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Can Chrysler Get Blood From A Supplier?

News: Analysis & Commentary: Cars

Can Chrysler Get Blood from a Supplier?

The carmaker wants price cuts--but vendors are balking

From the moment he arrived on Nov. 20th, Chrysler's new CEO, Dieter Zetsche, promised bold moves to turn around the struggling auto unit. Now, the German executive, 47, is showing his hand. He has demanded that, beginning Jan. 1, all 9,000 Chrysler suppliers tear up existing contracts and cut prices by 5%. Then, over the next two years, the vendors will be required to squeeze out an additional 10% by redesigning parts and processes. These cost cuts, totaling some $6 billion over three years, are the "major cornerstone of the turnaround," says Wolfgang Bernhard, Chrysler's new chief operating officer and Zetsche's designated cost-cutter.TRACK RECORD. If Zetsche and Bernhard think squeezing suppliers is the way out of Chrysler's problems, they'd better think again. Vendors have a track record of fighting cost cuts and their profits are already falling as the industry heads into a downturn. If they get mad enough, they may turn their backs on a company that has historically profited much more from having strong relations with suppliers than any other carmaker.

Already, many suppliers are privately saying there's no way they can--or will--cough up enough price cuts to pay for management's mistakes. "They just want us to tear up our purchase orders and start over," says one angry supply executive. "We have a business to run, too." While, so far, no one is actually threatening to withhold parts, "it's definitely a possibility," says analyst Greg L. Salchow of Detroit brokerage Raymond James & Associates Inc.

The cuts are coming at a particularly bad time for vendors. In the most recent quarter, they averaged profit margins of only 4.8%. "The auto makers already have a lot of these suppliers right up against the wall," says Joseph Phillippi, an analyst at UBS Warburg.

Chrysler isn't blind to the risks. Its top supplier exec, Thomas Sidlik, acknowledges the cuts are severe. "We didn't say it wouldn't hurt," he says. But considering Chrysler's mounting losses, management think they can at least get agreement on the 5% cuts by Jan. 1. "We need results fast," says Bernhard.

Given the Big Three's recent record on cost concessions from suppliers, Zetsche has his work cut out for him. Ford Motor Co. proposed a 5% cut in 1995. And General Motors Corp. attempted a similar cut in 1998. Each time, vendors pressured the carmakers to back off. Eventually, both Ford and GM were forced to accept smaller cuts.

Auto suppliers also have more clout than ever before. Consolidation and globalization have spawned several megasuppliers, including Delphi Automotive Systems, with $28 billion in revenue, Visteon, with sales of $19 billion, and Dana Corp., with $13 billion. If some vendors turn away from it, Chrysler won't easily find competitors to pick up production.

Indeed, many suppliers believe their expertise can't easily be replaced. In recent years, auto makers have been shifting more of the basic design and engineering work for vehicle components to their suppliers. Currently, 65% of Chrysler's parts are from outsiders.

What's more, if Chrysler pushes too hard, it risks jeopardizing a critical industry advantage. "Chrysler used to be the company that every supplier wanted to work with," because of its cooperative attitude, says Gregory J. Janicki, vice-president of CSM Worldwide Inc., a consulting firm in Northville, Mich. The premise was simple: Find 10% in savings, and you could keep half. Consequently, vendors often came to Chrysler first with new cost-saving technologies. Since Zetsche's new program has no sharing of savings, that's likely to end. "If they think we're still going to be bringing them our best technology, they're crazy," says one angry supplier.

Certainly Zetsche needs to find cash quickly. Without the cuts, Chrysler could face even steeper losses in the first half of 2001. But amidst shrinking market share and swelling vehicle inventories, a supplier revolt is the last thing the auto maker needs.By Jeff Green in DetroitReturn to top

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