By on June 9, 2008

money1.jpgChrysler is no longer "asking" suppliers for a five percent cost cut across the board– they're just taking it. More ominously, they've changed their payment terms. We just received this information from a reader (independently confirmed) who wishes to keep his name and company confidential for obvious reasons:

On June 3 we received revised purchase orders (PO's) indicating Chrysler will now be taking five percent off all PO's and will take 60 days to pay instead of 45. The trouble is they are doing it to all existing orders, not just future orders. I was told by Chrysler purchasing they were trying to keep their cash flow together and there was nothing they could do about the PO changes. I think that might be all for Chrysler unfortunately. They also told me the new rules were going to include PO's shipped after June 1 even if they hadn't bothered to change the order.

If Chrysler's cash flow is so precarious that they have to shortchange suppliers and take longer to do it, it doesn't bode well for the company's short-term prospects. It looks like the only thing that will pull them out of this death spiral is a healthy infusion of cash from Cerberus' deep pockets; the private equity firm isn't known for throwing good money after bad. Look for Chrysler to file for C11 before the end of August, when the statute of limitations expires for suing Daimler for false conveyance.

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33 Comments on “Chrysler Cashflow Crisis Confirmed...”


  • avatar
    Ingvar

    What stops the suppliers from not fulfilling the orders? I mean, is Chrysler/Cerberus even gonna last sixty days? Is there gonna be strikes? Legal battles? Can they even change the existing orders just like that? What stops the suppliers from saying “We ain’t gonna deliver unless you pay us.”

  • avatar
    menno

    The end could be really close.

    All it will take is one supplier with gonads enough to say “stop shipping parts.”

    If it’s a part that cannot be easily replaced and is critical to building, say, the Caliber (the ONLY moderately small vehicle Chrysler makes in the US), the PT Cruiser (small-ish, from Mexico but has some US suppliers I’m sure) or Journey (see PT Cruiser) then the show’s over.

  • avatar
    50merc

    A bad omen, indeed. Chrysler is stiffing suppliers by more than 5% when one considers the time value of money that would have been paid two weeks sooner. I can’t imagine that contracts with suppliers would provide for unilateral arbitrary reductions in payments, so presumably suppliers are now calling their attorneys in the hopes of getting Chrysler to disgorge the withheld money. Suppliers who have any leverage (i.e., sole sources of crucial components) won’t be willing to be patsies. They will start demanding payment in advance or upon delivery out of escrowed funds. Why trust Chrysler?

  • avatar
    Ingvar

    Why should the suppliers take the fall, when Cerberus had the money, but are unwilling to contribute to the cash flow? There’s no incentive for the suppliers to take part, especially when the chance of Chrysler going bust WITHIN sixty days are so grave. Even without leverage, the chance of being screwed is bigger than the chance of getting paid.

  • avatar
    mel23

    It’s not like suppliers have a cushion to fall back on. Given the lower volumes, especially in truck/SUV parts they’ve been shipping, higher costs for energy, steel and plastics, etc. they are up against the wall too. Assuming Ford is the best managed of the 2.8, maybe they have some kind of spaghetti-like chart showing the likely domino effect of this.

    What are the odds of an industry bailout before year end? What would be the point? Just send some checks to the workers; let the execs and stock holders take their medicine.

  • avatar
    Verbal

    Doesn’t Chrysler have contracts with its suppliers that include pricing and payment schedules? And doesn’t this represent breach of contract? If you or I walked into a store to buy something priced at $1000, but only paid $950 before walking out with it, wouldn’t that be… theft?

  • avatar
    Matthew Danda

    This is the language that executives use to indicate disaster is coming. Obviously they can’t say it in real words, so they do it in such policy changes.

    Also, interestingly you can determine the financial health of a company by looking at the employee kitchen. If coffee, sodas, and tea are available for free, the company is rich. When they take away the styrofoam cups, the company is under significant financial strain and it is time to start interviewing elsewhere. When the coffee is no longer free, it is too late to find another job. Just hang out until you can get severence.

