Chryser's Conflict With Minority Supplier, Plastech Engineering, Exposes A Formerly Secret Legacy Cost, Which May Be The Highest One Of All.

Implications: Is privately owned Chrysler acting out the role of champion for American OEM heavy industry in its battle with OEM automotive supplier, Plastech Engineering? Is Chrysler obligated to continue to do business, and lose money because of it,  with an insolvent supplier due to social and political demands thinly disguised as legal obligations enabled by an interpretation of the Civil Rights Act of 1964, which was never intended to bring this about? What part did affirmative action have in bringing down the OEM American automotive industry when that industry tried to compete with global car makers in the American domestic market?

Analysis: The OEM American automotive industry was the US's first and always the largest, in dollars, promoter of minority supplier development. First each American owned OEM automotive assembler,  and then all of the 'transplanted," i.e., foreign owned, OEM automotive companies,  opened and still maintain internal offices of minority supplier development.

Since the early 1970s hundreds, perhaps thousands, of minority owned and operated suppliers of parts and services have been purposely advanced to the head of the line to be looked at and, frequently, if at all possible based on finances and qualifications and whether or not there were any other minority enterprises already supplying in the chosen category, awarded some business.

The brutal boom and bust cycles, which the American OEM automotive industry has faced during the last 40 years collapsed more than one OEM American car company and, statistically, at one time or another during the period, most of the supply base. No matter what the specific external or internal causes of the market decline were it was through taking advantage of these cycles that foreign competition was able to gain its entry into the US market; foreign car companies, the Japanese in particular, were ready and willing to accept losses for a substantial amount of time in order to penetrate the US, the world's largest, car market.

Minority owned and operated OEM automotive suppliers suffered disproportionately from boom and bust cycles due to their typically thin capitalization, which offered little or no buffer against downturns. Noting the disproportionate effect that the industry's cycles had on minority companies-they were usually the first to fail during a downturn-gave the OEM American car companies the impetus to try and save the special category of minority suppliers, because the industry simply could not deal with the cost of constantly developing, losing, and redeveloping suppliers.  Therefore the industry's giants came up with a plan agreed to by all to pressure their largest and most successful suppliers to mentor selected minority suppliers in order that the minority suppliers be made capable of being profitable and self-supporting. 

This process evolved, some say cynically, into a method by which the large car companies fobbed off the requirement for achieving, and being penalized for not having, a certain percentage of, minority content; a goal set and reset higher arbitrarily by bureaucrats under the eye of Federal politicians.

The Big Three, in particular, forced the creation of large, in retrospect too large, minority suppliers, so that they would have less of the very expensive detail work and drain on their own human resources required to monitor the performance of 'minority' suppliers. Ultimately the largest majority suppliers were coerced into 'lending' startup capital for huge minority companies, which were in fact internal captives, and duplications of effort, of the large majority owned suppliers. All of the production of the 'mentored minority' was counted twice, once for the tier one supplier and once for the main  OEM car maker-customer as minority content.

Hypocritically and cynically it wasn't necessary for the minority company to even employ minorities it was only necessary for that company to be owned and, theoretically, operated by a minority. An example of this was and is a company called Bridgewater Interiors 'created' by a huge loan, to construct a facility to make OEM automotive interior components, to an African American 'entrepreneur' , who prior to 'starting' Bridgewater had failed as a franchise restaurant operator and had after that become the executive director of the Michigan Minority Business Development Council, MMBDC, from which he was plucked by Johnson Controls International to become overnight a major supplier of interior parts. Bridgewater was the first minority 'owned and operated' supplier to OEM American automotive to have an order book of one billion dollars, every penny of which was booked as minority content both by Johnson Controls International and by the Big Three (mostly GM). It is not known if Bridgewater is or ever has been profitable, because as a private company it does not have to publish its results or how the results it announces were calculated. It is the MMBDC which, in Michigan, decides which companies qualify as minority business enterprises 'owned' and 'operated' by minorities and disadvantaged
individuals.

