Ford, Navistar Working Toward Compromise

Ford Motor Co.’s ongoing dispute with Navistar International Corp. may be indicative of a troubling trend between the auto maker and its suppliers, says Planning Perspectives President John Henke Jr., whose company conducts an annual survey measuring the relations between auto makers and suppliers.

In the annual survey, Ford routinely is ranked one of the worst companies to do business with, according to suppliers. The only auto maker ranked below Ford is General Motors Corp., Henke says.

“I suspect it may be a pattern, because as suppliers are becoming more desperate, and if they continue to be pushed, they have no choice but to lash back.

“I don’t know if this is an indication of the dire straits Ford is in. Maybe they don’t have cash to fool around with. Or it’s a case of incredibly bad judgment of how to deal with suppliers, or a combination of both,” Henke says.

Ford and Navistar yesterday agreed in an Oakland County, MI, circuit court to keep negotiating in the contract dispute concerning diesel engines supplied to the auto maker by Navistar.

Production was slowed because of an ongoing dispute between the auto maker and supplier of the 6.4L Power Stroke diesel used in the truck.

On Feb. 26, Navistar announced it had ceased production of the engine because Ford was not honoring terms of the purchase agreement.

In early January, Ford filed a lawsuit against Navistar over warranty costs and pricing for the diesel engines. In the filing, Ford alleged Navistar owes it money under an agreement to share engine warranty costs, which it said Navistar failed to pay.

Ford and Navistar in court over pricing of Super Duty diesel engines.

At the time, Navistar said Ford’s claims were “totally without merit,” and it would “vigorously respond in court.”

Ford sought reimbursement equal to what it said it overpaid for the engines and for financial obligations owed by Navistar as a result of warranty claims tied to the previous-generation diesel engine sold to Ford.

The argument escalated when Ford reportedly took the unorthodox move of subtracting the amount of money it said Navistar owed from the agreed-upon price for the new diesel mills. Ford reportedly began paying Navistar only $6,167 of the agreed upon per-unit price of $7,673.

Navistar ceased delivering engines to Ford Feb. 26. However, the Oakland County court Feb. 28 ordered Navistar to resume engine shipments.

Ford will restart full-scale production at of its diesel ’08 F-Series Super-Duty pickups March 12 at its Kentucky Truck Plant in Louisville, a spokeswoman says.

With the flow of engines resuming, production at KTP goes from one to two of its normal three shifts, she says. “Everybody is supposed to be up and resuming normal work shifts on March 12.”

The ’08 Super Duty is a critical product for Ford and its dealer network. Dealers contacted by Ward’s are aware of the dispute between Navistar and Ford but say it has not affected their supply of ’08 Super Duty diesels.

Although most dealers say they expect the dispute to be resolved, they express concern a long dispute could harm their respective franchises.

“I have not seen any delivery issues at this point,” says Kevin Collins, president of Bill Collins Ford in Louisville, KY. “Clearly, if the issue lingers, it will have an impact on sales of these vehicles.

“I feel confident that Ford and Navistar will solve their disagreement. In this type of circumstance neither comes out a winner unless engines are built and installed in Ford trucks,” Collins tells Ward’s, adding that his take-rate for diesel Super Duties is about 80%.

Diesels typically account for about 75% of Super Duty sales, Ford says.

Adds Jon Sinclair, general manager of Dave Sinclair Ford in St. Louis: “We have sold the diesel engines pretty well. I think our bigger fleet orders will probably suffer a longer delivery than our retail orders.

“Other than that, the sluggish market should offset the slowdown and, as it picks up in the spring/summer months, everything should come together,” he says.

The dispute with Navistar is not the first Ford has been involved in that has led to the unorthodox move of a supplier stopping shipment of a key component.

In October 2006, Collins & Aikman Corp. halted shipments of key interior components to Ford’s plant in Hermosillo, Mexico, causing the facility to shut down temporarily and irreparably harming the relationship between the two companies.

Hermosillo produces the crucial Ford Fusion, Mercury Milan and Lincoln MKZ sedans.

The conflict stemmed from a commodity-pricing dispute between the two parties, in which C&A had been asking Ford for price increases to cover the rising costs of steel and plastics used in the carpeting, instrument panels and other components it supplied to Hermosillo.

Eventually, Ford relented to C&A’s demands and shipments resumed.

According to Henke, “there is no trust or relationship left between Ford and Navistar. “It’s an extreme example of an adversarial relationship that has evolved.”

“One has to conclude Navistar is perceiving that Ford is taking an opportunistic view toward dealing with them, and they need to do the same thing to survive,” Henke tells Ward’s.

Ford is aware of its negative reputation among suppliers and has attempted to address it, most recently through a program called “Aligned Business Framework.”

The ABF, announced in September 2005, is designed to strengthen relationships and collaborations between Ford and its supply chain. Additionally, the program trims Ford’s supplier base in half, while growing with select parts makers.

To date, Ford has 43 suppliers on its preferred supplier list. Navistar is not one of them.

That could change, however, a spokeswoman tells Ward’s.

“We started this program in 2005, and new companies are entering the list all the time,” she says. “This is not a final list.”

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