Vendors wary of ailing Valeo

Chapter 11 filing dries up credit

Customer commitments
Customers of Valeo Electrical Systems in Rochester, N.Y.


  • General Motors

  • Delphi Automotive Systems

  • Chrysler group

  • Ford Motor Co.

  • Mitsubishi


    4 of the programs supplied


    1. Pontiac Montana

    2. Chevrolet Venture

    3. Chrysler minivans

    4. Cadillac Seville

  • Vendors to Valeo SA's Rochester, N.Y., operations are nervous.

    Since Valeo Electrical Systems Inc. filed for Chapter 11 bankruptcy reorganization on Dec. 14, some suppliers now demand cash on delivery for parts.

    In the first days after the filing, some delivery trucks refused to unload without receiving cash payments, a plant source said. The problem nearly shut down a couple of departments, including windshield wiper system production on Dec. 18, the source said, but operations soon returned to normal.

    Valeo management wouldn't confirm changes in supplier payment terms or comment on threats to production. It did say distribution of wiper systems, airflow systems, compressors and electric motors has continued without disruption.

    "We've met all our commitments to customers," said Walter Kneuer, general manager of Valeo Electric. "We don't expect to have any problems. Our goal is to continue to service the customer in our normal manner."

    The bankruptcy filing affects only the Electrical Systems division, which Paris-based Valeo SA established as a separate legal entity.

    The company faces challenges:

  • Valeo seeks lower wages and benefits from a union that has refused to budge on such concessions. The company signed an unprecedented eight-year contract with its workers in August 2000.

  • Market share with bread-and-butter customers continues to decline, and pricing and quality threaten new business prospects.

    Valeo Electric projects losses of $70 million this year, and the operation likely won't break even or return to profitability until 2005, even with changes planned under the bankruptcy reorganization. It's an outcome different than Valeo expected when it bought the Rochester operation for $1.7 billion in 1998 from ITT Corp.

    Suppliers hit by fallout

    Vendors wonder when they'll get payment for supplies shipped prior to the bankruptcy filing, which stopped those payments. Some suppliers speculate Valeo accelerated shipments early in December to build up inventory before the court filing, but Valeo management says increased orders stem from production demands caused by 0 percent financing.

    "That's the kind of thing in a situation like this that doesn't sit well with the supply base," one supplier representative said.

    Valeo targeted suppliers for price cuts earlier this year, and some refused or dropped the business rather than accept new terms. Meridian Automotive Systems, one of Valeo's larger creditors with a claim of more than $1 million, gave Valeo a 5 percent price cut early in 2001.

    "They've been pushing hard for those for over a year," said John Lester, a Meridian account manager. "That plant has been in trouble for quite a while."

    Valeo's problems put some of its suppliers in precarious financial positions.

    "The thing that all suppliers are very concerned about is the current economic situation," a supplier source said. "We can't afford, any more than Valeo can, to absorb a huge loss."

    Lenders now are likely to call in credit lines extended on the basis of receivables that are in limbo, one turnaround expert said.

    "There's a chain reaction when a company files for Chapter 11 that affects the suppliers of those companies," said Jim McTevia of McTevia and Associates Inc. of Eastpointe, Mich. "If they don't have a lot of profit and a lot of places to go to replace that amount when the banks call those receivables, then that supplier to Valeo has got serious problems."

    Labor compromised, too

    Valeo is seeking wage and benefit cuts that average $3 per hour. At one point, the company asked for a $5 per hour wage concession plus other benefit cuts in an attempt to reduce labor expenses by $33 million by 2005, the union representing Valeo workers said.

    The company pays members of Local 509 of the IUE-CWA an average wage and benefit rate of $38 per hour, with hourly wages ranging from $8.86 to $33.06, the company said. An eight-year contract ratified in August 2000 calls for alternating 3 percent wage increases and lump-sum payments over the life of the contract. The contract also includes a plant closing moratorium and job security measures.

    But management wants to eliminate jobs and has offered early retirement and severance incentives designed to reduce the union work force from about 2,200 today to 1,000 by 2004, a union official said.

    Local 509 leaders have agreed to the attrition program but refuse to consider wage concessions until other cost-savings tools are exhausted, said Joe Giffi, union president. In the last contract, the company won more flexible work rules, including streamlined job classifications and cross-training opportunities, that have yet to be fully used, he said.

    While important, those considerations aren't enough to return the plant to a competitive position, Valeo's Kneuer said.

    "We've got a four-point plan, and we need all four points to be in a fair and equitable manner in order for this facility to be competitive long term," he said.

    Losses mount

    Valeo already has lost significant market share with major customers in recent years. Quality problems and pricing pressures jeopardize future business.

    General Motors, former owner of the facility, is Valeo Electric's largest customer, followed by Delphi Automotive Systems Corp. Both companies say they are monitoring reorganization proceedings and working with Valeo to ensure continued supply. Neither would provide details about affected programs, assistance they might be offering or supply alternatives under consideration.

    Valeo has lost out on major contract renewals, company management said in a May 2001 internal newsletter. Market share of the GM wiper business will drop from 94 percent in 2000 to as low as 65 percent in 2003, and Valeo has failed to meet quality expectations of both GM and Chrysler, the newsletter said.

    Valeo can emerge from bankruptcy reorganization with a better cost structure and a chance to win new business from customers, Kneuer said. "We'll be more competitive for them," he said.

    But Chapter 11 puts current business from those customers on shaky ground.

    Said McTevia: "They're watching it very closely, and if they feel as though there's the least likelihood that the problems of the company's Chapter 11 are going to cause problems to their production capabilities, they're going to kiss them goodbye in a New York minute."

  • You can reach Amy Wilson at awilson@crain.com

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