August 11, 2008 - 12:01 am ET
When Dana Holding Corp. sued Chrysler LLC over contract terms last week, Dana sent a message to all its customers: Dana needs to be reimbursed for rising raw material costs.
On Wednesday, Aug. 6, Dana asked a U.S. Bankruptcy Court in New York to affirm Dana's interpretation of an agreement the two companies reached during the supplier's Chapter 11 reorganization. Under that agreement, Dana contends, the supplier can stop shipping parts to Chrysler starting Jan. 1, unless the two companies agree to new prices and other terms.
Not picking a fight
"We're not here to pick a fight with Chrysler," Dana Executive Chairman John Devine said. "We have a business today that is at a significant loss, and that needs to be resolved. Our intent with Chrysler is to have a good, strong, long-term relationship."
Dana spokesman Chuck Hartlage said the parts maker filed the suit to bring Chrysler to the bargaining table. Chrysler spokesman Mike Palese said that Chrysler's underlying purchase orders were intended to continue in accordance with their terms. He appeared to imply that Dana has to continue shipping parts under the terms of the current contracts after Jan. 1.
Dana supplies driveline systems for the Jeep Wrangler, Liberty and select versions of Grand Cherokee SUVs; Dodge Nitro SUV and Viper car; and select light- and medium-duty versions of the Dodge Ram pickup.
Dana has supplied Chrysler with four-wheel-drive and axle technologies since the first Willys Jeep in 1941. But its Chrysler business is shrinking.
In the first half of this year, Chrysler accounted for just 3 percent of Dana's revenue.
By comparison, Ford Motor Co. accounted for 19 percent of Dana's first-half revenues.
Chrysler has options
Dana's threat is puzzling. Chrysler has several options to replace Dana's axles and driveshafts, say industry executives, although re-sourcing the parts to Chrysler axle-making plants or another supplier could take 18 months.
"Chrysler is in the best bargaining position here," says consultant John Groustra, of Conway MacKenzie & Dunleavy. "There are other qualified suppliers who have capacity."
American Axle & Manufacturing Holdings Inc., Magna International Inc. and Linamar Corp. are among several companies capable of taking on the Dana contracts, he says. "But Chrysler would end up paying the price increases that Dana is looking for."
American Axle has several Chrysler driveline contracts and excess capacity. Chrysler is American Axle's second-largest customer. The automaker buys parts for the Dodge Ram 2500 and 3500, Jeep Wrangler Rubicon, and the Chrysler 300 car built in China. "We have the ability to help them if they ask," says American Axle spokeswoman Renee Rogers.
Dana appears to be joining the likes of other suppliers who are signaling the industry that unrealistic pricing cannot be tolerated, especially during tough times.
Last week, Canadian driveline supplier Linamar filed suit in Detroit District Court against steel maker FormTech Industries LLC in a dispute over raw material surcharges.
In June, Johnson Controls Inc. filed suits against three suppliers. The giant seat maker claimed those suppliers weren't absorbing their share of higher steel prices.
Dana, of Toledo, Ohio, has been a Chrysler supplier for decades. But its current contracts mean it loses $75 million a year on its Chrysler contracts. Much of those losses come from increases in the cost of materials.