  • avatar
    OldandSlow

    This isn’t a workable long term strategy for Chrysler. Personally, I would have to bail on doing business with Chrysler, if they were pulling a net 60 days on payments and using the excuse that they are having cash flow problems.

    Furthermore, if they go belly up, who wants to lose 60 days worth of inventory.

  • avatar
    Ingvar

    “Furthermore, if they go belly up, who wants to lose 60 days worth of inventory.”

    And not getting paid.

    Suppliers that accept those terms is in the risk of going belly-up themselves. And what Cerberus is looking for is to avoid paying at all. If the suppliers don’t accept, that will be the end of Chrysler. Then they can point fingers and say, “Look, it’s not our fault, it’s the suppliers who didn’t deliver”.

  • avatar
    netrun

    Keep in mind that one “supplier” that Chrysler uses a lot of is people who work on contract to them. People that walk in the front door every day. They are getting the shaft without any re-negotiation of their contracts either.

    Also, this isn’t the first time Chrysler has done this. The last time was February 2002. Same thing, 5% pay cut, retroactive if possible.

  • avatar
    Ingvar

    There are at least two reasons to this manouvre:

    1. Cerberus plans for Chrysler to go Chapter 11 within 60 days. Why spend more cash, or any cash at all, when the house of cards will fall? Why don’t stop the cash flow completely, and gain some supplies they don’t even have to pay for in the meantime?

    2. Cerberus wants a scapegoat they can point fingers to. As I stated above in a previous post. “Look, it’s not our fault…”

  • avatar
    John Horner

    This is breach of contract pure and simple and would not be held up in court, but the supplier is in a real bind if they are dependent upon Chrysler business for their own survival.

    It’s dirty pool and will leave a very long bitter memory. The end is nigh, and it is going to be very ugly. Jim Press is going to have a long retirement in which to ponder why he committed career suicide. If he is lucky, he will not be spending it in Club Fed. People will certainly be looking for a few executives to lock up in anger. In fact, there might be some criminal charges which could be built on this supplier squeeze maneuver. Racketeering? Fraud? After all, how different is this situation from the thug asking for 5% of your income for “protection”? Elliot Spitzer could have had a field day with this situation if he wasn’t trying to keep himself out of prison.

  • avatar
    mel23

    And Phil Murtaugh. I’d think these guys got some money up front besides a very good package in case things went well; well, better than this at least.

    So looks like Nissan might have to do with the Titan for awhile yet. And if the Cummins business dries up with the Ram, might Ford be interested given the ongoing fighting with International?

  • avatar
    rm

    Much of this has been brewing for months. I’m only going to assume that Chrysler will either pull the trigger itself or the suppliers will do it for ’em.

    If Chrysler somehow manages to survive this, they’re pricing themselves into suppliers that can’t support them the way they’ve been used to. The expertise for doing the E D & T work on sub components largely lies with the suppliers not the OEM.

  • avatar
    blowfish

    Looks like writings are already on the wall.

    Wonder if they could sue anything out of Dumbler?
    After all buying such a bg co. what are the implied warranty that things are going well.
    Dumbler’s defence ” Is all youe American making of sub-prime, and the Arabs gave u the Hershey hghway. ”

    Holding payments longer is never a good sign, a 5% discount looks even worse. When they file CH 11 Chrylerbus has less to pay thats all.
    To the suppliers, should all yours eggs in one Chryslerbus basket, u wont be long to turn into a basket case.
    Is really sad situation, high oil price screw it all.

  • avatar
    motownr

    While it certainly is a challenging environment, I’d be surprised if Cerberus willingly cratered its reputation by filing for Chapter this soon after taking control of Chrysler.

    Premier firms don’t like to have public black eyes, and it would be hard to imagine a more public black eye than filing a company the likes of Chrysler so shortly after buying it. The repercussions for Cerberus would be immense.

