CHRYSLER’S PLASTECH GAMBIT?
Bob Nardelli continues to amaze.
This time, though, it looks like his company miscalculated.
Which explains why Chrysler has been forced to shut down four of its assembly plants, due to lack of parts. Chrysler attorneys claim that the company may be forced to close all of its assembly plants by the end of the week and could lose as much as $225 million this week alone.
It is an impressive public display of the business accumen Nardelli and Cerberus Financial, Chrysler’s owners, have brought to the auto industry.
(more after the jump)
In case you don’t follow the financial news closely, Plastech is the largest minority-owned automotive parts supplier to the Detroit three. It makes plastic parts, such as dashboards, consoles, and other molded pieces, both interior and exterior. Of all the Detroit automakers, Chrysler was its biggest customer.
But, Plastech ran into financial trouble when squeezed between its customers demanding ever lower prices and the ever increasing prices for its petroleum based root stocks.
Though the automakers had been in discussions about ways to aid the firm, Chrysler abruptly decided last Friday to terminate its contracts, effective immediately, and take back equipment used by the company to make Chrysler’s parts. (The extent to which Chrysler owns that equipment is unclear.)
Whereupon, Plastech promptly filed a petition in bankruptcy with the federal court, the kind of bankruptcy used by other parts companies, including Delphi and Dana, to keep operating while reorganizing finances.
Whenever such a bankruptcy petition is filed, the court automatically issues an order freezing the property owned or possessed by the firm.
Chrysler can’t get parts it needs, so it’s had to closed down four assembly plants.
It can’t get the parts, because it cancelled its contracts with Plastech.
It had intended to have the machinery that makes those parts moved to other suppliers, primarily Magna, one of its other big suppliers.
But, the bankruptcy court’s freeze order prevents moving the equipment.
Chrysler’s abrupt termination of its Plastech contracts has now forced Chrysler to shut down four of them. Monday night, it cancelled the second shift at a fifth plant and its lawyers say that the company could be forced to close all assembly plants by the end of the week. The attorneys say the company could end up losing as much as $225 million - this week alone.
It gets better. Chrysler has just initiated a new ad campaign in which they claim that they’ve improved interior quality. According to CNNMoney.com and Dow Jones News, dealers have increased orders in anticipation of the effects of the ad campaign. But, Chrysler is unable to fill all of those orders because of its plant shut-downs. Obviously, closing more plants will just make the situation even worse.
Although both Ford and General Motors are also Plastech customers, they are not having any problems, as they didn’t cancel their contracts. In fact, a GM spokesperson specifically stated that the company “continue[s] to support Plastech as a long term supplier to GM.”
There are indications that Chrysler double-crossed Plastech. According to CNNMoney.com and Dow Jones, Plastech had reached a deal with its customers to accelerate payments in order to keep the company out of Chapter Eleven bankruptcy. But, Chrysler cancelled its contracts the day after that agreement was reached.
What is not clear is Chrysler’s motivation. A Chapter Eleven bankruptcy filing by Plastech would not have endangered Chrysler’s parts supply, just as it has not affected parts supplied to Ford and GM.
It seems possible Chrysler acted to prevent being drawn into a plan that would have required that it, along with Ford and GM, advance money to help bail out Plastech. As the company’s largest customer, presumably Chrysler would have been expected to make the largest contribution to such a scheme.
Perhaps, Chrysler decided that it couldn’t afford to do that.
After all, less than two months ago, Nardelli himself described Chrysler as "operationally bankrupt."
Meantime, the parties will be negotiating. The next hearing in the bankruptcy court is scheduled for February 13th - over a week away.