Supply Excellence — Who’s the Boss? Chrysler May be Bought by its Supplier

Who’s the Boss? Chrysler May be Bought by its Supplier

February 28th, 2007 · by Tim Minahan · No Comments · automotive sector, supply management

Last week, in a post on where Chrysler went wrong, I joked that the automaker may need to face the fury of supplier backlash after reneging on its supply management commitments. I never expected how true that statement might become. Or how soon.

Rumors surfaced yesterday that Tier-One automotive supplier Magna International Inc. may buy DaimlerChrysler’s ailing North American unit. The Detroit News reported that a Canadian labor union president acknowledged discussing a possible Chrysler acqusition with Magna officials. This was corroborated by comments from auto analysts at KeyBanc Capital that Magna was “seriously considering the potential purchase” of Chrysler.

The news comes less than one week after rumored talks for a General Motors takeover by Chrysler. It also follows a double-whammy of announcements for Chrysler’s massive restructuring plans and disclosure that parent Daimler-Benz was looking to dump the unit.

On the surface, such a dog-bites-man deal might seem unrealistic. As the world’s third-largest automotive supplier, Magna, which logged $22.4 billion in revenue last year — is less than one-third the size of Chrysler. And, despite being one of the most financially successful auto suppliers over the past decade, Magna’s engines have slowed recently. Just yesterday, the Canadian auto-parts maker reported its first unprofitable year since 1990, largely due to its reliance on business with ailing Detroit automakers. An acquisition of Chrysler may risk business with two of Magna’s biggest customers, GM and Ford Motor Co., which comprise 40% of the auto-supplier’s revenues. (Chrysler itself accounts for 21% of Magna’s annual business.)

However, a peek under the hood, suggests that Magna’s purchase plans are not unrealistic. Despite its recent performance, Magna is financially healthy with no debt. It has also managed an ever-increasing portion of vehicle module design and assembly on behalf of its customers, including Chrysler.

According to KeyBanc analyst Brett Hoselton, the acquisition of Chrysler is a natural progression for the next phase of growth for Magna (or any leading Tier One, for that matter). Magna has “reached a plateau as a supplier and niche contract assembler and that increased involvement in the design, research, and development of vehicles is the natural progression of its current capabilities,” wrote Hoselton in his report on the potential deal. The marriage would pair Magna’s engineering and production competence with Chrysler’s marketing know-how. (Can you say, vertical integration?) And the new company would be better positioned to ease labor issues and expand into emerging markets, particularly China — a region where both Magna and Chrysler are only beginning to build a presence.

The battle for control of Chrysler is far from over. But recent industry maneuverings portend severe impacts — both good (more available metals supply) and bad (increased supplier insolvency) — that will extend well beyond the automotive sector. Supply managers would be wise to audit their supply base to assess balance of trade and supply issues that may disrupt suppliers’ financial and operating health. Savvy buyers will use this new-found intelligence to negotiate closer ties (and lock in long-term discounts) with suppliers looking to offset their own risks and optimize asset utilization.

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