How Delphi Automotive beat the odds in vast corporate turnaround
DETROIT -- Delphi Automotive may be based in suburban Detroit, but to understand the company's turnaround, consider it a company without borders.
For tax purposes, Delphi is incorporated in the United Kingdom. The company's once-vast network of U.S. factories is nearly gone, replaced by a growing network of plants in China, Mexico and eastern Europe.
And Delphi continues to wean itself from its former corporate parent, General Motors. Last year GM accounted for 19 percent of Delphi's revenues, down from 53 percent when Delphi sought Chapter 11 reorganization in 2005.
Now that Delphi has established profitable niches in some of the auto industry's fastest-growing sectors -- collision avoidance, fuel economy and infotainment -- Wall Street considers it an attractive investment.
Since it went public last November, Delphi's stock price has risen about 28 percent.
In many ways, Delphi tells the story of how America's suppliers can thrive after the recession: go global, ruthlessly jettison unprofitable businesses and focus tightly on promising niches.
The company's painful four-year bankruptcy allowed CEO Rodney O'Neal to carry out the makeover that began when GM spun off its component operation in 1999.
"It's a totally transformed company," said O'Neal during a June 29 interview with Automotive News.
"We have the right products, the right customers and the right management."
To make sense of Delphi's painful transformation, it helps to understand the company's tangled relationship with GM.
After he was named GM's vice president of worldwide purchasing in 2001, Bo Andersson set up an unfurnished room in his suburban Detroit headquarters in which he could track GM's numerous contracts with the newly independent Delphi.
All four walls of the room were covered with taped-up paper documents that summarized GM's purchasing contracts with unionized suppliers.
Many of those contracts were with Delphi, which paid its workers as much as $65 an hour in wages and benefits -- significantly more than the industry average of $25 or so.
From time to time Andersson ushered visitors into that room. His message was clear: General Motors was acutely aware of the labor costs of its former in-house parts operation.
At the time, Delphi CEO J.T. Battenberg III had a plan to do something about that. The company was producing more parts in low-cost countries such as Mexico and China. And it was attracting new customers such as Ford Motor Co., which was willing to do business with Delphi after it became independent.
Delphi also was entering new product sectors such as diesel fuel injectors, which it added to its portfolio with the $871 million acquisition of Lucas Diesel Systems.
But there was one big problem: Delphi wasn't able to negotiate major wage cuts for its U.S. plants with the UAW, according to Donald Runkle, Delphi's former vice chairman who retired from the company in 2005.
"Everything was working except [the loss] of GM business," Runkle said. "There was no way you could get your productivity high enough [to compensate for high wages]. At the end of the day, we couldn't handle it."
By the time Battenberg retired in 2005, Delphi's sales to GM had declined to 50 percent of total sales.
But it wasn't enough. GM was shifting contracts to other customers faster than Delphi could find new business. In 2005, turnaround artist Steve Miller took Delphi into Chapter 11 reorganization just three months after he replaced Battenberg as CEO.
When Delphi emerged from bankruptcy in 2009, it had one big advantage over its rivals: lower manufacturing costs. In bankruptcy court, all but five U.S. plants were sold, closed or returned to GM.
Now Delphi has only 1,000 hourly workers in the United States, vs. 33,000 in 2005 and 71,000 in 2001.
It supplies most of its North American customers from Mexico. The company's Chinese plants serve its Asian customers, and its factories in eastern Europe and North Africa supply European assembly plants.
Delphi estimates that 91 percent of its hourly work force is located in plants in low-wage countries, and a third of its hourly workers are temporary.
In part because of its low manufacturing costs, Delphi profits have been solid. In 2011, it reported a net income of $1.2 billion, up from $703 million the previous year.
Delphi is not immune to the shaky global economy. The company expects sales to rise only 1 to 3 percent this year, due in part to currency fluctuations and also due to Delphi's heavy presence in Europe, a stagnant market.
But J.P. Morgan has projected sales to rise 6 percent annually through 2014 as the auto industry recovers.
"Delphi is in an enviable position," said Ryan Brinkman, a J.P. Morgan analyst who published a "buy" recommendation on Delphi on July 18. Having factories in low-wage countries "is a structural advantage in an industry in which such advantages matter a great deal."
To make that work, a supplier must be able to ship components long distances. That's true for Delphi-made components such as wire harnesses, fuel injectors and infotainment systems, which can be shipped efficiently.
Producers of bulky components such as seats, axles and glass are not so lucky, Brinkman notes.
In his interview, O'Neal said Delphi would stick with its lineup of four main product groups: electrical systems, electronics and safety, powertrain components and cooling systems.
He also spelled out Delphi's plan for the next five years or so:
Delphi will have a balanced geographical portfolio. North America, Europe and Asia each will account for 30 percent of revenues, while South America will generate 10 percent.
GM's share of Delphi revenue will continue to shrink, from 19 percent last year to 15 percent or so in the next few years.
The company will consider "bolt-ons" -- that is, acquisitions of companies that would supplement one of Delphi's existing product groups.
A good example of a bolt-on is Delphi's proposed $972 million acquisition of FCI Group's Motorized Vehicles Division, which makes electrical connectors.
That deal, which O'Neal hopes to complete this year, will bolster Delphi's electrical systems operation.
O'Neal says he would consider other acquisitions ranging up to $1 billion or so. Acquisition targets might involve powertrain components, electronics or software -- especially infotainment software.
But O'Neal says he will not make any major changes in his fundamental corporate strategy to focus on the product segments that he dubs "safe, green and connected."
"The transformation of Delphi is complete," O'Neal said. "There are no moving parts."
You can reach David Sedgwick at firstname.lastname@example.org.