In the wake of a key supplier's financial crisis, General Motors is trying to secure a stable supply of seat belts for its highly profitable light trucks.
Last month, Breed Technologies Inc. nearly shut down nine GM truck plants after it suspended seat belt shipments for three days.
Company CEO Johnnie Breed halted the shipments in a pricing dispute after GM refused her demand for an immediate payment of $44.5 million. The shipments resumed Aug. 9 under a court order, but GM and other Breed customers are quietly discussing contingency plans with other suppliers.
GM - which submitted court documents calling Breed's demands 'extortion' - seeks a preliminary injunction against the supplier in Oakland County Circuit Court in Pontiac, Mich.
According to court documents, a shutdown of those nine plants would have cost the automaker $80 million per day.
In this age of just-in-time parts supply, the dispute highlights the dependence of automakers on their suppliers.
Like other automakers, GM's assembly plants maintain small inventories of parts that are replenished daily. Even a brief suspension of deliveries can disrupt production.
The GM lawsuit also underscores the perils of merger mania among suppliers. Over the past five years, Breed spent $1 billion to acquire 11 companies, part of its ambitious bid to compete against industry behemoths Autoliv Inc. and TRW Inc.
Breed became the world's fourth-largest maker of airbags and seat belts. Now it is sinking under a mountain of debt.
Breed spokeswoman Gina McLean declined to comment on the dispute.
Breed's troubles are rippling through the domestic auto industry. DaimlerChrysler and Fiat Auto have asked Autoliv Inc. and TRW Inc. to bid on Breed's business in case the supplier collapses, said Scott Upham, president of Provi-data Automotive Inc., a consulting firm in Ann Arbor., Mich.
Breed had been the former Chrysler Corp.'s top seat belt supplier. The automakers 'need to protect themselves,' Upham said.
Even before the recent crisis, DaimlerChrysler and Ford Motor Co. had reduced their dependence on Breed. DaimlerChrysler shifted some of its seat belt contracts to Takata Corp. Meanwhile, Ford gave Autoliv its contract to make steering wheels for the Taurus.
However, Breed still supplies steering wheels for Ford's F-series pickup - the continent's hottest-selling vehicle - plus seat belts for the Taurus.
Asked whether GM is forming its own contingency plan, spokesman Dan Jankowski said 'We are always looking at contingency plans. It's good management.'
At this point, GM has three options: help Breed recover; choose a new vendor; or wait to see if another supplier acquires Breed.
If GM sticks with Breed, however, its influence over the company appears to be limited. In similar situations in the past, GM has negotiated so-called 'right-of-access' agreements with financially troubled suppliers.
These agreements typically give GM the right to take over and operate a supplier's plant for a limited time if component shipments are disrupted.
Over the past decade, GM has negotiated more than 100 such deals. Asked whether GM could legally take over Breed's factories, Jankowski declined to comment. However, a review of GM's court documents failed to turn up any such agreement.
Although GM's options are few, the fight comes at a bad time for Breed. The Lakeland, Fla., company has posted seven straight quarters of losses totaling $604 million. Moreover, it must pay or refinance $608 million of debt that comes due in October.
Breed's share price has fallen from a 52-week high of $10 to a low of 38 cents. A $250 million Breed corporate bond issue now trades at one penny on the dollar.
In fact, Breed's finances are so precarious that the company considered seeking Chapter 11 creditor protection last month in U.S. Bankruptcy Court in Delaware, according to the lawsuit.
According to financial analysts, Breed's costly acquisition of AlliedSignal Inc.'s seat belt business in 1997 was a major cause of the company's financial decline.
Amid the turmoil, Breed's investment bankers are seeking bids from other suppliers to buy all or part of the company.
A RUNNING BATTLE
But it seems likely that Breed's legal dispute with one of its biggest customers will depress its market value. GM accounts for 19 percent of Breed's sales, and court documents indicate the two companies have engaged in a running battle over seat belt prices.
In a letter dated April 29, Robert Socia - then GM's executive director for worldwide purchasing of chemical commodities - rejected John-nie Breed's demand for a price increase.
As the supplier's financial condition worsened, Socia softened his position. In a May 26 letter, Socia said GM would pay higher prices if Breed provided a restructuring plan. But Johnnie Breed did not deliver one.
'I have asked for this plan numerous times, to no avail,' Socia wrote.
In June, Breed's bankers granted the company more time to pay its debts, and GM offered financial assistance.
Socia offered to buy Breed's tooling, pay for added engineering costs, and offered a price increase on seat belts for GM's pickups. The package was worth $14 million, but Breed was not satisfied.
RAISING THE STAKES
On Aug. 6, Johnnie Breed's financial demands escalated. That afternoon, she phoned Socia and demanded a payment of $44.5 million, according to a letter from Robert Weiss, a Detroit attorney who represents the automaker. Weiss' letter to Breed's attorneys was part of GM's court file.
Breed warned that if the payment was not made immediately, her company 'will stop shipping trucks,' Weiss wrote.
During a telephone call on Sunday, according to court documents, Socia asked her why she was demanding the money. Johnnie Breed told Socia that 'it did not matter what the basis of the demand was. Until the $44.5 million was received she would not explain it to us,' the documents state.
Johnnie Breed's demands 'can only be described as an attempt to extort money from GM,' the automaker stated in its lawsuit filed Aug. 9.
GM quickly wired Breed $5 million. But Breed halted seat belt shipments anyway, suspending deliveries from Friday, Aug. 6, through Sunday, Aug. 8.
When Breed halted shipments, GM kept affected plants open by shifting unused seat belts from other plants. Had shipments been halted during the week, GM would not have been as fortunate, according to a source familiar with the situation.
On Aug. 9, Oakland Circuit Judge Colleen O'Brien issued a restraining order compelling Breed to resume shipments.
While the court considers GM's lawsuit, GM says it still hopes to re-establish communications with Johnnie Breed.
'GM will continue its attempts to re-establish a businesslike relationship with Breed,' said GM attorney Weiss, in a statement to Automotive News.
But it is not clear if the automaker believes this is still possible, according to the company's court documents. GM executives fear Johnnie Breed is not listening to her own attorneys and financial advisers, the documents say.
If Breed Technologies is to survive long enough to greet the millennium, Johnnie Breed will have to mollify GM, her bankers and her shareholders. At this point, that appears to be the auto industry's equivalent of a 30-foot putt.