Minority owned and operated companies have been almost entirely privately owned because the definition of minority ownership under Federal regulations would not have been met if such companies went 'public' through an IPO or a private offering open to all. This ridiculous impediment to capitalization left entrepreneurs who wanted to obtain funding at the mercy of agendas such as those described above. Of course in the real business world, rather than the synthetic one in which these minority businesses existed, the ability to raise capital is dependent on the experience and potential of the business owners and the business itself to compete, so that very few minority entrepreneurs have ever successfully raised capital through a public offering to fund the startup or growth of a manufacturing company, and, if it did happen, that company was not being promoted as a minority company.

Plastech engineering was probably the largest privately owned minority owned and operated company dedicated to manufacturing parts for the OEM American automotive industry. It is, or was, owned and operated by a woman of Vietnamese descent, Mrs Julie Brown. Unfortunately for Ms. Brown she learned that by taking advantage of minority status she has also most likely doomed her company to extinction.

Plastech was so out of touch that tried to do an IPO just a couple of years ago; it was then trying to raise capital to buy out the then newly bankrupt Collins & Aikman, a mostly plastic parts manufacturer cobbled together by a hedge fund directed by David Stockman, formerly a budget official, under President Ronald Reagan. No financial institution would agree to take on and fund the IPO, because they said Plastech was not well capitalized to start with and it did not look to them like Plastech could handle the financial needs of a re-organization of Collins & Aikman. In short Plastech had too much debt and seemed to be losing money on top of that.

The OEM automotive industry's financial management knew all about Plastech's shaky finances, they were certainly no secret after Plastech failed to get the financing to takeover Collins & Aikman, but the need perceived on the part of the OEM's to have minority content seems to have simply blinded them to the fact that they could no longer afford to be a lender of last resort to anyone, much less a technically insolvent supplier.

The American OEM automotive industry's principal players, GM, Chrysler, and Ford have now come to a fork in the road. 

Plastech being a private company does not have to publish its results or balance sheet publicly. But for the last several years it has been showing them to its OEM customers, because it has needed to take advantage of the programs that the OEMs established for 'troubled' suppliers such as accelerated payments of invoices and prepayments for future orders.

It is understood in Detroit that Plastech is now at least 200 million dollars in debt to the OEM car makers and that Chrysler balked at any further 'lending' thus stopping the process and propelling Plastech into a bankruptcy filing.

The Detroit news media tonight are saying that Chrysler and Plastech have agreed in bankruptcy court to act as customer and supplier until Feb.. 15 to avoid a shut down of Chrysler. 

I predict that this so-called agreement is only for the purpose of an orderly removal of Chrysler-owned tooling, and to allow Plastech to work through its existing inventory of raw materials  specific to Chrysler. Chrysler cannot possibly afford to increase its losses by supporting a continuation of its business with Plastech through becoming a Plastech lender of last resort.

I further predict that the OEM car makers are scrambling to tyry and save face by getting Plastech a mentor, perhaps, for the first time, a foreign tier one, to move production to a lower labor cost country.

Chrysler has been trying to eliminate single source suppliers, including minority businesses, for several years to avoid just this kind of problem.

The whole OEM American automotive world is watching this situation play out.  For the past two or three years the American three have been supporting Plastech lavishly at the expense of other solvent and well managed suppliers who had to downsize and lay off workers even while Chrysler, for example, was wasting money keeping Plastech going. Many suppliers have also gone bankrupt or have been taken private or both. The new owners have no loyalty to or sympathy for the customers who are now begging them to accept work formerly awarded to Plastech.

Other large minority companies like Bridgewater are watching fearfully, because Bing Steel went out last year and now it looks like Plastech will follow. Both were of a size and category, minority enterprise, that was considered unassailable in Detroit; they couldn't be allowed to fail for political reasons, it was said. 

Plastech is probably the breaking point. Minority enterprise development will never again be the same in Detroit.

You never heard about the failures of minority business enterprises in the American OEM automotive supply market, they were covered up, because they were all private companies, but it is estimated that such failures probably cost the Detroit Three between 10 and 20 billion dollars right off the bottom line in just the last 20 years. What would those balance sheets look like now without those losses?