The Last Laugh is on Chrysler
Cerberus recently sent a letter to its Chrysler investors, perhaps intending to reassure them. It may have had the opposite effect. According to the Detroit News and Detroit Free Press, the letter attempted to lower investors’ expectations by claiming Cerberus had bought Chrysler “very cheaply, and [we] do not need to be heroes to earn a good return on the investment.”
However, the letter also acknowledged that Chrysler faced “significant risks” and disclosed that the company has only $8 billion in cash. The letter acknowledged that there were three scenarios that the company might not be able to survive: a “potent recession,” a “meltdown in the automotive market,” or the collapse of the auto finance market. In reality, however, these are not separate scenarios, but merely three facets of one economic picture. Any one would lead to the occurrence of the other two.
The letter concluded by saying that “[w]e believe Bob Nardelli is one of the best and toughest CEOs in the country, which, in our view, is exactly what the auto industry needs.
Well, you can judge that one for yourself.
(more after the jump)
Exhibit A for your consideration, however, might be the decision of the federal bankruptcy court in Detroit yesterday, ruling that Plastech will retain all of the tooling which Chrysler had claimed to own and which it had attempted to take from Plastech’s plant. The tooling is used to make interior parts for Chrysler cars and trucks.
You may recall from a post about two weeks ago that Chrysler, LLC had decided to cancel its contracts with Plastech. Plastech was in a financial bind due to the rising price of oil, which affects the prices it pays for plastic feedstocks. Alone among the Detroit auto companies - who are all Plastech customers - Chrysler decided to play hardball and cancel its contracts with Plastech, rather than participate in a bail-out plan agreed to by the other car makers. Chrysler then served a state court order on Plastech allowing Chrysler to remove machinery used to make the parts, machinery which Chrysler claims it actually owns.
The move backfired: Plastech filed for federal bankruptcy court reorganization and within hours the bankruptcy court issued a “stay order,” one that nullified the state court order and required the machinery to stay with Plastech until there was a full hearing in bankruptcy court.
The immediate effect was that Chrysler interrupted its own parts supply, and had to close down four assembly plants for almost a week. Chrysler was forced to cut a temporary deal with Plastech for it to continue making parts to reopen them.
But, if he who laughs last laughs best, then Plastech got an even better laugh yesterday.
After a full hearing, the bankruptcy court ruled that the machinery will remain with Plastech indefinitely, machinery which Chrysler claims is worth $167 million.
That means that Chrysler can either negotiate a new deal, very likely at higher prices, with Plastech for it to continue producing the parts or it can replace the machinery and have the parts made elsewhere. Of course, if Chrysler only has about $8 billion in cash, replacing the tooling would cost about one-fortieth of Chrysler’s entire cash assets. Even then, it would take the company months for the tooling to be built and production ramped up elsewhere. Though the judge did rule that the equipment might be released later, if Plastech did not pursue reorganization with sufficient vigor, that’s not going to do much for Chrysler – which has immediate need for the parts made by those machines.
So, Chrysler is going to have to strike a deal with Plastech to keep that company producing the parts. Realistically, it has no other choice.
Chrysler claims that participating in the bail-out plan would have cost it $100 million, illustrating precisely how expensive it is to be in the car building business.
On the one hand, Chrysler faced spending $100 million to keep a supplier of crucial parts afloat.
On the other hand – the hand it elected to choose – cancelling the contracts created a parts shortage that cost Chrysler, by its own admission, tens of millions in plant down time. Additionally, the company has been deprived of tooling worth $167 million and is now forced to negotiate a new deal with Plastech for parts. Doubtless, it will be paying significantly more for them, because the deal will have to be approved by the bankruptcy court, which is legally obligated to protect the financial interests of the bankrupt Plastech.
Perhaps Nardelli took a calculated risk which just didn’t pan out. But, the impression is that Nardelli was blind-sided, that he didn’t understand the consequences of forcing Plastech into bankruptcy. For that there is no excuse: parts suppliers in Detroit, large and small, have been filing for bankruptcy organization for over a decade.
Perhaps the real reason things turned out so poorly for Chrysler was pinpointed in a remark made by a mid-level General Motors executive during the Chicago auto show, a man who has held a variety of positions in GM’s operations on four continents. Asked about the whether executives from outside the industry lack the necessary background to run an auto manufacturer, he paused, smiled slightly, and said,
“There is a certain nuance to the car business.”