FCA sues auto supplier over breach of contract, faces $100M loss
Fiat Chrysler Automobiles NV is suing a Canadian auto supplier in federal court over an alleged breach of contract because it cannot provide enough engine blocks needed to build popular Jeep SUVs, Ram trucks and Chrysler minivans — a decision the automaker says could cost it more than $100 million.
Martinrea International Inc. "improperly and unilaterally" reallocated one of its engine-block manufacturing machines in Mexico to another customer, according to FCA. The Italian American automaker says the change will leave it with "irreparable harm" — thousands of units short of the critical piece for which Martinrea is the only external supplier and is needed to build the vehicles that boosted FCA to record-high profits in North America last quarter.
"Martinrea's decision will imminently cause a shortfall in parts from which FCA US will not be able to recover within any reasonable length of time, resulting in extraordinary monetary damages that could quickly eclipse $100,000,000.00 as well as plant shutdowns, layoffs, and reputational harm," FCA's attorney Moheeb Murray said in the lawsuit that moved Monday from Oakland County's Circuit Court to the federal U.S. District Court for the Eastern District of Michigan.
The auto supplier agreed to manufacture 13,021 engine blocks weekly for FCA on its 3,500-ton aluminum die casting machines at its facility in Quereataro, Mexico, according to the automaker. After reallocating one of the machines for another customer, Martinrea is promising a maximum of only 6,247 engine blocks per week, FCA says.
"The insufficient supply will inevitably require FCA US to shut down production of six top-selling vehicle platforms in at least six of its plants," Murray wrote. "Each hour Martinrea fails to meet fully FCA US's releases is already resulting in monetary damages to FCA US of thousands of dollars, plus other incidental and consequential damages. And this amount could continue to climb to hundreds of thousands of dollars per hour."
Martinrea did not immediately respond to request for comment. The supplier, however, blamed Fiat Chrysler for the part shortage in a Dec. 11 letter sent in reply to FCA that was included in the case.
The automaker in October insourced approximately 30% of the casting production it says it needs at a plant in Kokomo, Indiana, Rob Fairchild, the supplier's executive vice president of sales and engineering, wrote in the letter. Fiat Chrysler in January also authorized Martinrea to refurbish six instead of eight dies that left the supplier without sufficient tooling, he added.
FCA then "abruptly changed course" from producing the casts itself, Fairchild wrote, "apparently in response to another supplier's situation."
"Martinrea was disappointed that FCA chose to in-source a significant portion of the casting production but, Martinrea relied on, and reallocated, the open casting production capacity created by FCA's decision," he wrote. "Martinrea wanted to keep this business, but FCA took it away anyway.
"FCA is now suddenly demanding that Martinrea produce 13,000 Parts per week — for a period of time — a weekly volume that FCA has never come close to demanding for many years."
He added that due to the conditions amid the COVID-19 pandemic, Martrinea's Mexican operations lacks the skilled labor needed to perform at that output.
The automaker does not address the October insourcing change in its legal complaint. It says it learned of the decision made by Martinrea CEO Pat D'Eramo during phone conversations on Dec. 2 and Dec. 3, one month after receiving confirmation that Martinrea could meet full capacity, Murray wrote. Martinrea has refused to engage or pay for a third party to make up the capacity shortfall, he added.
Fiat Chrysler is requesting a temporary restraining order and order to show cause to compel Martinrea to fulfill its contractual obligations, a monetary award for any economic damages and legal fees.
"FCA US is pursuing this matter to ensure Martinrea meets its contractual obligations to our business," the company said in a statement. "FCA US will pursue all necessary steps to minimize any potential impact to our production."
Fiat Chrysler uses Martinrea's "casted and cubed" Pentastar Upgrade Engine Blocks in the Jeep Wrangler, Jeep Gladiator, Jeep Grand Cherokee, Dodge Durango, Ram pickup truck and Chrysler Pacifica minivan. The company sold more than 333,000 of those vehicles in the third quarter, contributing to a record $2.9 billion in pre-tax earnings in North America.
For now, the automaker has plenty of inventory, though sales typically pick up during the last week of December, said Michelle Krebs, executive analyst at AutoTrader. The industry days-of-supply average was 69 days at the end of November. The Wrangler was among the lowest in stock of FCA's vehicles sitting between 66 and 70 days. Overall, Chrysler was at 89, Dodge was at 105, Jeep was at 99 and Ram was at 82 days.
"It's not what you want, but it's definitely really good," Mark Trudell, general manager at Extreme Dodge, Chrysler, Jeep in Jackson, said Monday of his inventory levels. He was unaware of potential production issues caused by Martinrea:
"We're selling everything we can get. The last time I talked to some people a few days ago, they said most of their plants were running full-time, triple shifts. They're doing everything they can."