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Detroit's crisis of confidence

Long-term relationships are being shattered by the auto-sales depression.

By Alex Taylor III, senior editor
February 11, 2009: 1:11 PM ET

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(Fortune) -- The Detroit automakers have to prove by next week that they can be financially viable, but they have another big problem that won't be addressed - the shattered relationship with their many suppliers.

To be sure, Topic A is still the Feb. 17 date when GM and Chrysler have to submit their plans for future financial health. The hurdles they must clear are high and numerous: They have to get creditors to bend; reduce labor costs; meet federal fuel-efficiency and emission requirements; agree to manufacture advanced technology vehicles in the United States; and, oh yes, explain how they are going to repay all current and future federal loans.

The automakers already owe the government $17.4 billion and they will almost certainly be back for more. In a visit to Capitol Hill on Tuesday, GM chairman and CEO Rick Wagoner admitted, "The time horizon [for the plan] is short and there are a lot of pieces coming together." But he added, " We are making progress where we need to make progress."

Meanwhile, the supplier crisis looms large.

The automakers have always had the upper-hand because there are hundreds of suppliers but only three manufacturers. The automakers have used their clout to squeeze out every advantage possible when it comes to terms, conditions, and prices.

With vehicle sales way down, many suppliers have been teetering on the brink of insolvency. Manufacturers have responded by playing hardball -- and something worse.

GM (GM, Fortune 500) has been stretching out the terms by which it pays suppliers. Officially, it now waits two months before paying non-production suppliers -- up from 35 days in the past -- and some GM consultants say suppliers must wait 90 days.

At the same time, GM is playing rough with suppliers who fall into financial distress.

Under longstanding industry practice, automakers own the tools in supplier plants that actually make the parts for their cars.

In January, GM yanked its tools from a troubled metal stamping firm that made parts for the popular Chevrolet Malibu, and moved them to two other more financially robust suppliers. It was a rare action and one that was not supported by two other automakers. Honda and Ford (F, Fortune 500) were reported by Automotive News to have kept faith with the supplier and were "propping" it up.

Nobody plays tougher with suppliers than Chrysler. Last year, it faced off against Plastech, a financially teetering maker of plastic parts. When Chrysler threatened to pull its tools from the company's plants, Plastech retaliated by filing for bankruptcy, thus protecting itself under court order. Chrysler sued to get its tools back, but the bankruptcy court ruled against Chrysler, saying there was insufficient cause to grant relief.

Now Chrysler is involved in another nasty legal squabble that made its way into the automotive press this week.

Faurecia Interior Systems of Pontiac, which made parts for Chrysler models like the PT Cruiser and Dodge Avenger, sued to recover $45 million in engineering and research and development costs that it alleged Chrysler refused to pay.

According to the suit, Chrysler agreed to pay the costs as a surcharge placed on every individual part that Faurecia produced. But when sales of the vehicles fell, and production was chopped by as much as 73% below the forecast volumes, Chrysler refused to adjust its prices.

The dispute will be aired in a Michigan state court. Regardless of who wins and who loses, however, there will be no rebuilding the level of trust that has been destroyed. To top of page


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