Got Chrysler Got Headache
GRAND RAPIDS — Having the Chrysler Group as a customer will mean less revenue, and likely more headaches, for some plastics companies.
That unfortunate scenario is a direct result of the automaker’s plan to reduce production costs and to show a $500 million profit for the year.
A few months ago, DaimlerChrysler AG told suppliers that it’s their way or the highway. Either cut costs to the ailing carmaker by 5 percent this year and 10 percent by the end of next year or find yourself another customer.
That was the message sent to the company’s suppliers by the Chrysler Group based in Auburn Hills.
The reason for the ultimatum?
Chrysler wants to reduce costs by $12.1 billion and improve revenues by $4.8 billion over the next few years.
In addition to plant closings, layoffs, and sell-offs of nonessential assets, getting lower prices from parts suppliers is part of Chrysler’s plan to achieve those numbers.
Industry reports show that about 40 percent of Chrysler’s suppliers have agreed to cut costs to the automaker by 5 percent, while about half either negotiated smaller cuts or other cuts down the road. Reportedly, only 10 percent of Chrysler’s suppliers refused to make any price concessions, and a company executive said those firms would be dropped from the automaker’s list.
“Over the next year, over the next two years, the next product cycle — we’ll say goodbye,” said Chrysler Group COO Wolfgang Bernhard to the Detroit Free Press.
Bernhard added that suppliers who cooperate with Chrysler will see increased business in the coming years.
Chrysler claimed it was paying more for identical parts than either Ford or General Motors. Also, executives found that they were paying different prices for the same parts within the company’s divisions.
The automaker wants to standardize its part procurement process across brands and vehicles throughout the company. Chrysler hopes to save $900 million this year.
But for ADAC Plastics Inc., one of the region’s largest plastics manufacturers with 990 employees and $133 million in 1999 sales revenue, the Chrysler demand has little impact for the firm because the company doesn’t do that much work for the automaker.
“We don’t have a whole lot of business with Daimler,” said Jim Teets, executive vice president of sales and marketing for ADAC. “Have we participated in the 5 percent give-back? Yes, we have. It’s a very small portion of our overall mix.”
Teets said, however, that other companies may not be so lucky. Firms that count on Chrysler for 30 percent or more of their orders may have a difficult time trimming costs by even 5 percent. That’s because to become a large supplier to an OEM, a company normally must offer smaller margins in exchange for the volume of work.
“If the cuts were not in their projections, there could be serious problems for that supplier,” he said. “That’s why some people have said no.”
Some firms in that financial position that don’t want to lose Chrysler as a client haven’t rejected the 5 percent pullback, as it’s known in the industry, but have told the automaker that they were willing to negotiate. It’s their way of telling Chrysler that they can’t afford the demanded cut this year, let alone next year’s, but still want to work with the company.
“Individual suppliers have to look at their book of business to see if it’s profitable, pretty marginal, or if it’s negative right now and they can’t afford to give this back,” said Teets.
“That is the balancing game each and every individual company needs to play.”
Teets explained that the key for suppliers heavily invested in Chrysler is to try to find a way to recoup the lost revenue through improvements to the production process that will reduce the manufacturing cost over the contract’s life.
Industry consultants agree with Teets, and also suggest that plastics companies serving as suppliers to Chrysler become more like ADAC and diversify their customer lists.
“Those suppliers who are almost exclusively with (DaimlerChrysler) will definitely have some challenges. It’s all going to depend on the diversity of the platforms they’re involved in,” said J. A. Crough, director for the automotive group of the Canadian Imperial Bank of Commerce to platicsnews.com.
But there is a downside to becoming more diverse. Even if a plastics firm does find a new customer to replace Chrysler, say an office furniture manufacturer, the change may put the firm’s molder in a tight spot.
“It’s affecting people who don’t even do work with Chrysler,” said auto consultant Jeff Mengel, a partner with Plante & Moran LLP in Auburn Hills.
“The direct impact is only on a limited number of suppliers, but the trickle-down effect has everybody wondering what’s next.”
For ADAC, agreeing to the pullback with Chrysler will cost the firm a few dollars today, but should result in more business from the automaker down the road.
“We said 'Yes' on our small amount in light of some other new product areas that we are getting into with Chrysler,” said Teets.
“And we anticipate some future growth there.”