Bare knuckles in Detroit
Chrysler's legal battle with Plastech reveals a new get-tough approach on both sides.
|General Motors Corp. is no longer the clear leader in global auto sales. It now officially shares the title with Toyota Motor Corp.|
NEW YORK (Fortune) -- A temporary truce has been declared in the war between Chrysler and one of its suppliers, but the shockwaves continue to ripple through the auto business. Industry watchers are divided on who the real winner was.
Supplier-automaker relations in Detroit have never been for the faint-hearted. Automakers make nasty customers because they usually hold the upper hand - there are hundreds of suppliers but only three customers. So when suppliers complain about contracts that require them to lower prices, provide higher levels of service and eat increased raw material costs, the response is always "Like it or lump it." Not surprisingly, as industry volumes have fallen, limiting the opportunities for scale economies, parts makers have been plunging into bankruptcy like lemmings falling in the ocean.
Not in years, though, has an industry witnessed a knock-down, drag-out fight like Chrysler vs. Plastech. Consider this chronology of events:
Plastech's Cinderella story made it one of the bright lights of the supplier business. It was founded - and is still wholly owned - by a Vietnamese woman, Julie Nguyen Brown. With a bachelor of science degree from Tulane, Brown had returned to her native land but was forced to flee in 1975, one week before the fall of Saigon. Settling in California, Brown worked as a waitress to get her brother through high school and then got a masters in engineering at Wayne State University in Detroit.
After working as an engineer at Ford, she founded Plastech, a plastic injection molding company, in nearby Dearborn in 1988. Making such parts as engine covers and door panels, it had grown to $1.4 billion in sales and 8,000 employees, with 35 plants around the country.
Like other suppliers, Plastech was being squeezed by high material costs and lower volumes. To keep it afloat, Chrysler and other customers advanced $46 million in early 2007 and then another $40 million early in 2008. The automaker had a vested interest in propping Plastech up so it could keep production lines running - and so it wouldn't have to go through the headache of retrieving its production tooling. Auto companies usually own the tools made to produce their parts, even though they are located in supplier plants, for reasons of quality and security, and to protect themselves in case of a financial collapse.
But Chrysler came to feel as if it were being blackmailed by Plastech. In its lawsuit, Chrysler says that it "was no longer willing to engage in the brinksmanship and hostage-talking approach" that Plastech pursued. So last Friday, it terminated all its business with Plastech and sent a team of trucks to Plastech's Michigan factories to retrieve its tooling.
Just as NFL coaches freeze a kicker by calling a timeout before he makes a field goal attempt, Plastech froze the Chrysler trucks with a bankruptcy filing. As the team of trucks "were in the process of entering the Debtor's facilities," according to the Chrysler complaint, "the Debtor filed its petition." As a result, Chrysler was unable to retrieve its tooling. With no stockpile of parts on hand because of just-in-time inventory control, it was forced to shut down production at four assembly plants and worried that it may have to shutter its other ten plants as well.
Was the imbroglio a case of Chrysler's new management overplaying its hand? With a large stock of unsold cars, it probably felt it could survive a shutdown of a few days. Or was Plastech, a scrappy company by most accounts, just engaging in the kind of tactics that had enabled its rapid rise?
One industry executive, now retired, sees the standoff as a case of Chrysler, or its new private equity owners, drawing a line in the sand when it comes to supplier bailouts. Having been burned by other suppliers, it didn't want to fork over any more cash.
That's all part of Detroit's new way of doing business. But this executive worries that Chrysler has undermined the trust it can expect with the supplier community. As a result, he says, "suppliers will become much more reluctant to provide technology and support for their restructuring." Worse, now that Plastech is operating under Chapter 11, the bankruptcy court now has more control of the situation than either Chrysler or Plastech.