Crain News Service
When Delphi Automotive Systems Corp. goes public early this year, it will test the notion that bigger is better.
The key to whether this 800-pound gorilla can stomp its competition, seize global dominance and snatch huge profits befitting the nation's 25th-largest company depends greatly on how nimble it can be.
Sheer size will not be enough. Although Troy, Mich.-based Delphi, with 1997 sales of $31.4 billion, is several times the size of competitors such as TRW Inc. of Cleveland or Siemens Automotive Corp. of Auburn Hills, Mich., it will have to maneuver past risks such as union disputes, high labor costs and competition for General Motors' business without the advantage of being a GM division.
Those risks are immediate and long-term. In September, Delphi's contract with its largest union, the UAW, expires. Down the road, the company will have to compete for GM's international business, currently 17 percent of Delphi's sales.
Nonetheless, Delphi starts with huge advantages, namely a global reach that takes rival suppliers years to acquire. And while size is not everything, it offers some advantages.
'That size will give them tremendous ability in the financial markets,' said Jim Gillette, vice president of the Grand Rapids, Mich., automotive analysis company International Resource Network.
Gillette consulted for GM and its parts operations in the late 1980s.
'People will be willing to put an equity investment into them,' he said. 'If Delphi gets a good idea, it will get the money to move on it.'
Size also means Delphi can produce a product anywhere in the world that a customer demands. Also, it puts Delphi ahead of other suppliers at a time when $1 billion in revenue barely gets a company a seat at the supplier table.
Furthermore, Delphi's size means that, unlike other auto suppliers that may be at the mercy of customers several times their size, Delphi actually will be larger in sales than some automakers, including Mazda Motor Corp. ($15.4 billion), AB Volvo ($22.7 billion) and Mitsubishi Motors Corp. ($28.2 billion).
'Well, we do come onto the scene as the biggest player by a factor of two,' said Steve Gaut, Delphi director of media relations.
Delphi expects to hold its initial public offering in early 1999, probably before March 31. The company estimates its stock will open at $14 to $18 a share, for an initial market value of about $10.2 billion. At $16 a share, Delphi would raise about $15.3 billion.
Delphi plans to sell 100 million shares, or 17.7 percent of the company. GM will hold the rest. The stock is scheduled to trade on the New York Stock Exchange under the symbol DPH.
RISKS AND REWARDS
In Delphi's 180-page filing with the Securities and Exchange Commission, the company spells out a series of risks and rewards that could follow its separation with GM.
First on the list is the company's reliance on one major customer, GM. Despite increasing non-GM sales several years in a row, Delphi still made 82.6 percent of its 1997 sales to GM.
That figure had dropped to 78.3 percent for the first nine months of 1998, but it was hurt by last year's two-month UAW strikes against GM.
Typically, companies do not want to be too dependent on one customer. Delphi is no different.
In its SEC filing, the company says it wants to increase sales 'to customers other than GM-North America to 50 percent of total sales by 2002.' That will take some doing.
Customers other than GM-North America were just 35.6 percent, or about $11 billion of Delphi's 1997 sales. That means that if GM-North America sales held steady or dropped just slightly the next three years at Delphi, the company would have to add about $10 billion in new business outside GM-North America to achieve the 50 percent target.
Delphi says it is a goal that can be reached, because it plans to focus on overseas markets.
'We want to diversify, and we think the market is growing in places like India or the Pacific, where we feel the supplier base is relatively unsophisticated,' Gaut said.
'We are also finding interest in Europe for features we provide, like power steering and air conditioning. They had been considered luxuries there, but now there are more opportunities for those features, and we already have established bases from which we can provide them.'
Another risk that Delphi discusses in its filing, called a Form S-1 by the SEC, is its separation from GM. The advantage of being a GM division bidding for a GM contract will be gone, replaced by the extremely competitive auto-supplier bidding process.
'I know that J.T. Battenberg (Delphi's CEO) felt like he was actually pushed harder for price cuts by GM than non-allied suppliers. So he doesn't think he had an advantage in being part of GM,' Gillette said.