    More likely, IMO, if there truly is a looming fume date, the dog-wonders will sprinkle in a bit more cash to protect the company and (hopefully) ride out the storm. If you look at the ResCap situation, you’ll see that Cerberus is really adept at sidestepping even the most looming of disasters with financial dexterity.

  • avatar
    Ryan Knuckles

    So much for Quality Control. I would expect to see a lot more defect part come in the dock doors at Chrysler’s plants. Well, you would if I were in charge of one of these suppliers. If I were asked to do this and were not in a position where you could tell them where to shove it, I would get my 5% back by lowering my threshold for defects. Throw away less = Ship more = a little more money in my pocket. Oh, and I would definitely start looking for new customers or organizing a downsizing strategy.

  • avatar
    stephdumas

    There are at least two reasons to this manouvre:

    1. Cerberus plans for Chrysler to go Chapter 11 within 60 days. Why spend more cash, or any cash at all, when the house of cards will fall? Why don’t stop the cash flow completely, and gain some supplies they don’t even have to pay for in the meantime?

    I won’t be surprised to see Cerberus giving the keys to someone else after they filled Chapter 11 like a Indian or Chinese conglomerate or another automaker (Fiat, Peugeot-Citroen, VW or even Renault-Nissan, well that’s what Peter DeLorenzo of AutoExtremist think)

  • avatar
    Alex Rodriguez

    Please forgive me if I don’t take this story as Gospel truth. In 60 days either TTAC will be sounding the trumpets from the hills about how right their prediction was, or TTAC will be talking about something else.

    Until then, this is rumor and opinion.

  • avatar
    oboylepr

    On June 3 we received revised purchase orders (PO’s) indicating Chrysler will now be taking five percent off all PO’s and will take 60 days to pay instead of 45. The trouble is they are doing it to all existing orders, not just future orders. I was told by Chrysler purchasing they were trying to keep their cash flow together and there was nothing they could do about the PO changes. I think that might be all for Chrysler unfortunately. They also told me the new rules were going to include PO’s shipped after June 1 even if they hadn’t bothered to change the order.

    This does not sound like rumour Alex. Besides, it’s all been seen before from all of the D3. It is highly likely that this 5% will kill whatever meagre profit some suppliers were making and might cause series liquidity problems for others. There is going to be blood on the floor!

  • avatar
    jaje

    If Chrysler pays up front then a 5% discount is ok to suppliers as they can put in bank for 60 days and make up that 5% or reuse it for funds. But to take an unagreed 5% off and add 15 more days to payment – that is a slap in the face. That 5% “discount” is compounded with the lack of interest for the extra 15 days the supplier would have normally gotten if paid within NET 45. NET 30 is the standard invoice payment schedule and NET 60 for commercial (common for many municipal gov’ts) isn’t the norm.

  • avatar
    daro31

    My plant makes a major component, seats for Chrysler, they are our main customer. Last week the releases went way up, beyond what we are normally capable of producing. The parts are for Minivans, Dakotas, Journeys and some Jeeps. This weekend the entire Quality department had to be in 24 hours a day to ensure that any production disruption was quickly resolved because we can not afford to lose a unit or they are saying we are going to shut the customer down. I just heard that we did meet the requirement miraculously considering the heat the production people are working in. Guess what the logistics guys are panicking again, because Chrysler just put up the releases to something impossible. I have been wondering what is going on, when truck and van sales are way down. Anyone think this looks suspicious?

  • avatar
    Ingvar

    “Anyone think this looks suspicious?”

    Everything that Cerberus/Chrysler does right now looks outright suspicious. This is clearly a set-up, but a set-up of what? what is the ultimate goal here? For those who have been following Chryslers actions for the last couple of months, something is clearly happening at the end of this summer. But what?

  • avatar
    KatiePuckrik

    How about this for a hypothesis:

    “Boot ’em” Bob has only been in the job for less than a year. That isn’t enough time to do a proper strip down and downsize.

    So, what if, Cerberus PURPOSELY go into Chapter 11 (like Ingvar said earlier, using the suppliers as a scapegoat) to buy more time whilst “Boot ’em” Bob does what he needs to?

