Tower Auto will not supply next Explorer frame - Ford Forums

Stacy94PGT · 12-17-2002, 08:56

Reuters / December 17, 2002

CHICAGO -- Tower Automotive Inc. said on Tuesday that it will not supply the frame for the next-generation Ford Explorer sport-utility because the business is not expected to be profitable enough.

"Our decision is based strictly on the fact that the expected returns at targeted pricing levels did not meet our requirements," Tower President Dug Campbell said in a statement.

Tower produces the frame for the Ford Explorer at its Corydon, Ind., plant. The plant employs about 800 people, most of whom are members of the UAW.

A Tower spokesman declined to comment on the plant's future. Options could include closing the plant, selling it to a company that would continue to make Explorer frames, or producing structures for other vehicles there.

A UAW spokesman was not immediately available for comment.

Ford Motor Co. has not said when a new Explorer might be introduced. The 2002 model debuted about 1-1/2 years ago.

Tower of Grand Rapids, Mich., said the decision does not affect its previously announced backlog of $1.4 billion of new business.

Tower has said 35 percent of its revenue is derived from business with Ford.

Shares of Tower were pressured in September after investors interpreted remarks by a Ford official that suggested Tower was vulnerable to pricing pressure from Ford that could erode its profit margin.

Ford COO Nick Scheele had said Ford worked with Tower to save $40 million a year on the Explorer frame, redesigning it to use less metal.

Automotive component suppliers are under intense pressure from automakers to cut costs. They typically face demands for price reductions ranging from 1 percent to 8 percent a year, according to the Original Equipment Suppliers Association.

Stacy94PGT · 12-17-2002, 22:58

Dissatisfied supplier exits Explorer-frame bidding
December 18, 2002
BY JAMIE BUTTERS
DETROIT FREE PRESS BUSINESS WRITER

Tower Automotive Inc. took the unusual step Tuesday of announcing that it won't make frames for the next version of the popular Ford Explorer sport-utility vehicle, because Ford Motor Co. won't pay enough. The Explorer is thought to be Tower's biggest single contract, accounting for about one-fifth of the Grand Rapids company's annual operating profits, expected this year to be between $50 million and $60 million.

But Tower said it wouldn't continue bidding on the next-generation Explorer, thought to be due out in 2005, because "the expected returns at (Ford's) targeted pricing levels did not meet our requirements."

Investors want companies to enter contracts judiciously, but giving up the Explorer business was seen as a bad sign for Tower.

The supplier's shares fell 17 cents, or 3.4 percent, Tuesday to close at $4.82. The stock has lost two-thirds of its value since spring.

"While investors should reward companies for exercising such capital discipline, in our opinion, the transition from a focus on top-line (sales) growth to return on capital is likely to be a rocky one for the industry," said analyst Wendy Beale Needham of Credit Suisse First Boston in a note.

Auto parts makers decide every day to stop bidding on future contracts, but it can be very difficult with a company's biggest customers or biggest contract.

"That's a pretty brave move on the part of Tower," said Neil De Koker, president of the Original Equipment Suppliers Association. "Not many of us feel we are able to do that. I'm sure they didn't do it lightly."

Announcing that a company is declining to bid on a contract is extremely rare in the auto industry -- or any business.

In late 2000, former Chrysler Corp. and General Motors Corp. executive Dennis Pawley resigned as chairman and chief executive of Guide Corp., angrily accusing GM of strangling the lighting supplier by refusing, in his opinion, to honor agreed-upon price increases. GM disputed Pawley's interpretation.

Tower said the decision was a "difficult one in light of our strong Ford relationship and the long supply history of this product."

Tower acquired the APC Group of A.O. Smith in April 1997, including the Corydon, Ind., facility that had supplied Explorer frames since the vehicle was launched in March 1990. The outlook for the 800 UAW-represented employees at the plant is unclear, Tower said.

Tuesday's announcement was necessary, spokesman David Huit said, to inform shareholders of the decision. "We had to as a matter of public record," he said.

Ford is working to repair its reputation among suppliers for demanding seemingly arbitrary annual price cuts.

Suppliers often take contracts at unprofitable prices, then fight back with steep re-engineering charges.

To try to end that cycle -- and save billions of dollars -- Ford's global purchasing chief, David Thursfield, has launched an ambitious system that focuses on collaboration among purchasing, design, manufacturing and suppliers.

In speeches to suppliers, Thursfield and other Ford executives have emphasized that they want both sides to be profitable.

"I can't stress enough that I'm not interested in your margins," he said last month.

The new system, called Team Value Management, is already getting started, but it won't be fully in place until mid-2003.

Bids on the Explorer frame are presumably being handled under the old system.

This is somewhat surprising, if only because Ford and Tower have had success in working together to take out costs.

Earlier this year, Ford was running behind on its goal to shave an average of $200 from the cost of each vehicle. But it got a big boost when the two companies worked together to redesign the Explorer's frame, saving almost $100 on each model.

Ford will sell more than 400,000 Explorers this year in the United States alone.

Ford shares fell 6 cents, or 0.6 percent, Tuesday to close at $9.88 a share.