Rejecting Business May Have Disastrous Results Claim Automakers

Price pressures on some of North America’s biggest automotive parts suppliers may have come home to roost, sparking fears of disastrous consequences.
According to a report in industry publication Automotive News, Detroit automakers as well as some of their key suppliers may be facing a crisis if the second of two castings suppliers currently in Chapter 11 filings is allowed to reject "unprofitable" contracts.
Damages in the hundreds of millions of dollars and thousands of layoffs will follow if Intermet Corp. of Troy, Mich., is allowed to reject hundreds of what it calls unprofitable contracts, according to a motion by attorneys for U.S. automakers and suppliers in a bankruptcy court filing last week.
Intermet, a key supplier of ferrous castings for suspension and brake parts that filed for Chapter 11 bankruptcy protection on Sept. 29, argued that the Big 3’s prediction of an industry catastrophe is a “red herring.”
Automakers can usually sidestep a supplier in bankruptcy court. In this case, they have few alternatives. Two of North America’s largest suppliers of ferrous castings are in Chapter 11 reorganization – Intermet and Citation Corp. of Birmingham, Ala.
In a move that will reduce Intermet’s parts-making capacity further, the company last week said it will close its die-casting and machining plants in Sturtevant, Wis. The decision came three days after UAW Local 627 members rejected proposed contract concessions at the plants.
Intermet’s customers face a similar hard line: Pay higher prices and steel surcharges or risk having contracts canceled.
Last year, Intermet reported losses of $82.3 million.
Intermet ranks No. 69 on the Automotive News list of the top 150 suppliers to North America with North American original-equipment automotive parts sales of $578 million in 2003.
Attorneys for the Big 3, Honda and others argue that their clients “would suffer massive economic harm, including the shutdown of critical production lines,” according to a motion filed by the automakers this month in U.S. Bankruptcy Court for the Eastern District of Michigan in Detroit.
GM spokesman Tom Wickham called the case a serious issue.
The Big 3 contend that Intermet threatened the supply interruption to force them to “capitulate to demands for uncompetitive price increases” and better terms.
Intermet CEO Gary Ruff declined to discuss the case. But company lawyers argued in a motion on Wednesday, Dec. 15, that Intermet needs court approval to scrap “burdensome” contracts because the company is losing as much as $12 million a month.
Intermet disclosed that it must renegotiate contracts with 75 percent of its customers by Dec. 31 or face the loss of critical financing. That could send the company into Chapter 7 liquidation, according to a retired Detroit bankruptcy judge.
The automakers argue that they have agreed in principle to more profitable contracts for Intermet. But Intermet spokesman Mike Kelly says the company’s customers “have not agreed to any modifications.”