Chrysler Shuts Assembly Plants as Plastech Halts Delivery

A quietly growing game of brinksmanship between Chrysler LLC and newly bankrupt supplier Plastech Engineered Products has apparently come to a head yesterday, 4 February. Chrysler announced early in the day that it was idling four assembly plants in the United States due to a parts shortage from bankrupt supplier Plastech, which had ceased delivery to the automaker. Affected immediately were the company's Belvidere (Illinois), Newark (Delaware), Toledo (Ohio), and Sterling Heights (Michigan) assembly plants, which cancelled shifts and idled production lines. The situation was one of confusion among the media, with no statements issued by either party except those from the previous Friday (1 February), in which Chrysler announced that it had cancelled its contracts with Plastech, and was in the process of removing tooling to competitor suppliers. Plastech reportedly filed for bankruptcy protection to stop the automaker from removing its tooling; what, if any, tooling Chrysler was able to take possession of is not currently known.

More information came to light on Monday as Chrysler began shutting plants temporarily. It would appear that the story began one year ago, when Plastech asked for and received a US$46 million bail-out from the Detroit Three in order to continue operations. Continued increases in materials prices and ongoing reductions in production volume at the Detroit Three conspired to hurt the supplier instead of allowing it to recover. But as to whether Plastech took the required steps towards recovery during 2007 or not is now a subject of some debate. Plastech attorneys stated that a second bail-out deal was all but agreed to last Thursday (31 January), when Chrysler delivered a one-paragraph note to Plastech CEO Julie Brown explaining that the automaker was cancelling all of its contracts and demanding the release of tooling for nearly 500 parts supplied to the automaker. Trucks were on the way to Plastech facilities to collect the tooling in compliance with a Chrysler-received court order mandating the transfer when Plastech filed for bankruptcy, halting the transfer as well as any legal injunctions against the company. Chrysler filed yesterday for an exception to the rule, insisting that if it is not able to collect its tooling, that the entire company's manufacturing operation will be effectively shut down by the end of the week, costing Chrysler nearly US$225 million.

The hearing on Monday night led only to the establishment of a full hearing date on 13 February, according to Global Insight sources, but left the issue of what to do until then unresolved. Reportedly the judge in the case gave the suggestion that the two parties continue to try and work out the problem, just as a judge in the Ford-Navistar diesel engine suit did (see United States: 3 May 2007: Engine Dispute Escalates Between Navistar and Ford). Further court action is likely before that date, however. Until parts begin flowing into Chrysler plants however, the company is expected to continue to idle more and more plants in the coming days, as inventory pipelines of just-in-time delivery parts begin to run out.

Outlook and Implications

De-sourcing a supplier, especially one so very intimately tied into one's business, is an extraordinary, last-ditch manoeuvre that is used when all other options are exhausted. For Chrysler to have so abruptly cancelled all of their contracts and attempted to retrieve tooling when Plastech could so easily halt the action by filing bankruptcy is frankly bizarre. Such a move simply cannot be the decision of just one person; re-sourcing as much as US$200 million of parts business away from a single supplier typically requires approvals all the way up the management chain, or at least notification of such action, especially in light of the severity and almost certain outcome. Ford and General Motors (GM) have not faced any issues with delivery, and are not likely to: bankruptcy does not mean that the supplier stops shipping parts, but it does mean that the customers do tend to lose control over their payments and contract terms. Those go to the courts for renegotiation, which might or might not be favourable to the customer.

Was this an attempt by Chrysler to avoid having to deal with a supplier in bankruptcy by trying to snag its tooling before the bankruptcy axe fell? If so, it was dreadfully unsuccessful, and has left media pundits and industry analysts scratching their heads in thought, trying to deduce how Chrysler could possibly think that its actions would not be challenged or push Plastech to actually declare bankruptcy. Some outlets have openly wondered why Plastech has stopped shipping to Chrysler when it has continued to ship to GM and Ford, but the answer is simple—if Chrysler has cancelled the contracts it has with Plastech, why would it continue to ship anything to Chrysler? With the company holding Chrysler tooling, the protection afforded by a bankruptcy filing against litigation, and no contracts by Chrysler's own decision requiring shipment of any parts, Plastech seems to be holding the better hand.

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