Eyes forward

In a tough market, suppliers

Andrew Brown Jr.’s efforts go a long way toward explaining the massive changes under way at Delphi Automotive Systems Corp.

Delphi’s director of engineering last year spent $1.7 billion on r&d. That commitment to research reflects the Troy, Mich., company’s determination to use a larger share of corporate profits for risk taking and give it an edge in the highly competitive auto parts industry.

As Brown’s boss, Delphi CEO J.T. Battenberg III, shutters or sells billions of dollars of unprofitable businesses, it is Brown’s task to produce the technology that will lead to new products, sales and profits.

Despite falling earnings, sagging vehicle production schedules and a decelerating U.S. economy, a sample of North American auto parts makers say their r&d spending is up again this year. They have bet that future technological breakthroughs will give them the edge in a new era of global competition.

Bernd Gottschalk, president of the German Automobile Association, spoke to that issue at the Frankfurt auto show in September. He said that the 22,000 additional workers hired by the German auto industry during the past 12 months was a result of greater r&d and increased international competitiveness.

Make ’em obsolete

On this side of the Atlantic, Brown and his team of 16,000 engineers and technicians are developing “disruptive technologies” — drive-by-wire systems, mobile multimedia, integrated vehicle electronics and others — aimed at leaving competitors’ technologies obsolete.

“The growth in r&d spending will continue,” said Delphi’s Brown. “The important thing is where you apply the investment, in areas that will make a difference.’’

Brown, a former General Motors director of strategic futures, knows well that the ability to underwrite r&d spending is crucial because technology changes so quickly that it leaves behind those who cannot or will not innovate.

One of his competitors, Visteon Corp. of Dearborn, Mich., the world’s second-largest parts maker, understands. It spent $1.2 billion during 2000, its first year as an independent company. As a percentage of total sales, Visteon’s r&d spending hit 6.2 percent of sales, higher even than Delphi’s 5.8 percent. Such spending reassures analyst Richard Hilgert. Times are tough for the auto parts sector, he said, “but this is not the time to cut back r&d with other budget cutting.’’

“A CEO needs to be reinvesting in the company to gain more business and higher vehicle content,’’ says Hilgert, vice president of automotive research for the First of Michigan Division of Fahnestock & Co. “This is what keeps the automakers coming back.’’

R&d spending last year at nine auto parts makers selected for this report ranged from 1.5 percent of sales for ArvinMeritor Inc., American Axle & Manufacturing Holdings Inc. and Lear Corp. to 6.2 percent for Visteon. Hilgert says that not every parts maker need spend 5 percent or more. Johnson Controls Inc., for example, spent 2.4 percent of sales, or $404 million last year, which was in line with its industry, he said. The giant auto interiors supplier already has achieved the ability to provide an entire interior module, he said.

Gamble pays off

Drivetrain supplier BorgWarner Inc., one of the smallest public companies examined, is in tight competition in the powertrain sector. The Chicago-based company raised its r&d spending by 20 percent over a three-year period to 4.2 percent last year.

BorgWarner Controller Skip Cline said no cutbacks are planned. Such a move could draw concerns from his automaker customers. Beside, he said, “r&d is what drives future sales.’’

BorgWarner benefited from the payoff of an r&d project. Without a contract in hand, it undertook development during the early 1990s of a four-wheel-drive transfer case employing electronic sensors and microcomputer controls. It then rode the crest of light-truck and sport-utility popularity, with its product installed on nearly

2 million Ford Explorers, Ex-

peditions and Lincoln Navigat- ors.

American Axle may have one of the lowest rates of r&d spending, 1.5 percent of its sales dollars last year, or $46 million. But Patrick Lancaster, the company’s chief administrative officer, said that has not hampered future product development.

The Detroit-based driveline supplier expects 75 percent of its revenue next year will come from technology developed since 1998. Not reflected in its r&d figures are the company’s substantial capital expenses for its Detroit plants as part of its plan to enhance its manufacturing processes.

Competitor Dana Corp. is not focusing on the dollars spent, but on how well they are spent. “The smokestack industry has not done as good as other industries producing usable technology and usable products divided by the cost of what went into it,’’ said Chuck Jones, vice president of technology planning for Dana.

Jones, an engineer, said that when he thinks of all the dumb things “I worked on, I wish someone had stopped me.”

But not spending on r&d is a far greater risk, said investment banker Cliff Roesler of W.Y. Campbell & Co. in Detroit. He cited the case of a Tier 1 automotive rubber products company that sought to maximize profits on a key division by curtailing its r&d spending. The unit survived on its brand name and excellent products, until its competitors caught up. Now a business with $15 million in sales is under liquidation.

“If you’re not spending on r&d,’’ he said, “you had better be divesting. And if you’re doing neither, you are in a no-man’s land.’’

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