Global Insight Perspective | |
Significance | A bankruptcy court judge is scheduled to deliver a verdict tomorrow in the court case between bankrupt supplier Plastech Engineered Products and Chrysler, to determine if Chrysler can remove its tooling to alternate suppliers or whether it needs to stay with Plastech. Both sides have extended the current shipping arrangement, scheduled to end last Friday (16 February), until 27 February. |
Implications | Chrysler has said that it would see production losses of no more than four to five days, if it can get all the tooling it wants on its schedule; Plastech has called that impossible, citing a 24-40 month schedule to remove all the tooling and ancillary systems required to make the parts. Waiting in the wings is Magna's Decoma group, one of the biggest plastic trim makers, which is reportedly offering to take the business off Plastech's hands. |
Outlook | The result of the ruling will likely determine how healthy Plastech's chances of survival are going to be; if it loses the US$200 million in Chrysler revenue, there is no doubt that its restructuring task gets more difficult. But with Magna and potentially JCI waiting in the wings to pick up Plastech business, it may need to adjust its thinking if it is to survive at all. |
The dispute between struggling supplier Plastech Engineered Products and Chrysler continues to be fought in the courts, but the two sides agreed late last week to extend a temporary production agreement until 27 February as a judge decides the fate of Plastech's business with Chrysler. Chrysler has requested all of the tooling for some 500 parts that Plastech supplies to Chrysler, saying that if it can receive the tools, that it can set up production with alternative sources and lose only four or five days of total vehicle production. Chrysler representatives also reportedly testified that the company could build vehicles without the specific Plastech components and park them, adding the components in off-line procedures at a later date. Plastech representatives however decried the scenario as impossible, stating that not only the primary tooling would have to be removed from 21 of the suppliers plants, but also ancillary second-level tooling such as fixtures, jigs, computers, frames, and other systems necessary to build Chrysler's parts. "There are 4,000 items on this list. It's physically impossible," testified Plastech vice-president of operations Donald Coates while looking at a manifest of all the tooling used to make Chrysler parts.
Who Gets the Business?
A bankruptcy court judge is expected to deliver a ruling tomorrow on whether or not Chrysler can begin to remove its tooling from Plastech plants, a process that Plastech says will take 24-40 months, all told, and will likely result in the dissolution of the company. Plastech argues that losing the Chrysler business (nearly US$200 million in revenue, or 15% of the company's total in 2007) would irreparably harm its ability to restructure and get decent financing for its bankruptcy. But if Chrysler does get its way and has the ability to remove its tooling, it has already reportedly begun talking to suppliers to step in with replacements.
According to a report in Automotive News, one of the top suppliers angling to get a chunk of that business is Magna, and its Decoma interior trim division. Nearly half a dozen suppliers are expecting to receive contracts for production work, according to sources quoted by AN, but Decoma is reportedly slated to get the lion's share of the interior and exterior trim business, including mouldings, fascias, and fascia assemblies. Magna and Decoma reportedly declined to comment, and a Chrysler spokesperson reportedly stated that he was unaware of any contracts being made while the court fight continued. Decoma reportedly would receive a price premium for the production work in the short run, but has offered much better pricing in the long term than that given by Plastech.
Outlook and Implications
The outcome of tomorrow's court decision will be crucial in a number of ways. It is safe to say that Plastech has already lost the Chrysler business; even if the court rules in Plastech's favour, the contracts for the current vehicles will almost certainly not be renewed for the next generation of vehicles. As for which side is more accurate in its assessment of the impact and length of time needed to move the tooling out of Plastech's facilities, the real answer likely lies somewhere between Chrysler's figure of four or five days and Plastech's claim of 24-40 months. For Chrysler to say that its plants would only be down for less than a week is astonishing. The amount of tear-up required to physically move a component production line from one location to another completely different facility with a totally different supplier will take much longer than five days, Plastech is right about that. As to whether or not it would take up to 40 months to get everything out, that seems also far-fetched; Plastech could presumably reorganise and be out of bankruptcy even well before that. What is simply more puzzling is why Chrysler, which is doing a revamp of nearly its entire product line-up over the next two years with Cerberus' blessing, did not simply let the current production contracts die with the current models, and source an alternate supplier for the next-generation products. Such a scheme could potentially have even been finagled into providing current-production cost benefit, if future contracts were linked to current cost reductions.
As for Magna's involvement, the company is currently Chrysler's biggest supplier, and looking to expand. Magna was one of the finalists reported to be in the running to acquire Chrysler last year when it was up for sale by Daimler, but lost out to Cerberus Capital Management. Magna, and specifically Decoma, are top-notch manufacturing experts which are widely and well regarded as one of the best suppliers in terms of performance and partnerships. But even for Magna and Decoma, an effort such as taking on a significant amount of interior trim business and getting it up to production speed and quality in as short an amount of time as possible is an enormous undertaking. Decoma has as much a chance as any of actually accomplishing it, but Chrysler would almost certainly be down for much more than just four or five days. Producing vehicles without Plastech components and then adding the newly supplied, alternative supplier products later is also out of the question, given the amount of tear-up and opportunity for defects that would almost certainly result from such actions. The most logical action plan is the one that Chrysler CEO Bob Nardelli imparted to Global Insight on the floor of the 2008 Chicago Auto Show two weeks ago: an orderly transfer of business and tooling from Plastech to Chrysler's chosen suppliers, but likely at a rate considerably faster than that quoted by Plastech.
But one other unknown is just what role Johnson Controls will play in the unfolding drama. A report obtained by Automotive News suggests that JCI was looking to acquire some of Plastech's business in the days leading up to the bankruptcy declaration a couple of weeks ago, but the status of any bid JCI has made for Plastech's business has not been confirmed. JCI has already helped to keep Plastech afloat through reported bail-outs in concert with the Detroit Three automakers, but whether or not JCI would get some of Plastech's business now or wait for its bankruptcy strategy to become known in the hopes of getting a better deal is currently uncertain.