Real Estate News Blog: Chrysler Plans to Lease Factory

Chrysler LLC is crafting an unconventional pact to lease part of an Indiana transmission plant and some of its employees to a Canadian company that would build parts for the auto maker and other customers, including some outside the car industry.

The tentative deal is expected to be sealed this summer and is small in value -- just $60 million -- but it illustrates the different ideas that Chrysler is experimenting with to try to wring value out of under-used plants.

Since arriving last summer, Chief Executive Bob Nardelli has pushed Chrysler to rethink how it does business in a bid to conserve cash, cut capital spending and focus resources on improving the parts of cars that influence consumer purchases and perceptions.

For example, in recent months Chrysler has sought buyers for an axle plant that the company started building only a year ago. It also has put several Detroit-area properties up for sale, including a large engineering site, and has turned the company's auto museum into a nonprofit organization.

In an interview this week, Mr. Nardelli emphasized the urgency to control cash flow, especially now as a historic shift in consumer preference from trucks to cars squeezes Chrysler and other manufacturers.

"I keep score," he said, every day on sales, orders, the amount of cash the company generates and how much cash it uses.

He also noted that closing under-used facilities isn't always the most attractive option because, in many cases, Chrysler would still have to pay laid-off union workers. "You wouldn't be taking the cost out," he said.

In Indiana, the company is nearing a deal with Linamar Corp., a maker of metallic components, a spokeswoman confirmed. Linamar would lease more than 250,000 square feet of floor space at Chrysler's Kokomo transmission plant and use as many as 200 of Chrysler's unionized employees. While the workers would remain on Chrysler's payroll, part of their wages would be covered by Linamar, reducing Chrysler's costs.

Such a deal would be highly unusual for the auto industry, where suppliers have built products inside an auto maker's factory but not for companies outside the industry. Linamar would use existing Chrysler equipment previously used for older transmission parts. It would also buy and refurbish some of the equipment for use at other sites.

"There are several different avenues where the parties are benefiting," said Brian Harlow, general manager of transmission, casting and machining for Chrysler. "We reduce our investment. They reduce their investment by buying our equipment and refurbishing."

Workers represented by the United Auto Workers union would work on the Linamar floor space. Chrysler would handle all employee and union-related matters.

"We can step in and take on the business, and Chrysler could get a solution really to deal with excess people that they have that they had an obligation to," Linamar CEO Linda Hasenfratz said.

Linamar has only two of its 37 plants in the U.S.: in Kentucky and Iowa. The move is part of the supplier's growth strategy to diversify its power-train business with products that are more fuel-efficient.

Linamar's parts would go into dual-clutch transmissions produced by Getrag Corp., another supplier to which Chrysler has outsourced component work for its 2010 model-year vehicles. Linamar's contract with Chrysler would let the supplier make parts for competitors and industrial businesses.

The supplier's parts would also go into a new six-cylinder engine Chrysler has developed and a new, advanced transmission, "both of which are technologies that are helping to reduce emissions in vehicles," Ms. Hasenfratz said.

She said Linamar could be potentially interested in doing axle work, but she wouldn't go so far as to say the supplier is hashing out a joint-venture deal with Chrysler for its axle site.

"Linamar's strategy is pretty simple on the power-train side. Anywhere that we can grow in that arena would be an area of interest for us," she said.

The two hundred Chrysler employees who would work in Linamar's section of the plant would be paid lower wages allowed under the contract Chrysler and the UAW negotiated last fall.

UAW Local 685 approved the deal, 83% to 17%, last month, which ensures work over a nine-year product cycle. About 650 members participated in the vote that will allow Linamar to set up shop inside the plant, where more than 3,000 employees work.

As part of the agreement, jobs could increase upward of 500 in the future. Production is expected to begin in fall 2009.

A similar business model may be installed at Chrysler's Etobicoke casting plant in hopes of bringing "new life" to the Toronto factory, people familiar with the matter said.