The Wall Street Journal-20080205-Chrysler Shuts Down Four Plants- Auto-Maker Signals A Get-Tough Approach With Ailing Suppliers

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Chrysler Shuts Down Four Plants; Auto-Maker Signals A Get-Tough Approach With Ailing Suppliers

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Chrysler LLC closed four auto assembly plants and could close two more as soon as this evening, signaling the now closely held company is taking a get-tough approach to dealing with the industry's ailing suppliers.

The closures stem from a dispute with Plastech Engineered Products Inc., a maker of plastic parts that filed for bankruptcy-court protection Friday. The filing came hours after Chrysler announced it was terminating its supply contract with Plastech. In court documents, Plastech said it was "forced" to seek court protection by Chrysler's action.

Without more parts arriving from Plastech, Chrysler yesterday halted production at auto plants in Belvidere, Ill.; Newark, Del.; Sterling Heights, Mich.; and Toledo, Ohio. By this evening it may also close two Ontario plants, in Brampton and Windsor, a Chrysler spokeswoman said. Its seven other assembly plants could be forced to close later this week, she said.

Chrysler's strategy for dealing with Plastech represents a break from Detroit's tradition of pumping money into suppliers in hopes they will turn around.

As a private company, Chrysler doesn't have to report quarterly earnings or fear a backlash from the stock market if revenue falls because of a production stoppage, people familiar with the company's thinking said. Instead, Chrysler hopes to avoid injecting millions of dollars into a supplier that may never recover, these people said.

"It is a sign they are turning to a new way of handling supplier relations," said one industry executive.

Under Robert Nardelli, the chief executive installed after Cerberus Capital Management LP bought 80% of Chrysler last summer, the auto maker has shifted its focus from producing earnings to managing cash- flow. "Cash is king," Mr. Nardelli has repeated in numerous meetings, people familiar with the situation say.

Shutting down the plants will lower Chrysler's revenue because auto makers book sales when vehicles are shipped from the plant. But it will also cut the amount of cash the company is spending each day.

Plastech has been struggling for more than a year. In February 2007 it reached an agreement to get help from Chrysler, General Motors Corp., Ford Motor Co. and other customers. It negotiated a second aid plan last month, but Friday morning Chrysler sent Plastech a letter saying it was terminating their supply agreement and wanted to take back the Chrysler-owned tooling Plastech uses to produce its parts, according to court filings.

Hours later, Plastech filed for Chapter 11 bankruptcy protection.

Chrysler has been negotiating with new plastic parts suppliers as part of an effort to improve the quality of the interiors of its cars. It hopes to get its tooling from Plastech and have another supplier start producing the parts it needs, a person familiar with the matter said.

If it can't get the machinery from Plastech right away, it hopes to negotiate a deal to have Plastech make the parts for a period of time until it can transition to a new supplier.

GM and Ford are sticking with the traditional approach, at least for now, and agreed to help Plastech. Yesterday, spokesmen for GM and Ford said they don't expect any production stops. Ford's North American chief, Mark Fields, said, "We anticipate, for the time being, to be able to continue our production." He said the company isn't looking to take its business elsewhere.

Chrysler's new approach was influenced by the company's experience with Collins & Aikman Corp., another supplier that sought bankruptcy protection. In 2005 and 2006, Chrysler put more than $200 million into the company, and still ended up having to find a new supplier.

The showdown with Plastech is the first move by Chrysler since it hired PricewaterhouseCoopers LLP to gather financial and operational information on key suppliers. Chrysler, which is struggling to return to profitability amid a slowdown in the North American automotive market, notified suppliers in a letter in January that it expects the companies'"cooperation to provide PwC with the required information as quickly as possible."

Aaron Bragman, an analyst with Global Insight, said it is unusual for an auto maker to cut contracts without having backup suppliers, as the company runs the risk of shutting down production lines, which is costly. "This could prove to be a huge problem as Chrysler tries to return to profitability," Mr. Bragman said. "Idle plants are only costing money, they aren't producing cars and trucks."

The tougher approach contrasts with statements Mr. Nardelli has made in internal meetings where he has said the "new Chrysler" wants to deal more constructively with its suppliers. In one presentation in early December, Mr. Nardelli said Chrysler and some of its suppliers treat each other like spouses in a bitter divorce, according to people familiar with the situation. Instead, he said he would like Chrysler to be more of a parent to its suppliers, these people recalled him saying.

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Mike Spector contributed to this article.