Thursday, October 19, 2006

Alliance week continues - partnerships in distressed industries

Perhaps we should call it "Can't we all just get along? week." More partners fighting, but this time, we've got the added dimensions of the distressed US auto industry and the blunt instrument known as Chapter 11.

The Wall Street Journal reported (link here - subscription required) that Collins & Aikman, a longtime Ford Motor Company supplier, had cut off shipments to Ford's plant in Mexico--where the popular Ford Fusion is assembled--over a pricing dispute. (Here is a free link to a related article.)

Ford's situation is well-known. Collins & Aikman, an auto parts manufacturer created by former Reagan budget czar David Stockman, has been in Chapter 11 since May 2005.

Chapter 11 protection gives Collins & Aikman lots of power they wouldn't otherwise have. It's very difficult for companies who have contracts with Chapter 11 companies to renegotiate or terminate those contracts, and conversely it's very easy for Chapter 11 companies to renegotiate or terminate contracts if they wish to. (This powerpoint presentation includes a very good overview of US corporate bankruptcy, and slides 15-18 neatly summarize a bankrupt company's options regarding contracts.)

Which means companies like Collins & Aikman have lots of leverage they wouldn't possess if they were normal, going concerns. In this case, Collins & Aikman requested price hikes on certain of its plastic interior components, which Ford refused to pay. Says the Journal:

[This action] follows years in which the big Detroit auto makers have squeezed their suppliers to protect their own profit margins.

Needless to say, Ford agreed to the higher prices soon after the plant went idle.

The action of shutting off deliveries and thereby idling an assembly line is extremely rare. But Ford's comments betray their limited leverage: "This relationship has been irreparably harmed," said a Ford spokesman. The close integration of a parts supplier and the auto manufacturer means that there's a long lead time to replace a supplier. And existing contracts with a Chapter 11 company can't be terminated. Check back in a few years and see if Ford has followed through on its threat to cut off future business.

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