OEMs Won’t Coddle Bankrupt Suppliers

From supplier bankruptcies and soaring raw-material costs to global logistics and the eternal hunt for the best price, purchasing departments have become pivotal to the success – and survival – of North American auto makers. Ward’s 6-part series stems from interviews with the purchasing chiefs of GM, Ford, Chrysler, Toyota and Honda. Today is Part 1.

The “B” word has forced its way into Detroit’s lexicon, and it is bound to stay for a while.

Bankruptcies are so plentiful among automotive suppliers, the scorecard is full up with names such as Tower Automotive Inc., Intermet Corp., Venture Industries, Federal-Mogul Corp. and, most recently, Meridian Automotive Systems Inc., EaglePicher Inc. and Collins & Aikman Corp.

Oxford Automotive Inc. filed for Chapter 11 bankrutpcy protection in December and emerged in March.

Harsh critics of the Big Three auto makers might suggest their price-heavy, bare-knuckled model for supplier relations — combined with questionable acquisitions and exorbitant raw-material prices — has forced suppliers into this predicament, especially as downward production volumes make Big Three business even less attractive.

In recent interviews, Big Three purchasing executives say they will help their bankrupt Tier 1 suppliers as much as possible — and even will step in to pay their debts on occasion — but they ultimately deny responsibility for their suppliers landing in bankruptcy court.

“To say we are responsible goes way too far,” Peter Rosenfeld, executive vice president-procurement and supply for Chrysler Group, tells Ward’s. “I don’t force one supplier to take business with DaimlerChrysler — it is the supplier’s choice.” (See related story: OEMs Not Responsible for Supplier Bankruptcies)

Rosenfeld says Chrysler selects its suppliers with the goal of achieving mutual success.

Chrysler’s Rosenfeld: “Are there companies that are going out of business in China? You are darn right there are.”

“I gain nothing by having a supplier go into bankruptcy,” he says. “I don’t know of one supplier that declares bankruptcy with business only with DaimlerChrysler. These aren’t individuals we have coerced into taking business. They can choose not to take it if they don’t want to.”

Economic pain for U.S. suppliers, because of the nation’s free flow of financial information on public companies, is readily more visible here than in other countries, Rosenfeld points out.

“Are there suppliers in financial distress in Japan? Yes. Do they have Chapter 11 bankruptcy laws? No. Are there suppliers in Korea that are financially distressed? Yes. Do they have U.S. bankruptcy law that says they have to reveal everything so that all can see? No,” he says.

“Is it a Big Three issue? No. It’s very public here. Are there companies that are going out of business in China? You are darn right there are, but it (information) is very controlled.”

Bankruptcies have caused no disruptions in the supply of parts to General Motors Corp. plants. “And it will not happen,” promises Bo Andersson, GM’s vice president-worldwide purchasing.

When a supplier finds itself in trouble, such as Collins & Aikman, Andersson says GM sets up a command center to manage the supply of that company’s parts on a global basis. “It is a huge operational crisis center,” he says. “We keep the plants running.”

A GM supplier in bankruptcy sidesteps the “productivity expectations” that bedevil all suppliers: the requirement to reduce the component price an auto maker pays by a certain percentage each year.

“In reality, they (suppliers in Chapter 11) are protected by the courts, so we typically don’t have any productivity expectations of suppliers in bankruptcy,” Andersson says.

“On the other hand, we typically don’t source business to companies in bankruptcy. If you’re in bankruptcy for two years, you don’t get any new business for two years. When you are out, it’s more or less getting out of jail, right? Why should you hire a guy who has been in jail for two years?”

GM’s Andersson: “If you’re in bankruptcy for two years, you don’t get any new business for two years.”

Hailing from Europe, Andersson struggles to understand U.S. bankruptcy laws.

“People say you go into bankruptcy to clean up your past,” he says. “I don’t think that’s very good advice.”

Like GM, Ford has a contingency team that monitors the financial health of key suppliers in the event new sources of parts become necessary.

