Global Insight Perspective | |
Significance | Chrysler LLC and Plastech Engineered Products reached a temporary agreement yesterday that allows the latter to continue shipping parts to the former, averting the need for the automaker to idle its entire stable of 14 U.S. assembly and component plants by the end of the week. The agreement lasts until 15 February, two days after the next scheduled bankruptcy hearing between the two companies. |
Implications | Chrysler‘s recent actions may have been a deliberate ploy to get Plastech to accept lower prices or to counter the supplier's aggressive negotiating approach. However, its bluff seems to have been called, as the re-sourcing of business to competing suppliers is a long, difficult, and expensive move to be made only as a very last resort. |
Outlook | The agreement will be in place until 15 February, but the battle is by no means over. Whether or not Chrysler continues to sue for possession of its tooling or tries to get Plastech to accept what it views as more reasonable terms will depend on the outcome of the bankruptcy court proceedings. |
The battle between Chrysler LLC and bankrupt supplier Plastech Engineered Products has receded slightly, as the two sides have reportedly come to an agreement over the resumption of shipments of parts to Chrysler plants. The drama began on Friday (1 February), when Chrysler officially ended its contracts with Plastech and insisted on retrieving tooling for nearly 500 different parts. The move triggered Plastech to declare bankruptcy, halting the tooling removal but also shipments to Chrysler, resulting in the idling of at least four plants on Monday (4 February). Chrysler said in a court filing that it would no longer participate in the "brinksmanship and hostage-taking tactics" it claimed Plastech employed, but the two sides have now apparently reached an agreement that will see Plastech continue to ship parts to Chrysler, preventing a shutdown of the automaker's 14 U.S. assembly and component plants. The tentative agreement is due to last until 15 February, two days after the 13 February bankruptcy court hearing on Chrysler's case.
However, the tentative agreement has led to some parties crying foul, according to a report in Automotive News. The trade publication quotes Frank Merola, an attorney for the second-lien note-holders for Plastech's debt, who disagrees with any special secret agreements between Chrysler and Plastech in the wake of the latter's recent bankruptcy declaration. "We have to remain cognizant that Chrysler caused this bankruptcy and the debtor is currently a debtor in possession", said Merola. "The debtor [Plastech] and Chrysler cannot have a secret, undisclosed deal...everyone is entitled to see and vet what that deal is", he added. "At this point, regardless of what the debtor agrees on for an interim basis, we are of a position that the debtor is not in a position to grant Chrysler relief on behalf of its estate for anything, and we intend to hold Chrysler fully responsible", Merola said. Chrysler has not taken kindly to being accused of causing Plastech's bankruptcy. "We vehemently disagree with the contention that we caused this bankruptcy", said Mike Hammer, an attorney for Chrysler.
Outlook and Implications
More and more, it looks as though Chrysler attempted to force Plastech to agree to better terms and conditions for their contracts, using the threat of de-sourcing as a stick to beat back Plastech's forceful tactics. Unfortunately for Chrysler, Plastech appears to have called the automaker’s bluff with its bankruptcy filing. Although Chrysler may have sent a very forceful message to suppliers that are not developing and changing with the shifting fortunes of the market, it has risked serious losses as a result of idle plants. Although it is true that Chrysler had hoped to reduce production somewhat during the quarter, no automaker wants to reduce inventories and cut production because they were forced into it. Production cuts are something that companies want to implement on their own terms.
The idea that Chrysler can go in and simply pluck tooling from Plastech, reseat it with competitor suppliers, and be up and running again in a matter of days is also highly improbable. The amount of work, testing, validation, sub-supplier co-ordination, line set-up, and trial runs needed to make the same parts at a wholly different location is extremely costly and is typically measured in weeks, not days. Even moving a production line within a given plant requires a huge amount of approval and paperwork to comply with automakers' quality standards. There is no guarantee even that the tooling created for one manufacturing line will work on a competitor's line without significant modification, which again would require significant time and money. Considering that Chrysler had contracts for 500 parts with Plastech, the idea of taking tooling from the company and installing it elsewhere without expecting a major stoppage of production lines is bewildering. All of this adds further credence to the idea that Chrysler was attempting to call Plastech’s bluff.
As to who is to blame for Plastech's abrupt bankruptcy filing, a case can be made for the argument that Chrysler pushed the supplier into bankruptcy through the cancellation of US$200 million in business, but that was simply the last step in a long, drawn-out saga that has plagued Plastech for well over a year. The supplier received a US$46-million bailout last year, US$40 million in accelerated payments as of 22 January this year, and was reportedly seeking another US$200-million bailout for 2008 as well. Constant bailouts will not fix a business that is evidently fundamentally broken; Chrysler's refusal to continue to play the game was its attempt to draw a line in the sand. Bankruptcy is not necessarily a bad thing overall, as it allows for extreme measures to be taken in the restructuring of a company to bring it to a profitable position, or perhaps even the divestment of parts to refocus the business. To say that Chrysler caused the bankruptcy by finally deciding not to pay more money is overly simplistic.