Thursday, March 22, 2007

Supplying the Big Three: Has the Worm Turned?

A number of years ago, GM hired a new purchasing executive who managed to get GM suppliers to sign agreements which actually reduced the suppliers' prices by 5%/year for multi-years. This became an industry trend, and although the GM exec left after only a few years, his legacy did not.

If you didn't notice, that caused a few problems. (Think AOSmith/Tower, Delco/Delphi, Collins & Aikman, Lear, Federal-Mogul, Dura, Dana, and hundreds of others, big and small.)

While the Big Three were putting their suppliers into bankruptcy courts, others were willing to fill the orders--until recently.

Now, with fewer suppliers out there, and with consolidation (and other marketing options), some are kicking back, hard.

Example: Navistar which told FoMoCo to stick their offer......(fill in the blank).

The Warrenville, Ill., engine and heavy-truck maker has been through extensive restructuring, going back decades to when it was formed out of the old International Harvester. Navistar has long provided diesel engines for Ford's Super Duty F-250 and F-350 pickups, which are among Ford's few profitable products. Navistar brought out a new 6.4-liter engine in January, asking $7,600 each.

Ford thought the price should be $6,100. Ford also claimed the previous model had such problems that Navistar ought to pay some $1 billion to help defray repair costs that Ford bore under warranties. In mid-January, Ford began debiting Navistar's account by tens of millions of dollars, and in January filed suit.

The result was a blunt letter from the parts supplier. Ford, the letter said, was demanding that Navistar sell engines at a loss "to accommodate Ford's desire for higher profits." The letter from Navistar's general counsel then effectively served notice that the supplier was prepared to fire its biggest customer. Alleging that "we were the victim of Ford's heavy hand," the letter said, "That is now over." Four days later, on Feb. 23, Navistar stopped shipping diesel engines to Ford.

This put a crimp in FoMoCo's plans, to say the least.

A temporary restraining order obtained by Ford got the engines coming a few days later. Ford then agreed on March 9 to reimburse Navistar for part of the debited funds and to pay Navistar's asking price - $1,500 more per engine than Ford wants to pay - until Michigan state-court litigation between the two is settled. The price setback for Ford helped prompt Bear Stearns to lower its earnings estimates for the company.

Navistar CEO Daniel Ustian declines to comment. But in a mid-January speech a few blocks from Ford headquarters in Dearborn, Mich., he told an industry audience that auto makers face "a new reality" in which "the math must benefit all of us."

There are a lot of Wisconsin businesses which supply (or COULD supply) the Big Three. In other words, this might be good news.

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