Deal Revives Chrysler Output: Production Resumes on Interim Accord with Plastech

Production resumed at Chrysler LLC and interiors supplier Plastech Engineered Products Inc. on Tuesday after the two companies reached a deal that temporarily resolves a dispute that threatened to shut nearly all of Chrysler's factories. Chrysler halted production at five assembly plants Monday after the Auburn Hills, MI-based automaker on Friday canceled its contracts with the supplier, which filed for Chapter 11 bankruptcy protection that day.

From Detroit Free Press

AUBURN HILLS, MI — Production resumed at Chrysler LLC and interiors supplier Plastech Engineered Products Inc. on Tuesday after the two companies reached a deal that temporarily resolves a dispute that threatened to shut nearly all of Chrysler’s factories.

Chrysler halted production at five assembly plants Monday after the Auburn Hills, MI-based automaker on Friday canceled its contracts with the supplier, which filed for Chapter 11 bankruptcy protection that day.

The deal lasts until Feb. 15, acting as a stopgap measure ahead of a court hearing slated for Feb. 13, in which Chrysler said it will ask a U.S. bankruptcy judge to force Dearborn, MI-based Plastech to turn over thousands of molds and dies used to make parts for Chrysler vehicles, so Chrysler could have other companies make those parts.

Plastech said Chrysler’s decision forced the company to file for Chapter 11 protection.

So even though production resumed Tuesday night, lawyer fees and other expenses are sure to compound.

"I think it’s going to be costly to both parties," said Jim Gillette, director of financial services at CSM Worldwide. "It’s hard to imagine that relationships get damaged by something like this in the short run and in the long run everything runs smoothly again."

The strife between Chrysler and Plastech arose after the supplier had negotiated two deals with customers for financial aid, mostly through early payments, and was on the verge of a third deal that would have offered the cash Plastech needed for two more months.

But instead, Chrysler sought to cancel its contracts with Plastech, reflecting what appear to be changes in the company’s purchasing practices, six months after Cerberus Capital Management bought a controlling stake in Chrysler and made it the first major privately held U.S. automaker in 50 years.

The episode comes as Chrysler is investigating the health of its suppliers, having hired consultants PricewaterhouseCoopers to examine the operations and financial status of its vendors.

Chrysler also has a new purchasing chief, John Campi, formerly of Home Depot, the retailing giant once run by Bob Nardelli, who is now Chrysler’s chairman and CEO.

Campi, who came out of retirement last month to work at Chrysler, has made it clear that he wants to eliminate wasted cost, complexity and time from the purchasing process.

"My job is to get the best total cost of everything that we get and of the vehicle itself," Campi said in an interview last month. "And that total cost includes taking into consideration things like risk. … There is a risk in having a sole or single supplier. If that supplier goes bankrupt, I’m in trouble."

When a consulting firm investigates a supplier, it typically considers its factory operations, quality, management team and finances, said Michelle Hill, vice president at Oliver Wyman, which recently purchased Troy-based Harbour Consulting.

All of those factors, she said, cascade down to a company’s financial health.

That kind of evaluation has become important as several suppliers filed for bankruptcy in recent years. Suppliers will be tested further this year, as production is expected to drop with lower U.S. vehicle sales.

As for the Plastech dispute, Chrysler spokeswoman Michele Tinson said the five assembly plants that were idled Monday resumed production Tuesday.

But the second shift at Chrysler’s Toledo machining plant will be off all week, Tinson said, after indicating Monday that the cutbacks were related to the Plastech dispute.

"They determined that it wasn’t necessary to work a two-shift operation, regardless of the parts issue," she said.

Tinson also said the company is considering new suppliers for Plastech’s business, but declined to say which ones.

One possibility is Magna International, said Gillette, because Magna and Chrysler have a strong relationship.

Last year, Chrysler was Plastech’s fourth-largest customer, providing $200 million of its $1.4 billion in sales in 2007.

Plastech supplies Chrysler with about 500 plastic interior, exterior and powertrain components for its vehicles.

CSM Worldwide estimated that the production impact amounted to about 5,000 vehicles. GM and Ford have kept Plastech on as a supplier during its bankruptcy reorganization.

Attorneys for Chrysler and Plastech said their temporary deal is confidential. But attorneys representing debt holders have disputed that decision.

"The debtors and Chrysler can’t have this secret, undisclosed deal," said Frank Merola, who represents holders of $100 million of Plastech’s debt.

The company has struggled financially because of the rising price of oil to make plastic.

In 2006, Plastech, which has 7,700 employees, posted losses of $73 million, after recording a profit of $25 million in 2005.