The Plastech Cover Up; The Legacy of Wasted Effort By The American OEM Automotive Industry

Implications: Plastech Engineering, now in bankruptcy, was advertised as the largest minority owned and operated OEM automotive plastics supplier. In fact, it was a synthetic business, a money losing enterprise, created by the pressure, for minority content, which was generated by various Federal and State agencies that required any company holding or bidding on any state or federal contracts or services to meet arbitrarily imposed targets for percentages of their total outside purchases of parts and services by sourcing them from so-called minority businesses. Johnson Controls International, in turn, was pressured by its customers, OEM car makers, to 'mentor' Plastech Engineering; i.e., to become responsible for insuring that the big customer's minority content requirements were met. Its reward was to also count the production of Plastech towards its own minority content requirements. But raw materials price increases over the last 5 years, in particular, have destroyed any hope of continuing.

Analysis: In the late 1980s Julie Brown, an naturalized American citizen who had been an emigre from Viet Nam, was an engineer at a Detroit car maker; her husband, a native born American, was a purchasing agent at the same company. Their two salaries combined to make their family a solid upper middle class one.

Mr. Brown, like all purchasing agents in OEM automotive, in those days was being asked by his employer to actively seek out 'minority suppliers,' who at that time were almost always assumed to be enterprises owned and operated by African-American men. At the time each car company already had a Director of Minority Supplier Development, and the Director at each of the Big Three was an African American male. 

Brown decided to fight the system's bias towards African American males, and he encouraged his wife to leave her job and apply for financing as a 'disadvantaged minority' under Section 8a of the Civil Rights Act of 1964 as it had been amended when the Equal Employment Opportunity Commission was created and in turn opened an office to promote Minority Business Enterprise in the late 1970s in cooperation with the Small Business Administration.

After trying to be independent Plastech was advised to get a mentor and one of the Big Three suggested to Johnson that the matchup would be good for both companies as far as getting business from the Big Three. Cocooned as a captive supplier to Johnson Controls, a so called Tier 2 supplier, Plastech rode its mentor's coattails to a billion dollar orderbook and plants at 34 locations.

Around five years ago the prices for raw materials began their current climb, and unprepared, basically clueless OEM car maker purchasing departments began to simply refuse to accept price increases from beleaguered suppliers. Many, if not most, went bankrupt or moved their operations to low labor cost countries continuing not to realize that such countries paid the same for raw materials and that as soon as living standards improved, as in China, the low labor cost would evaporate.

Johnson was much better managed than GM, Ford, or Chrysler, and it managed to contain costs and even added other businesses to its portfolio.

The problem was that Johnson continued to value minority content at a much higher price than it was finally worth.

Johnson allowed Plastech for example to increase its prices to Johnson even when Johnson could no longer pass on those prices to its customers.

The game was almost exposed two years ago when Plastech tried to buy then newly bankrupt Collins & Aikman, a multifaceted, plastics based, OEM auto supplier around 4 times larger than Plastech. The bankruptcy judge ruled that it was unlikely that any lender would support such a purchase, since their was so little equity, if any, on Plastech's balance sheet, which even though private, he got to see.

Last week Johnson finally admitted that it had enough. It issued a statement that it could no longer afford to subsidize Plastech or to accept and be responsible for low quality products.

It is difficult to see how Plastech Engineering was founded by a person with a disadvantage, and it is incredible to see how much money was wasted by the car makers and Johnson International just to meet the "minority content target." 

The minority business development program at American OEM automotive was intended to give a leg up to the people of the southeastern Michigan community who were truly disadvantaged. Instead it was cynically gamed and helped jus a very few people, a handful, keep a portion of a huge amount of wasted money.

This kind of thing is the true legacy cost that OEM automotive managers talk about.