SYRACUSE, N.Y. and TORONTO — With its corrugated metal sides, loading bays and vast employee parking lot, there isn't much to distinguish New Process Gear from other large automotive factories.
The flat roof of the sprawling structure is dotted with ventilation ducts and steam shafts. Out front, facing the busy New York State Thruway, sits a modern two-storey building with tinted windows that houses its administrative offices.
Look a little closer and it becomes clear this isn't one plant at all. It's actually a jumble of additions, reflecting the company's four decades of producing an array of components for every major North American auto maker — axle parts, transmissions, gears and transfer cases that allow sport utility vehicles to shift into four-wheel drive. Every time the Syracuse plant won a big contract for another model, it would grow.
Bought by Magna International Inc. from DaimlerChrysler AG in 2004 as New Venture Gear, it offers a powerful taste of what's in store if Magna mounts a successful bid for Chrysler.
It embodies all the challenges facing the third-largest Detroit auto maker and its would-be new owners — an oversized union work force, wages and benefits significantly above the manufacturing norm, and a production process designed for an industry that has radically changed.
“New Venture Gear is probably a poster child of what needs to be done in North America from an operational standpoint,” Magna president Mark Hogan told analysts earlier this month.
As Magna's experience here demonstrates, coming up with the winning bid for Chrysler is only a tiny, first step for the Canadian auto parts giant, or whoever wins the Chrysler bidding — Blackstone Group LP, Cerberus Capital Management LP or gambling mogul Kirk Kerkorian's Tracinda Corp.
The repair job encompasses almost all facets of the auto maker's business: labour relations and related aspects of the cost structure; designing and developing hot new vehicles; manufacturing and vehicle assembly; distribution through sales and marketing and the dealership network; and finding a partner to share the costs of developing expensive new technologies.
“Hey, I hate to tell you this, but you're not going to fix this thing and flip it in two years,” says James Womack, founder of the Lean Enterprise Institute and author of The Machine that Changed the World, a seminal work on the auto industry. “This is a 10-year project.”
Nearly three years on, even Magna executives acknowledge they're still trying to figure out how to make New Process Gear a success.
Mr. Hogan says the plant still has too many workers and a patchwork production system that doesn't match the new realities of the auto industry. “We've got to fix both,” he insists.
And this former piece of Chrysler doesn't exactly fit the Magna mould. Neither does the rest of Chrysler. With 2,400 workers and spanning nearly two million square feet, the plant is a behemoth by Magna standards.
“These kinds of big monolithic plants with thousands of workers are not what [Magna] likes,” agrees Donald Western, director of economic development for Onondaga County, which encompasses Syracuse. He says the ideal Magna plant has 500 employees, covers 500,000 square feet and doesn't have a union.
“Magna is still working out what their business proposition is for this plant,” says Mr. Western, who has seen a long list of big manufacturers leave Syracuse over the past three decades. “This plant was a bit of a shock for them.”
Uncomfortable with the scale of the plant, Magna initially tried to hive it into four separate operating units — each with its own manager and supervisors, even purchasing staff. It failed, and Magna quickly abandoned the experiment.
“It was a plan on paper, but it didn't work,” said Vinny, a 34-year-old assembly worker who has been at New Process Gear seven years. “It was a joke.”
Workers at the plant are acutely aware of Magna's dilemma. Most employees here, members of the United Auto Workers union, make at least $22 (U.S.) an hour, and with overtime can take home as much $60,000 a year — a good wage by Syracuse standards.
“I've been here nine years and there isn't a day that goes why that I don't worry about my job,” said Dan, 38, as he arrived for the second shift Thursday afternoon and who, like most plant workers, talked only on condition he not be fully identified. “This is the auto industry.”
Scott Stanton, a tradesman at the plant and former president of UAW local 624, applauded Magna for cleaning up the factory and pursuing major new contracts with Ford and GM.
But Mr. Stanton says Magna has been gradually putting more outsourced parts into its four-wheel-drive transfer cases, making more work for people on the loading dock and less work for its own skilled trades workers.
“They're not afraid to talk about Mexico, that work can be done cheaper somewhere else,” he says, “and they're trying to leverage that [in contract talks.]”
The work force has already shrunk dramatically from the 4,000-plus in 2002, before the current slump hit Detroit-based auto makers.
More than 400 workers accepted buyouts last year. UAW officials expect another 300 may do the same in September, when Magna and the union sign their first contract at the plant.
And yet Magna is hiring, albeit tentatively. So far this year, it has added more than 100 new employees, and the company's website has 29 job postings.
