2014 MANAGEMENT BRIEFING SEMINARS

Marchionne vows to claw back share of supplier profits

Marchionne: "I am envious of some of the margins that I see coming out of our suppliers."
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TRAVERSE CITY, Mich. -- Chrysler Group CEO Sergio Marchionne today fired a shot at his supply base, saying that suppliers’ double-digit profit margins were making his blood pressure go up.

Speaking on a conference call discussing Chrysler’s $619 million second-quarter net income, Marchionne vowed that the automaker would speak with suppliers “to find a way that we can at least participate in their well-being, and perhaps allow them to rub off some of their newfound wealth onto us.”

Chrysler’s single-digit profit margin followed a series of buoyant second-quarter earnings reports this month from major Chrysler suppliers, such as Delphi Plc, BorgWarner Inc., TRW Automotive Holdings Corp. and American Axle & Manufacturing Holdings Inc.

American Axle, which supplies drivetrain components, underpins the hot-selling 2014 Jeep Cherokee as well as the redesigned 2015 Chrysler 200. The supplier, citing strong business from new product launches, said Friday it doubled its second-quarter net income to $52 million from last year.

Marchionne did not identify which suppliers’ profits were negatively impacting his personal health.

The comments come as Chrysler and its corporate parent, Fiat, are merging into a new corporate entity and are being closely scrutinized by analysts and shareholders.

Distrust and acrimony

Marchionne’s remarks were reminiscent of the distrust and acrimony that permeated the relationship between suppliers and their Detroit 3 customers for decades prior to the 2009 industry collapse -- a fact the Chrysler CEO acknowledged.

“I think we need to be very careful not to repeat the kind of aggressive behavior that happened here the last couple of decades where people went around trying to inflict -- or at least extract -- phenomenal concessions from the supplier base,” Marchionne said.

He warned that Chrysler must be cautious in approaching suppliers on the sensitive issue. “I think we need to be incredibly careful that we don’t push them over the edge,” he said.

Supplier response

But Marchionne’s comments drew sharp responses at the seminars here.

“Sergio needs to run his company as well as his suppliers are running theirs,” said Neil De Koker, the recently retired chairman of the Original Equipment Suppliers Association. “He wants to be the customer of choice for suppliers. He wants them to bring their best technology to them, and it will take supplier profitability to develop the technology Chrysler needs to reach the 54.5 mpg fuel standards that are coming.

“We won’t get there by taking money from each other,” De Koker said.

One top executive of a Tier 1 Chrysler supplier said that it takes money and engineers to develop new technology, and suppliers can pick and choose which automakers receive their best work.

“We have learned to say no,” the executive said, speaking anonymously because he had not heard Marchionne’s comments directly.

Chrysler fared poorly on Planning Perspectives consultant John Henke’s latest survey on OEM-supplier relations, finishing only slightly ahead of General Motors and behind all other automakers on supplier sentiments toward the automakers.

Transcript of remarks

Here is a transcript of Marchionne’s full comments on suppliers:

“I am envious of some of the margins that I see coming out of our suppliers, absolutely mesmerized by some of the double-digit performances that I’ve seen coming out of the supplier base. And unfortunately, when I see this, my blood pressure goes up. There’s not a single doubt that we will approach our supplier base in a constructive way to find a way in which we can effectively at least participate in their well-being, and perhaps allow them to rub off some of their newfound wealth onto us.

“I think we need to be very careful not to repeat the kind of aggressive behavior that happened here the last couple of decades where people went around trying to inflict -- or at least extract -- phenomenal concessions from the supplier base. I think that led to a very non-aligned supplier base with the OEMs, and this is an area of concern, especially in times like ours where we keep on putting additional impositions on them with increasing demand targets on our side. But more importantly, and especially in view of what’s happened now in the regulatory side, that issues of quality don’t start to falter in order to meet price targets. This has become an incredibly sensitive issue, not just here in the US but on a global scale, and I think we need to be incredibly careful that we don’t push them over the edge.

“Having said this, we will be having conversations with our suppliers to try and find a way in which we can improve our cost position. I, Richard and the whole management team are grossly dissatisfied with the margin performance of the business today, notwithstanding all of the significant gains that we’ve made in terms of product placement and volume. We’re still far behind where we need to be on margin performance. I think we need to go back to all sources of margin enhancement to try and get this thing leveled off.”

You can reach Larry P. Vellequette at lvellequette@crain.com.


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