The first step in DaimlerChrysler's North American turnaround strategy has suffered a setback.
Nearly 70 percent of the automaker's largest 100 suppliers have rejected its demand for an immediate 5 percent price cut that would have saved the troubled Chrysler group $2 billion this year, according to interviews with supplier CEOs and industry insiders. The group has more than 900 production suppliers.
The revolt has forced Chrysler group CEO Dieter Zetsche to pay more than he had planned for parts. Negotiations with suppliers to accept a cut less than 5 percent are continuing, according to the sources.
Of the six suppliers providing Chrysler with more than $1 billion annually, five rejected the full price cut.
Electronics supplier Robert Bosch GmbH rejected the demand out of fear that General Motors and Ford Motor Co. would order similar reductions if it capitulated. That concern is shared by other suppliers.
The suppliers that agreed to Chrysler's terms tended to be smaller or have less bargaining power, such as stamping companies or steel suppliers. Lear Corp. was the only powerhouse supplier to agree to 5 percent.
5% still expected
Chrysler is sticking with its demands, spokesman Jack Ferry said. Some suppliers have told the automaker that the price cut would pose problems. 'We are listening to their concerns,' he said, 'but at the end of the day, we expect a 5 percent price reduction to happen.'
The price cut is just one element of a restructuring under way at the Chrysler group. Zetsche also has ordered that six plants be shuttered and 26,000 jobs cut. The automaker sustained a $512 million loss in the third quarter and $1.3 billion in losses are expected from the fourth.
Cutting material costs, which total $40 billion annually, is a critical part of bolstering its bottom line.
Chrysler's demand for the 5 percent price cut marked a turnabout in the long cost-sharing relationship Chrysler enjoyed with its suppliers.
Suppliers reacted to the new demand quickly and in rare unison. Normally accustomed to elbowing each other to grab more business with the hope that more volume means more profit, a majority said no.
Supplier advocate Neil De Koker, managing director of the Original Equipment Suppliers Association, was unapologetic. DaimlerChrysler got into trouble and then 'decided to take a 5 percent across-the-board price cut without regard to the health of the supplier.'
'This action is sufficient to cause financial failure of some marginally profitable suppliers, and in many cases (cash flow) levels will not cover debt service costs,' De Koker stated in a Dec. 14, 2000, letter to Tom Sidlik, DaimlerChrysler's top North American procurement officer.
Rejection earns `red' rating
Some companies, citing financial problems for their rejection of the 5 percent cut, were lumped into the 'red' category of the automaker's 'stop light' rating system.
Chrysler has long used the rating system for scoring supplier performance in quality, delivery, technology and cost targets. A 'red' rating means the supplier failed to meet the target and could lose business.
Companies with financial concerns that are in the red category include Talon Automotive Group, LTV Inc., Key Plastics LLC and Intermet Corp.
Another red company is TRW Inc. It is not in financial trouble but was carrying $6.7 billion of debt as of Dec. 31, 2000, fully 72 percent of total capital. If debt-rating agencies feared a price cut would leave TRW without the profits to pay down debt, the supplier's ability to borrow would become more difficult, said Brett Hoselton, an analyst with McDonald Investments in Cleveland.
Healthy companies that initially rejected the price cut also were lumped in the red category.
They include Dana Corp., Motorola Automotive, ArvinMeritor Inc. and Bosch. All are believed to be in negotiations for a smaller reduction.
The 'yellow' category contains the largest group of Chrysler's top suppliers, about 50 percent. They were prepared to give some, but not all of the 5 percent cut. Sources say there is little threat that yellow suppliers will lose future Chrysler business. Those include Johnson Controls Inc., Magna International Inc. and Textron Automotive Co. Inc.
'Green' suppliers are at the top of Chrysler's ranking. They can expect to be rewarded with future business. The group includes Lear, Exide Corp. and Venture Industries Corp.