For Mold-A-Matic Inc., it was the best of times that led to the absolute worst of times.
The custom tooling shop, based in Madison Heights, Mich., quoted on a $7 million contract in 1995 to make injection molds for a large automotive supplier working on a model-year 2000 vehicle. The medium-sized mold builder just had recorded an all-time high of close to $15 million in annual sales.
At that moment, the shop and its 75 employees celebrated a significant step since its founding in 1948. Unfortunately, that step was into a deep hole that put Mold-A-Matic on the brink of bankruptcy and forced the company to sell its assets during an auction March 3.
Mold-A-Matic was brought to its knees not because of performance issues but because cash flow dried up, said partner David Turczynski.
The firm typically spent millions for each contract in tool steel and equipment costs, but didn't receive payment from customers until more than a year after the tools were shipped, he said.
In the case of the $7 million contract, Mold-A-Matic was told not to expect any money until sometime after the year 2000, when the model is expected to begin production, Turczynski said. The company had to turn down the job because it could not wait to be paid, Turczynski said.
A recent slowdown in suppliers' payment dates for molds has left a bad feeling among many large auto-parts tool builders. The situation, arising because parts suppliers are not paid until after assembly-line components are approved, has torn asunder several companies and forced them to close. It also has caused a financial and accounting migraine for those mold makers.
For Mold-A-Matic, the end came when banks were unwilling to finance the firm's funds shortfall for more than 120 days.
The prospect of closing the company does not bother Turczynski, who has worked in toolmaking his entire adult life. It beats the alternative.
``I'm not crying about it,'' Turczynski said. ``Now, I can go back to a normal life instead of waking up in the middle of the night wondering where the money was going to come from. Building tools was the easiest part.''
Collecting money has become the difficult part. It has led to a constant harangue between mold maker and molder, with mold makers resorting to holding tools hostage and placing a hidden interest charge of 1 percent per month on every tool order as a late fee.
While the issue is one of the largest problems facing the industry, little has been done to speed payment, said Mark Krajniak, president of Hale Molds Inc. in Rochester Hills, Mich.
Krajniak, who recently completed his term as national president of the American Moldbuilders Association in Roselle, Ill., has helped spearhead an effort to pass a mold lien law in Michigan, a first step to draw attention to the larger issue.
The law would force molders who go out of business to make a toolmaker a major secured creditor near the top of the list for payment instead of buried in a long line of unsecured vendors.
However, AMBA's recent drive to get that law passed has stalled, partly due to the group's lack of lobbying skills in Michigan's Lansing statehouse, Krajniak said. The group also could not muster enough strong, and brave, voices to take on their customers publicly, he said.
``I really believe [the Big Three] are taking advantage of the industry,'' Krajniak said. ``The money is a drop in the bucket for GM, Ford and Chrysler, but it can break the small guys like us. And if we complain too loudly, they can pick up their business and take it down the street.''
Some of the larger tooling companies — those that a supplier would be hard-pressed to replace — have complained. The problem has so incensed Peter Mozer, president of Delta Tooling Co. in Auburn Hills, Mich., that he now vows to increase his percentage of business outside the auto industry, where he does 90 percent of his work.
The problem stems from a relatively subtle change in the Big Three's accounting practices earlier this decade, said Delta Chief Financial Officer John Wagner. Automakers elected to pay their suppliers after final parts were approved for production instead of when they were completed.
That started a domino effect. Large suppliers, waiting for payment on a program, do not pay their toolmakers until they get money from the automaker, Wagner said. With cars scheduled for launch two to three years after designs are submitted, toolmakers wait a long time.
At Delta, that wait for payment generally is at least six to nine months — on a fast-moving program. The company, which recorded about $31 million in sales last year, frequently has gone more than a year before it can put the final bills to bed, Wagner said.
Contrast that with other countries. In Portugal, a major tooling center, companies receive one-third payment upfront, one-third upon tool delivery and the rest when production begins, said Alfredo Morgado, president of Somoltec LDA, a toolmaker in Marinha Grande, Portugal. Firms in other countries require a letter of credit to secure payment to a special account once the tool is delivered.
But North American toolmakers have not been able to challenge the payment schedule, Wagner said. The situation brings other repercussions besides financing nightmares, he said.
``The [supplier's] tooling program goes up in price because of finance costs,'' Wagner said. ``We're not a bank, but we're forced to act as one. So we generally add 12 percent interest a year right into the price.''
Delta, as with others interviewed for this story, does not break out that late payment charge as a separate line item. Supplier purchasing departments would be loathe to pay it because interest charges are not part of the written contract, Wagner said.
Yet, suppliers understand that the final tool price is 12 percent higher to account for late charges, Wagner said.
``We would also have limited success in adding finance charges later if a payment date slips,'' Wagner said. ``It must be part of the tooling price.''
At Delta, which makes injection molds for large parts, a typical tool can cost from $500,000 to $1 million. Considering that programs typically use multiple tools, the late fees tack millions to a supplier's tool price in an industry that always is attempting to reduce costs.
