Magna Execs Keep Close Eye on Chrysler

Magna International Inc.’s “strategic” interest in the possible sale of Chrysler Group by DaimlerChrysler AG is meant to guard against any erosion of the supplier’s business, its executives say.

“I’d characterize our look at these activities as pro-active,” President Mark Hogan says today during a webcast to discuss Magna’s fourth-quarter and full-year 2006 financial results.

Expect Magna to pull back from supplying complete vehicle interiors on the heels of a 17.4% full-year net income decline to $528 million, compared with 2005’s $639 million, executives add.

As investment house JP Morgan prepares a prospectus outlining Chrysler’s market value, Magna’s name has surfaced as a potential buyer. Media reports have said Frank Stronach, Magna founder and chairman, has met with DaimlerChrysler Chairman Dieter Zetsche.

But analysts point to a potential conflict if Magna – which has cash-on-hand of nearly $2 billion and more than $13 billion in assets – were to acquire part or all of Chrysler. Detroit-based General Motors Corp. and Ford Motor Co., Chrysler’s cross-town rivals, are among Magna’s key customers.

Says Magna Co-CEO Don Walker: “The future of all of our major customers is of concern to us. We have a lot at stake.”

Magna supplies major components for high-volume vehicle programs such as GM’s all-new fullsize SUVs and trucks and Ford’s F-150 pickups.

Magna Steyr plant in Graz, Austria, produces Mercedes M-Class and Jeep Grand Cherokee.

Chrysler also is a major customer of Magna, which supplies key components for its minivans. At its plant in Graz, Austria, Magna also assembles Chrysler minivans, 300 sedans and cross/utility vehicles – as well as Jeep products – for the European market.

Walker declines specific comment on the Chrysler situation but says Magna “would consider any alternatives” to help a valuable customer.

“There (are) changing relationships all over the world’s automotive industry,” he says. “People are looking for any sort of competitive advantage.”

Meanwhile, Magna attributes most of its net-income shortfall to “substantial” declines in its interiors business. Four of its seven subsidiaries – Intier Automotive Seating, Magna Donnelly, Magna Closures and Intier Automotive Interiors – supply components, modules or complete assemblies for vehicle interiors, a business considered “the holy grail” as recently as a few years ago, Walker says.

“Nobody thinks that anymore,” he adds.

Rising resin prices, a hostile pricing climate and the production cancellation of two Ford minivans contributed to Magna’s 2006 decline in North America.

It supplied all seating, door panels and some cargo area trim for the Ford Freestar, which was killed in November – three months after the auto maker pulled the plug on its platform-mate, the Mercury Monterey.

Magna’s European interiors business was eroded by $12 million in restructuring costs at key sites in the U.K., Spain and Czech Republic.

“These factors were partially offset by additional margins earned on the launch of new programs during or subsequent to 2005,” the supplier says in a statement.

In North America, key launches which feature Magna content included the Ford Edge cross/utility vehicle and Jeep Wrangler SUV. In Europe, the Mini Cooper and Peugeot 207 feature significant Magna content.

For 2007, the supplier expects average per-vehicle content in North America to range from $770 to $800. In Europe, that figure falls between $375 and $400.

But Walker warns the supplier will “have to get more realistic prices” from its customers in the future. This is especially true in the case of complete interiors, where the complexity levels are high.

“If you’re a large supplier and you misquote – and it does happen – the customers are very reluctant to help us out,” Walker says.

For this reason, expect Magna to gravitate away from this business, as competitor Lear Corp. is doing. “In some cases, I think we went too far (into complete interiors),” Walker says. “We didn’t get any return.”

Instead, expect Magna to concentrate on components and modules, he adds.

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