But the new hires are making as little as $13 an hour, or nearly half what existing workers make. They also don't get the full Chrysler company pension plan that others enjoy. Workers say Magna has also scaled back some health benefits since it took over. Magna spokeswoman Tracy Fuerst said Mr. Hogan was on vacation this week and not available to elaborate on the comments he made to the investor conference in New York.
Those conditions could eventually become a reality for existing workers, pending the outcome of contract negotiations.
But John, an electrician at the plant, isn't about to leave because there are no other major manufacturers paying this kind of money in the area. With 30-plus years service, he says he plans to have a look at the next buyout offer that's expected in September.
“I want to see what happens at the end of this,” John says. “Why get off the boat now?”
A Chrysler overhaul will require billions of dollars more than the up-front purchase price, and starts with labour relations and legacy costs that are estimated at about $16-billion. Health care tops the list of issues needing to be addressed.
The UAW has refused to provide Chrysler the same health care concessions that it gave to the company's larger rivals, Ford Motor Co. and General Motors Corp. That represents a penalty to Chrysler of about $600 a car versus those competitors, says David Cole, chairman of the Center for Automotive Research, an industry think tank in Ann Arbor, Mich.
The competitive disadvantage is even more striking when compared with Japan-based auto makers. Against those companies, Chrysler faces a deficit of as much as $2,500 a car.
“The starting point in the U.S. is the health care restructuring that both Ford and GM received,” Mr. Cole says. “That's absolutely a minimum.”
A critical point for Magna when it comes to labour relations will be transplanting the parts company's entrepreneurial culture to a company managed for generations by strict and regimented union rules and regulations. And on the manufacturing front, Chrysler earned plaudits last year from the influential Harbour Report because of improvements to its productivity and a 2005 capacity utilization rate of 94 per cent at its North American assembly plants.
But that figure slumped to 77 per cent in 2006 as a slide in sales caused a massive fourth-quarter cut in production that contributed mightily to a $1.5-billion operating loss at Chrysler. “You've got to run a Toyota-class plant. Full stop,” Mr. Womack says. That means assembly plants must produce high-quality vehicles, are flexible and can shift production quickly and easily when market tastes change.
Those plants will also have to be cranking out hot vehicles if the auto maker is going to generate sustainable profits — designing and developing cars and trucks that will be hits in the ferociously competitive North American market may represent the single most difficult challenge for Magna if it wins.
“You can do everything in every other area of the business, but if you can't get the revenue line going, you won't save this company,” says one veteran New York auto industry analyst who knows the company well.
In another focus area, Magna and the other bidders bring zero expertise to the marketing and sales side of the business and the antiquated North American dealership model of selling vehicles.
If fixing that involves buying out dealers, it will cost billions and be gut-wrenching as GM found out earlier this decade, when it eliminated the Oldsmobile division.
The rewards, however, could be tremendous, Mr. Womack points out, because no one has been able to change the age-old relationship between the factory and the end customer — a good idea on that front could be a huge success.
“Can these guys do anything about creating a better [system] than the Monty Hall, Let's Make a Deal tradition of car dealing, where it's everybody in the jungle?” he says. “No one's been able to do it.”
Chrysler's dealership and distribution network is probably no worse than those of Ford and GM, but measured in vehicle sales per franchise, it trails its rivals in the U.S. market with 250 sales per franchise last year, compared with 288 for GM and 375 for Ford.
The divorce with DaimlerChrysler would leave a major hole for a buyer. “Chrysler needs scale,” maintains Mr. Cole of the Center for Automotive Research, who says he doesn't think Chrysler can survive as a stand-alone company.
The cost of developing new technologies, such as hybrid engines or fuel cells, is prohibitive and one of the reasons for the merger with Daimler in the first place was to spread those costs over a much larger base.
Chrysler chief executive officer Tom LaSorda has acknowledged that the company can't afford to develop a small car on its own, so it will need help for the more expensive task of finding the best way to replace the internal combustion engine. Magna is already doing work with BMW AG in that area, which may represent a link that can be exploited.
Back in Syracuse, Mr. Western, of the county economic development office, figures the area is better off with a smaller, leaner New Process Gear than a plant closing, which was feared when Chrysler originally put the factory up for sale. It could have become “another pigeon hotel,” like so many other factories, he says.
For some workers, there's a touch of irony at the prospect of Magna buying all of Chrysler. Dozens of workers here accepted transfers to another Chrysler plant in Illinois, rather than dealing with the unknown of Magna ownership in Syracuse.
Now, as one plant worker noted wryly, they could wind up working for Magna anyway.
© The Globe and Mail