Yet, that is not how suppliers view it, said Jeffrey Mengel, an automotive consultant for both suppliers and toolmakers with Plante & Moran LLC in Southfield, Mich.
``It's cheaper to pay the 12 percent interest over a whole year than [borrowing] equity money from a bank for capital,'' Mengel said. ``And when suppliers can't find other avenues to be cost-competitive and the tooling bill is due, they can make excuses to delay payments even longer. They have all the leverage.''
Molders also are working with a lean gross profit margin of 15-20 percent, giving them little wiggle room to buy equipment, Mengel said. Delaying payment to vendors is a way to use short-term funds for other investments, he said.
Toolmakers fight back in other ways. In December, Delta held captive $34,000 worth of tooling in production for a major supplier, Wagner said. The supplier had told Delta it would make no payments in 1997 so that it could end the year on a more profitable note. The firm owed Delta $2.5 million.
The large toolmaker shot back by saying that current tooling jobs would be halted until payment arrived. After an exchange of words between the companies, the supplier wrote Dec. 27 that it had found excess funds to pay the tooling costs by year end, Wagner said. The tools were released.
When asked to comment on the situation, several suppliers said they were unaware of the problem and could not find a source to discuss the issue.
Mengel said it was probably unfair to single out individual suppliers. The current environment, and the pressure to cut costs drive the problem, he added.
Unfortunately, tooling companies are the most vulnerable and least able to bear the costs, Mengel said. Banks are not especially eager to provide the front money for a tooling company's cash-flow problem.
``If you have a resin or a press that doesn't get used, the company can always resell it,'' Mengel said. ``If a mold doesn't work for a customer, you can't go back and resell it anywhere else. Banks are less willing to lend on customized pieces of equipment. After 90 or 120 days, you have to replace it with newer sales or pay off the loan.''
During the past year, at least four midsize companies, including Mold-A-Matic, have closed shop, according to other toolmakers. One of those companies, Pyramid Mold Inc. of Marysville, Mich., recently liquidated its assets after falling into heavy debt.
The company, which had recorded $6 million in sales, was in the middle of a lawsuit against a supplier that had backed out of a contract while owing money on tools, said Pyramid President James Essad. Low cash flow constantly stymied the company, he said. The firm also performed injection molding for Tier 1 suppliers, where it encountered the same problems.
``The new thing is for [suppliers] to hold the purse strings so tight that there's no upfront money anymore,'' Essad said. ``They come up with stuff all the time to delay payments. There's no reason for them to make a billion dollars a year and for us to go out of business.''
Pyramid's board of directors decided two days before Christmas to close the operation and sell its assets, Essad said. The company and its 18 employees were gone at the end of February.
Both Essad at Pyramid and Turczynski at Mold-A-Matic also blamed their plight on the growth of Canadian-based mold makers.
That group is capturing a larger share of the automotive market due largely to the relative strength of the U.S. dollar, Turczynski said.
However, Canadian companies are not immune from payment problems. One of Canada's largest tool shops, Weber Manufacturing Ltd. of Midland, Ontario, made a significant investment to buy equipment to develop a new tooling method using nickel vapor deposition technology. The process, which can make a large, durable tool, has been used by Chrysler Corp. for its new plastic-bodied Composite Concept Vehicle, or CCV.
Yet, that development has come at a cost, said Weber sales and marketing manager Jerry Smith during the SAE '98 automotive engineers' show last month in Detroit. The company's operating budget has been strained and its investment in new technology slowed while it waits to get paid, Smith said.
``We are asked all the time to find better ways to be competitive, and we've done that,'' Smith said. ``But now, our work gets held up until a [vehicle] goes into production. Our industry deserves better treatment.''
In the United States, toolmakers also must contend with the Internal Revenue Service. Last year, the IRS began asking mold builders to change their accounting method to a percentage completed basis instead of the typical completed contract format, Wagner said.
That forces tooling shops to pay as much as half the taxes on their work during tool production, further strapping cash flow, Wagner said. Delta and Hi-Tech Mold & Engineering Inc. of Rochester Hills, Mich., are filing an appeal with the IRS to review its position, Wagner said.
Meanwhile, toolmakers encounter model-year programs moved back as much as a year after the tool is shipped. Payment is delayed even more, said William Mach, president of Mach Mold & Die Co. of Benton Harbor, Mich., and president of AMBA's southwest Michigan chapter.
``It doesn't seem appropriate that small business should be funding big business,'' Mach said. ``Halfway though the project, they move the date back a year. We're sitting here with our money tied up, with no direction and without being able to close or cancel the order.''
Delta's Mozer said the problem is one the industry has to live with. However, he added that he is frustrated from spending much of each week devising and executing strategies to exact payment.
``We could be taking the same time to do work that is much more value-added and helps the business grow,'' Mozer said. ``This isn't a business for the faint of heart. I've grown up here, and the auto industry has always been a big part of my life. But it isn't as much fun as it used to be.''