Chrysler and Plastech: make up and break up

Implications: Raw material costs for metals and plastics are squeezing profits out of Tier suppliers in the auto industry.  Locked in to firm part price contracts with OEMs, suppliers cannot pass on rising commodity costs to stay profitable.  The cash drain has forced many into bankruptcy and presents strategic supply chain issues for the domestic OEMs.

Analysis: Just hours after Chrysler and Plastech agreed in court to resume normal business operations CEO Bob Nardelli announced that Chrysler would terminate all future business dealings with the troubled supplier.  Chrysler's tough talk was a painfully visible shot across the bow of the automotive Tier supply base as it tries to pass rising commodity material costs on to the OEMs via component part price increases.

As prices of oil and natural gas have jumped the plastic resins made from these hydrocarbon feedstocks have risen by double digit percentages.  With component part margins already near breakeven this has pushed molded plastic parts suppliers into an abyss of red ink.  With part prices below raw material costs the drain on cash flow is immediate and dramatic; as more suppliers seek bankruptcy protection the cost burden will ultimately shift to the OEMs as alternate suppliers get opportunities to re-bid the parts contracts at market price.

Analysts speculate that losing Chrysler could be a mortal blow to Plastech, leaving GM and Ford in the lurch as well.  Although Ford and GM have provided millions to prop Plastech up in the short term they would be faced with writing off that goodwill and accepting higher parts prices from the competition.

In the long term more suppliers will adopt 'market price' material cost pricing terms allowing relief if commodity prices remain volatile.  Under such terms prices would be quoted for the per pound value of the plastic resin separate from the value-added molding.   Similar terms would be appropriate for cast or machined metal parts subject to spikes in steel and aluminum markets.  While OEMs will push back on this they may be left with few options as the traditional supply base dwindles through financial attrition.