Is this multiplier effect or ripple effect ?
Charles B.
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DaimlerChrysler tells suppliers to slash prices
Automaker wants a 15% reduction in bid to chop $6B.
By Bill Vlasic and Joe Miller / The Detroit News
AUBURN HILLS -- In a major restructuring move, DaimlerChrysler AG demanded
Thursday that suppliers to its Chrysler unit cut prices by 15 percent over the next
two years in an effort to trim operating costs by nearly $6 billion.
The cuts include an immediate 5-percent reduction in all parts and service charges
from suppliers.
The sweeping program to cut purchasing costs is a cornerstone of the turnaround
strategy of the new German leadership of the struggling Chrysler Group.
"We need results fast," said Wolfgang Bernhard, Chrysler's new chief operating
officer. "We can't wait forever. We thought this was the best way to go about it."
Bernhard is the chief deputy of Chrysler President Dieter Zetsche, the veteran
German executive dispatched to replace James Holden, the top-ranking American
executive fired in the wake of Chrysler's $512-million operating loss in the third
quarter.
The moves unveiled by Bernhard and Thomas Sidlik, Chrysler's top procurement and
supply executive, are expected to send shock waves through the supplier community that
produces about 65 percent of Chrysler's automotive parts.
Auto parts suppliers are already reeling from lower car and truck demand, a weak
euro, reduced demand for replacement parts and high debt levels following a wave of
mergers and acquisitions.
The bleak outlook has prompted credit rating agencies to lower ratings on many
suppliers, raising their borrowing costs and hampering restructuring moves.
"The real question is whether suppliers will the have the backbone, will they cave
in to Chrysler," said Bear Stearns & Co. analyst Eric Goldstein. "We'll see how badly
Chrysler wants to bankrupt its supplier base."
At least publicly, the suppliers maintained a steely front, saying the moves by
DaimlerChrysler are not unexpected.
"Price reduction is a reality of our business -- the upside is if we can give a
better product at a lower cost, we'll sell more parts," said Gary Corrigan, spokesman
for Toledo, Ohio-based Dana, a supplier of light-truck axles to DaimlerChrysler.
Slowdown blamed
DaimlerChrysler's announcement came as evidence mounted that the nation's auto
industry was headed for significant slowdown. Production cutbacks and factory layoffs
are becoming almost daily occurrences.
Just Thursday, General Motors Corp., the world's biggest automaker, said it will
cut first quarter output by 14 percent as new car and truck demand cools.
GM plans to make 1.301 million vehicles during the quarter, down from the 1.521
million a year ago. The company didn't say whether it would idle plants.
And Troy auto parts maker ArvinMeritor Inc. said it will close an Iowa factory that
builds driveshaft parts for marine and construction markets. The move will result in
the layoff of 265 workers.
Chrysler, facing pressure in its core minivan, large pickup and sport-utility
vehicle lineup, faces a greater urgency to reduce costs as financial losses mount.
"We see a potential storm coming, and we can put our head in the sand or we can act
now," said Peter Rosenfeld, Chrysler's vice-president of procurement and sourcing
strategy.
Two-phase strategy
The cuts will be implemented in two phases. The first initiative takes effect Jan.
1 when 900 of Chrysler's largest suppliers will be forced to cut their prices by 5
percent. The move will trim $2 billion from Chrysler's $40 billion annual spending on
components.
Those price reductions are non-negotiable, Sidlik said.
"We're assuming success," said Sidlik, one of two Americans who will remain on the
management board of DaimlerChrysler following the retirement this month of Thomas
Gale. "This is how we're going to run the company."
The second phase of the cost cutting will occur over the next two years. Suppliers
will be expected to slash another 10 percent in costs, giving Chrysler additional
annual savings of about $3.8 billion.
In simple terms that means that by 2002 the price of a $100 part on average will be
pared to $85, Sidlik said.
He stressed that Chrysler's engineers, designers and purchasing specialists will
work closely with suppliers to identify the 10-percent cost reductions due in 2002.
Swift action needed
Sidlik broke the news to the chief executives of Chrysler's top 20 suppliers in a
meeting Thursday morning. His message: the depths of Chrysler's troubles demanded
swift action.
"They're going to take a major hit on January 1," Sidlik said.
Bernhard called the urgent move "a major program of the turnaround" ordered by
Chairman Juergen Schrempp and DaimlerChrysler's supervisory board.
"We are getting started on this as early as possible," he said.
About 78 percent of Chrysler's costs -- outside of labor and factories -- are in
components supplied by outside suppliers. The parts range from simple screws and bolts
to seating systems, air-bag modules, bumpers and tires.
Chrysler, which was acquired by Daimler-Benz AG in 1998, established close
relations with its suppliers over the past decade.
Its previous cost-reduction program, allowed suppliers and Chrysler to equally
share savings from efficiency improvements.
Sense of urgency
The new plan supercedes the company's previous price-reduction targets, which had
suppliers stretching out 10 percent in cost reductions over the next three years.
The Chrysler unit, which had an operating loss of $512 million in the third
quarter, is expected to lose an estimated $1 billion in the fourth quarter, lending a
sense of urgency to the supplier cuts.
"Clearly we have to react to that situation in the immediate future," Sidlik said.
Richard Schaum, head of Chrysler product development, said members of the vehicle
platform teams will work closely with suppliers to trim costs in the second,
10-percent phase of the program. The company expects 75 percent of those savings to
come within a year.
"The concept is not to in any way deteriorate the (profit) margins of the
suppliers," Schaum said.
But the initial 5-percent cut will come straight from suppliers' bottom lines. That
might cause some suppliers to abandon Chrysler, Sidlik admitted.
"We may also have some suppliers that will fill the vacuum," Sidlik said. "It's a
competitive world out there."
Chrysler's biggest suppliers -- Magna International Inc., Johnson Controls Corp.,
Lear Corp., Textron, TRW Inc. and Dana -- are expected to be hit the hardest, analysts
say.
"There's not very many supplier companies who will be able to skate by on this
one," said Joe Phillippi, an analyst with UBS Warburg LLC
