Dana suit's message: Give cost relief

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.