“Sometimes we do have disruptions, no major disruptions, nor do we expect any major disruptions,” says Tony Brown, Ford’s senior vice president-global purchasing. “Our hope is that we avoid them altogether and that we end up, ultimately, with a healthy supply base that has sustainable growth and profitability.”

Brown dismisses the notion that auto makers bear responsibility for supplier bankruptcies.

“If they had streaming profits over the moon, would they declare me responsible for that?” Brown asks. “It doesn’t connect for me because in the end, it’s a 2-sided transaction. There’s an offer and an acceptance (to do business). So I struggle with it.”

Brown says he understands a problem exists. “I’m not ignoring it,” he says. But, “this notion of, ‘the OEMs are putting so much pressure on us to do this or do that,’ (suppliers can) walk away. Walk away. Just say no.”

Ford’s Brown: “If they had streaming profits over the moon, would they declare me responsible for that?”

GM and Chrysler say they have stepped in recently to pay Tier 2 and Tier 3 suppliers on behalf of bankrupt Tier 1s. (See related story: GM Studies Paying Tier 2s Directly)

Brown declines to reveal Ford’s direct response but says the auto maker is willing to help.

“In the case of bankruptcy, we do whatever we need to do this side of legal, ethical and moral to ensure the product flows,” Brown says. “It is part of the supply chain, so ultimately we have to make certain that supply chain is somehow operating.”

GM has been paying certain Tier 2 and Tier 3 suppliers directly over the past three years.

Andersson says GM intervened because some bankrupt Tier 1 suppliers had “somewhat mismanaged” their Tier 2 suppliers and in some cases had not paid those companies for parts delivered for three months. He says some Tier 2 suppliers requested help from GM.

Going forward, Andersson says GM will decide whether to intervene “on a case-by-case basis.”

Rosenfeld agrees with Andersson’s assessment. “Some suppliers overextended themselves, and other suppliers were mismanaged,” he says. “It’s no different for automotive than it is for any other sector of the economy. There are companies that are mismanaged, and there are companies that overextended themselves.”

Meridian filed for bankruptcy earlier this year during the launch of a major program: the revolutionary composite box and in-bed trunk for Honda Motor Co. Ltd.’s all-new Ridgeline sport/utility truck.(See related story: Meridian: Honda Composite Box Profitable)

Since the filing, Meridian officials have met repeatedly with management at Honda of America Mfg. Inc. to ensure steady delivery of the crucial pickup bed.

“They’ve been continuing to supply us without interruption and the quality has been good, the delivery has been good,” Larry Jutte, Honda senior vice president-procurement, tells Ward’s.

Despite bankruptcy, Meridian has met with Honda’s Jutte to ensure steady delivery of Ridgeline pickup bed.

“I still think we picked the right supplier because they were very competitive in this new business venture with us, and they had good input into the manufacturability of this product, which led to them winning the business,” Jutte says. “I still believe that due to that fact and others that they’re the right company.”

As for other suppliers in bankruptcy proceedings, including Intermet, Tower and Federal-Mogul, Jutte says Honda has business with them all, and that none has left the auto maker in the lurch, waiting for parts.

Still, Japanese executives are concerned, and Jutte says he recently met with a director from Honda in Japan to discuss the long-term viability of sourcing parts from bankrupt suppliers.

“Part of our responsibility in our extended family, which is our supply base, we need to make sure our family is healthy,” Jutte says.

Do auto makers share in the responsibility for supplier bankruptcies? “From Honda’s point of view, I would say no,” Jutte says.

“If you’re my supplier and I’m treating you fairly and I’m working with you and we’re having good communications and our business relationship is fair, then if you end up in bankruptcy, I would have to ask, ‘Why?’”

While bankruptcies appear to be piling up, GM’s Andersson says the rate of filings among automotive suppliers actually is about the same as it was five years ago.

The difference, however, is that today much larger companies, including Collins & Aikman and Tower, are ending up in Chapter 11.

–with Kevin Kelly and John D.Stoll

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