Delphi also sees the separation as a way to grab new business. The company says several times in its filing that its ties to GM have been 'a major impediment to business with customers other than GM.'
Delphi says other automakers were concerned that helping Delphi in turn helped GM. Rival automakers also worried that 'GM might obtain access through Delphi to confidential information,' even though Delphi said it had a confidentiality pledge.
Delphi's two largest non-GM customers, Gaut said, are DaimlerChrysler AG and Volkswagen AG. Others include Toyota Motor Corp. and Fiat S.p.A.
Any risk in separating from GM should be softened for Delphi by a supply agreement with GM that says contracts with the automaker as of Jan. 1, 1999, remain in effect.
GM also will be required to give Delphi the chance to supply the first U.S. and Canadian replacement cycle of product programs provided by Delphi before 1999, as long as GM sources such business before Jan. 1, 2002.
A key aspect of this separation agreement may be that it covers only GM's U.S. and Canadian business and not the $5.3 billion Delphi gets from GM-International. That means Delphi will not automatically have the right to match contracts it currently has with GM-International.
Another risk spelled out by Delphi, and perhaps its most immediate one, is in its labor relations. The company has 159,691 workers represented by unions, almost 80 percent of its total work force.
Those workers are represented by 53 unions, the largest of which is the UAW, with 46,032 workers at Delphi. The contract for those UAW workers, 23 percent of Delphi's work force, expires Sept. 14, 1999.
Delphi's contract with its second-largest union, the International Union of Electrical Workers AFL-CIO, expires in November. But that union is considered more Delphi-friendly than the UAW.
'I really think that labor is going to be a huge issue for Delphi. The UAW will fight like hell to keep wages up,' Gillette said.
That means that, within months of becoming an independent company, Delphi will have to go into negotiations with a union that has launched strikes against GM and Last summer's two-month work stoppage cost Delphi $560 million in profits.
Furthermore, UAW leadership already has voiced its opposition to Delphi's very existence as a separate company.
'The UAW is on the record as opposing the split-off or spin-off of GM's Delphi's operations, and that remains our position,' UAW President Steve Yokich said in a statement in early August.
UAW Vice President Richard Shoemaker said in the statement, 'We will aggressively work to protect the rights and interests of UAW members impacted by the sale.'
Delphi also has about 1,000 employees represented by the Canadian Auto Workers, a union that is considered sympathetic to UAW causes and that also may prove to be challenging in contract negotiations.
A MIXED BAG
Delphi lists its labor relations both as a risk and an advantage. 'We recognize that a key element of our long-term competitiveness is developing a constructive working relationship with our unions,' the company has said.
Delphi sees an advantage in that it expects separating from GM will allow it to 'establish local work rules and practices more consistent with those generally prevailing in the auto parts industry.'
Gaut said Delphi is looking for flexibility from the UAW, such as a reduction in the number of job classifications. That would allow Delphi to shift workers from one job to another more easily.
Gaut said that just because the UAW has voiced its opposition to Delphi, that does not mean there will be a work stoppage.
'We have a lot of experience in dealing with unions,' he said.
Outsiders are not so sure, saying Delphi's goal of transforming its union work rules clashes with the UAW's worker-protection goals.
'Delphi does have sophistication to work with the unions, but you can't underestimate the potential strike situation here,' Gillette said.
Delphi says it needs flexibility from the UAW because its hourly wages in the United States are twice those of many competitors.
To keep down these labor costs, Delphi probably will continue its expansion outside the United States.
From 1992-97, the percentage of sites Delphi owned or leased outside the United States and Canada grew from 20 percent to about 30 percent. The percentage of its employees outside the United States and Canada increased from 38 percent to 56 percent. That had the effect of reducing Delphi's average worldwide hourly wage, including benefits, from $27 in 1992 to $20 in 1997.
That international reach not only lowers Delphi's wage structure, but also gives Delphi the global presence other suppliers usually must create. The company has offices and plants in 36 countries.
'Their global operations - like in Mexico, where they are huge -could make them far more competitive elsewhere around the world than any other supplier,' Gillette said.