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The Tight Squeeze At Chrysler

News: Analysis & Commentary: Cars

The Tight Squeeze at Chrysler

Its cost-cutting is souring relations with suppliers

Talk to sales reps at one Detroit-area auto supplier about relations with Chrysler these days, and you're likely to get an earful. The cost-cutting pressure coming from the U.S. unit of DaimlerChrysler has been building for months--and that, they complain, is hurting the cooperative relationship they shared. The give-and-take at meetings, says one executive, has been replaced by one-sided demands on the part of Chrysler representatives. And once-flexible goals have become unforgiving. The result: Chrysler may be blowing years of painfully built goodwill for short-term cost savings. "They're only interested in the bottom line," laments the exec, who asked not to be identified. "There's a sense they're going to nail suppliers."

Unfortunately, the drastic steps look plenty warranted--and are likely to continue. Facing soft sales, high rebate costs, and the cost of launching new vehicles, DaimlerChrysler on Sept. 26 announced that it would report a $600 million loss at its Chrysler unit in the third quarter. The red ink will likely increase the pressures on Chrysler, which was already expected to cut more than $2 billion as part of a $5.7 billion corporate belt-tightening.LONG-TERM FALLOUT. That means suppliers will have to adjust to a more adversarial stance from a carmaker long seen as the most supplier-friendly in Detroit. And that could mean long-term consequences for Chrysler. "By emphasizing the hard costs, I think there's a risk to the essence of Chrysler's purchasing system," says Ronald A. Taddross, an analyst who follows suppliers for Credit Suisse First Boston. He fears suppliers might neglect things that produce long-term savings, such as being helpful in rushing orders, as they struggle to make current goals.

Adding to the sense that severe cost-cutting is just around the corner, DaimlerChrysler announced on Sept. 11 that James D. Donlon is returning to the Detroit office from a top finance job at German headquarters. Insiders say Donlon is expected to play "bad cop" to Chrysler President James P. Holden's "good cop" in pressing both internal and external savings.

Chrysler execs say suppliers' fears are misplaced. Jeffrey Trimmer, director of operations and strategy for procurement and supply, says the company has asked suppliers to cut costs by only 6% in 2000, compared with 5% last year. But that's not necessarily an easy adjustment. A supplier doing $300 million in business with Chrysler would have to find an extra $3 million. And many suppliers are already struggling with razor-thin margins.

Trimmer insists that the changes have been ongoing and expects most suppliers to make the cuts by re-examining their manufacturing operations. But for many suppliers the shift is more profound. Pre-merger Chrysler was renowned for working closely with its suppliers, a group that accounted for an industry high of 70% of the parts used in its vehicles. The enthusiastic response it earned from suppliers as new products were jointly developed meant that Chrysler's manufacturing costs shrank in turn. By 1998, its tight supplier relationships had helped Chrysler become one of the lowest-cost producers in the world. It also boasted the highest profits per vehicle. "Chrysler made the most progress when it was different from everyone else," says Thomas T. Stallkamp, the brains behind the former supplier scheme and now president of supplier MSX International Inc. And ordinary is likely to be dangerous territory for the Chrysler unit.

One supplier, grousing about the shift, suggests that his company may shop its best technology at other auto makers if the trend continues. And that is a cost that Chrysler can ill afford.By Jeff Green in DetroitReturn to top


Where It's Starting to Hurt

DaimlerChrysler's U.S. arm needs to cut at least $2 billion in expenses. Efforts include:

-- Forcing suppliers to provide either cheaper goods or general discounts

-- Consolidating advertising and marketing spending with one agency for volume discounts

-- Increasing bidding competition among suppliers to reduce prices

-- Limiting in-house travel and instituting some hiring freezesReturn to top

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