    Things look a bit TOO calculated for my liking…..

  • avatar
    jaje

    Looks like Chrysler is looking to go into C11 and blame it on someone – by setting impossible goals for suppliers looks like their tactic. Come August we’ll see what’s going on as gas is supposed to stay or go even higher this summer which means Chrysler has 2-3 more months of sales like May 2008 (20% plus loss of market share).

  • avatar
    NickR

    I will chime in with the consensus and say that this is a sure sign that they are going to go belly up.

    Apart from the short term savings, everything about this move smacks of ‘doom’. Poisoning relations with suppliers, if not bankrupting them, sullying whatever reputation they have left. Maybe customers won’t hear about this, but the idea of buying a vehicle from a company that simply turns it’s back on contract provisions is a non-starter unless it’s mayb 20cents on the MSRP dollar.

    They should sell Mopar Performance (which truthfully isn’t worth that much I think) and call it a day.

    As has been previously mentioned, the Big 2.8 have done this before. An associate on contract at Ford was called into a room with a batch of other contractors and told they could accept a 7% reduction in fees or walk.

  • avatar
    Ingvar

    I guess they don’t even give a shit, as they reckon no one in position will be left long enough to take the blame. It’s more like, take the money and run. Or, adios muchachos…

  • avatar
    motownr

    Daro31:

    Are any of your products at risk for being included in the India sourcing? Building up a supply of inventory prior to potentially rebidding a contract isn’t unusual….

    Can somebody please explain the logic of C11 for Cerberus? I can’t see how this would begin to make sense…the equity would be toast.

  • avatar
    daro31

    Are any of your products at risk for being included in the India sourcing? Building up a supply of inventory prior to potentially rebidding a contract isn’t unusual….

    I doubt that is going on as we are currently installing a new 600 Ton Press to dop some more of our own parts in house. Of course these type of projects are long term, and the issues we are talking about is short term, so who knows?

  • avatar
    mel23

    Are seats a component that can be sourced from far away? My impression is that they are not since they have to be color-coordinated with other parts of the interior, and possibly for other reasons. A substantial inventory of seats would occupy a LOT of space, but I suppose that could be pushed off to the supplier.

  • avatar
    Mcloud1

    Well, I am agreeing that by the end of the summer, that will be it for Chrysler.

    I still can’t believe that a company that was flush with cash and had a product portfolio of just about every car being class leading, is now only two months away from obliviation.

    Now, lets recall my prediction of Chrysler’s fate: They will go out RCA style. Ford will buy the bankrupt, C11ed dyeing Chrysler from Cerberus, spin off Jeep, take in the useful parts and break up and sell the rest, with Chrysler and Dodge being sold to Chinese automakers as empty brands under which to sell their vehicles in the US.

  • avatar
    chadpothier

    This is completely ridiculous. Ever since Chrysler went private the media has been grasping at straws for stories to publish and jump on every tiny news they can get their hands on. I’m on the inside and can tell you Chrysler is exceeding their forcasted sales and are pushing for cost cuts because in todays automotive industry that is the reality; you don’t survive by sitting back and waiting for the market to shift. Chrysler runs some of the most efficient plants in North America, aand are tied with Toyota for manufacturing efficiency.The Jeep plant in Toledo is the best performing plant in North America. To be efficient you need efficient suppliers, end of story. Eat or be eaten, and Chrysler is here to survive.

  • avatar
    blowfish

    chadpothier

    Lets hope your info is totally reliable & correct.
    All of us are base on speculation. Even though we cannot see what u see, certain things can be predicted with educated guess. Some are unfound rumours that can never be true.

    We do all sincerely hope Chryslerbus can slowly turn around.
    First the product has to be dependable, reliable.

    No difference than why people will always go back to a not all impressive decored restaurant and skip a real freshly renovated rest?
    Is the food quality, they rather sit not as comfortable but good food than an expensive meal with not top quality food.

    Hope Chryslerbus can sell the real jucy steak but not the sizzle.


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