Automotive-Related Bankruptcies Continue as Major Supplier Plastech Files for Chapter 11 Protection

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Researched by Industrial Info Resources (Sugar Land, Texas)--The list of automotive-related firms filing for Chapter 11 protection is long and distinguished and continues to grow each year: Delphi Corporation (Troy, Michigan) filed in 2005; Tower Automotive (Novi, Michigan) filed in 2005 and came out of protection in 2007 when it was taken over by Cerberus Capital Management (New York, New York), the same company that bought Chrysler LLC (Auburn, Hills, Michigan) in 2007; Collins & Aikman filed in 2005 and is now defunct; Dana Holdings Company (NYSE:DAN) (Toledo, Ohio) filed in 2005 and came out of protection on February 1, 2008; and now Plastech Engineered Products, Incorporated (Dearborn, Michigan) has filed for Chapter 11 protection from its creditors.

This latest bankruptcy announcement hardly comes as a surprise. In early 2007, Plastech, facing higher material costs and lower industry volumes, convinced the Big Three and Johnson Controls Incorporated (NYSE:JCI) (Milwaukee, Wisconsin) to give the company a $46 million bailout. In early 2008, a similar arrangement was reached to the tune of an additional $40 million. However, after the latest round of bailout financing, Chrysler determined that enough was enough and notified Plastech that it would be canceling their existing contracts, worth an estimated $200 million.

Approximately a month later, Plastech filed for Chapter 11 protection. Then the battle of the lawsuits began. Chrysler filed suit against Plastech, claiming that the supplier could no longer meet its production demands and that this would force the automaker to cease production because of its "just-in-time" inventory controls that require the automaker to maintain daily delivery of parts to remain in operation. After Plastech's filing, Chrysler halted production at four of its assembly plants: Belvidere, Illinois; Toledo; Newark, Delaware; and Sterling Heights, Michigan, while threatening to cease operations at the balance of its plants if a solution was not reached soon.

Chrysler and Plastech's feud has come to a temporary halt, allowing the automaker to reopen its four plants. However, the war is far from over as this temporary reprieve only lasts until February 15, 2008. If a new agreement is not reached by that time, Chrysler may be forced to once again halt operations at a part of or at all of its assembly plants.

Plastech plays an important role in the manufacture of nearly every vehicle that is produced by the Big Three. In the case of Chrysler, Plastech supplies approximately 500 plastic interior, exterior and powertrain parts to the company. Plastech's contracts with Ford Motor Company (NYSE:F) (Dearborn) and General Motors Corporation (NYSE:GM) (Detroit, Michigan) are similar.

Plastech had been one of the great stories of survival in the industry. Plastech's owner, Julie Nguyen Brown, founded the company after working at Ford as an engineer. After escaping Saigon a week before its fall, Brown settled in California and worked as a waitress while her brother finished high school. After his graduation, Brown received her master's degree in engineering from Wayne State University (Detroit) and began working for Ford. Brown built Plastech from nothing to a business with more than $1.4 billion in annual sales, more than 8,000 employees and 35 manufacturing plants. Now, all of that hard work has been placed at risk.

The beginning battles of this latest skirmish are just now over, but the prolonged war between the Big Three and their suppliers will continue to wage for years to come. Demands of higher quality and lower prices by the automakers have contributed to driving many suppliers into bankruptcy. As the Big Three continue to reinvent themselves as profitable entities once again, cuts will have to continue to be made, which, more than likely, will mean additional suppliers will fall by the wayside.

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