Chrysler Cuts Costs and Puts Axle Plants Up for Sale

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Researched by Industrial Info Resources (Sugar Land, Texas)--Domestic automakers have been trying to slim down their operations in recent years through layoffs, plant closures, and by offering buyouts and early retirement packages. Chrysler LLC (Auburn Hills, Michigan) is among those companies going through restructuring and cost-saving efforts.

The company has been attacking costs from all angles. Over the past year, the company has offered 10,000 of its 44,000 employees buyout offers worth up to $100,000. Salaried and hourly employees have also been instructed to take a mandatory extended vacation beginning July 7 and July 21, during the traditional summer shutdown. The company also plans to cut the number of models it produces in half, from 30 to 15. Chrysler will remove redundant models throughout its Chrysler, Dodge and Jeep lines, trucks and minivans. The elimination of the redundant models will then enable the automaker to reduce shifts and possibly close plants to reduce costs.

Chrysler has also been undergoing an aggressive capital-expenditures program. The company is investing heavily in its engine- and drive-train-manufacturing operations with the construction of a $570 million plant in Mexico, a $730 million plant in Michigan, a $450 million expansion in Wisconsin and a $700 million axle plant in Michigan.

The axle plant is planned to replace the aging Detroit axle plant. In April 2008, Chrysler had put the Detroit plant up for sale, along with an axle plant under construction in Marysville. The company has reportedly approached two axle suppliers, Dana Holding Corporation (NYSE:DAN) (Toledo, Ohio) and American Axle & Manufacturing Holdings Incorporated (NYSE:AXL) (Detroit), as well as various private-equity groups about purchasing the plant for about $400 million, almost half of the cost of the land, construction and equipment installation.

With the mess in the credit market, it could be difficult to find someone willing to assume the credit risk on the deal -- be it a private equity firm or current automotive industry player. Both Dana and American Axle are going through their own turmoil; Dana has recently emerged from bankruptcy, and workers at American Axle had been on strike February to May. Even though Chrysler is selling both of the plants at a heavy discount, two plants for less than the amount of capital it takes to build one, it does not seem to be a good time for either one of the axle suppliers to make a major purchase like this. Especially given that American Axle is considering closing two or three of its plants, it would not make sense to purchase two more plants. Chrysler is looking for a company to take over the construction of the plant, finish it out and then close the Detroit plant after the Marysville plant is operational.

Construction on the 800,000-square-foot, $700 million Marysville plant began in May 2007. BEI Associates is the architecture and engineering firm for the project, which has been designed to meet the LEED requirements of the U.S. Green Building Council. Walbridge Aldinger Company (Detroit) is the general contractor, and Gemellaro Systems Integration (GSI) (Troy, Michigan) is the electrical contractor. Gemellaro Systems will be responsible for electrical construction, closed-circuit television system, access control and fire alarm systems. The manufacturing plant and employee center will occupy 645,000 square feet. There will also be a 23,700-square-foot energy center containing air compressors and dryers, oil storage tanks, substations and an emergency generator.

The Detroit axle plant was built in 1917 and purchased by Chrysler in 1928 and been expanded several times since then. The plant has 1.2 million square feet of floor space on a 48-acre site and produces nearly 1 million front- and rear-drive axles, 600,000 trailing axles and more than 150,000 differentials. The plant makes axles and differentials for more than 10 different Chrysler models. The plant is also the only source of Chrysler-manufactured axles; axles not made by Chrysler are from tier suppliers, such as American Axle and Dana. Over the years, the plant has been known as one of the industry's most inefficient axle plants, mainly because of its age and size. It is one of the industry's smallest axle factories. In 2003, Dana had considered purchasing this plant to expand its axle businesses, but that deal was unraveled by the UAW. Both General Motors Corporation (NYSE:GM) (Detroit) and Ford Motor Company (NYSE:F) (Dearborn, Michigan) shed their axle factories years ago: GM in the 1990s and Ford in 2001.

It has been stated that Goldman Sachs Group Incorporated (NYSE:GS) (New York, New York) is advising Chrysler on the sale of the plants. Interest in the plants has been meager mainly because the new owner would have to work with the UAW. Chrysler is trying to relieve itself of the plants because the automaker wants to focus more on interiors and fuel-saving technologies. The company would also like to create more partnerships and alliances to share the cost of developing and making components. Chrysler has formed relationships with Getrag to produce new transmissions and automakers Nissan and China's Cherry Automobile Company for small cars. The Chrysler-Getrag joint venture is currently building a $560 million plant in Indiana that is scheduled to come online later this year.

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