they filed. Without removing that clause an automaker bankruptcy could trigger a string of other business failures.

The boldest suggestion is for the government to show restraint in applying provisions of anti-trust regulations in order to allow suppliers, automakers and interested parties to openly discuss how to consolidate without fear of legal action.

While Ms. Marcero sees some programs in the stimulus bill as spurring a rebound in consumer demand, it will take “more aggressive action to move sales into the 12-million to 14-million-unit range as quickly as possible.” The entire industry needs the infusion of liquidity, she says.

As for the automakers themselves, perhaps the most important recommendation Ms. Marcero makes is that they keep their volume forecasts conservative. That way, suppliers can have a realistic idea of their business volume and plan financing accordingly. Parts makers are reeling from plant closures with only a week’s notice.

All told, this is a tall order for groups that have the kinds of issues that often cloud the scene beyond their immediate worlds. Ms. Marcero says the situation “is not insurmountable.”

It’s a race against time with several obstacles. Excess inventory, excess manufacturing capacity and for the Detroit-based automakers, too many dealers given their likely sales volume once the demand returns to 12 million to 14 million in annual sales. There are political hurdles to changing the bankruptcy code and temporarily setting aside anti-trust regulations. There will be arguments raised about how changing bankruptcy law might effect other large company filings and just how long the Justice Department should allow a skirting of anti-trust law. Those two issues are enough to hold up necessary legislation while time is of the essence.

The high end of the range is still 12.5 percent below the 16 million vehicles sold each year during the past decade. Many of the 9.8 million new vehicle sales expected this year will be existing inventory. Demand will have to rise more than 22 percent to reach the lower figure of 12 million new vehicles sold. That’s a long-shot for 2010.

That leaves parts makers waiting for increased production. more automaker support than ever, and hoping for enough cash from banks and the government to sustain them while they figure out how to survive. Because when the music stops and the lights come on, suppliers could see a lot of chairs missing.