As investors decide whether to snap up Delphi Automotive Systems' newly issued stock, they must ask themselves whether the supplier's financial glass is half full or half empty.
On Friday, Feb. 5, Delphi issued its initial offering of 100 million shares - worth 17.7 percent of Delphi - for $17 a share. A total of 34,124,800 shares were traded, and the closing price Friday was $18.44 per share.
Later this year, Delphi will complete the spinoff by distributing its remaining shares to General Motors shareholders.
Delphi executives recently toured many U.S. and European cities to drum up support for the spinoff. During the tour, the executives described their steps to wean Delphi from its corporate parent, GM. But Delphi's report to the Securities and Exchange Commission reveals how far the supplier has to go.
For example, Delphi sales to non-GM customers have grown 10 percent annually since 1993, a good indication of Delphi's competitiveness. But GM still accounts for 82 percent of Delphi's sales. That suggests Delphi will depend on GM sales for years to come.
That is one reason some Wall Street analysts have taken a wait-and-see attitude.
'Delphi is probably going to find out that the real world is kind of chilly outside the GM blanket,' said David Healy of Burnham Securities, a New York investment firm.
Still, Delphi executives argue that their newly independent company enjoys several key advantages:
Although Delphi is courting non-GM customers, it can count on GM sales for years to come. In its spinoff agreement, GM said that whenever a Delphi-GM parts contract expires before Jan. 1, 2002, Delphi will retain the business as long as it matches its rivals' prices, technology and quality. After that date, GM can treat Delphi on an equal basis with its other suppliers.
Delphi has completed its campaign to 'fix, sell or close' its unprofitable factories. Seven years ago, at least 50 Delphi plants were money losers. Last fall, the last two factories on the list - both in Dayton, Ohio - secured union backing for improved productivity.
The company is expanding sales to non-GM customers. Delphi's top non-GM customers, in order, are DaimlerChrysler AG, Fiat Auto S.p.A., Toyota Motor Corp., Volks-wagen AG and Renault SA. Those five customers account for $1.7 billion in sales.
Quality is steadily improving. Last year, Delphi averaged 106 defective parts per million, down sharply from 812 defects in 1995, according to a company spokesman. A world-class plant generally averages fewer than 30 defects per million. Some Delphi plants are hitting that target.
The number of UAW-represented Delphi employees is shrinking. In 1997, the UAW represented 46,000 Delphi workers, down from 79,000 in 1992. By contrast, Delphi's non-UAW overseas work force totaled 46,000 in 1997, up from 28,000 in 1992.
Delphi is cutting prices to keep pace with its rivals. The company cut prices 3 percent in 1996, 2.3 percent in 1997 and 1.6 percent for the first nine months of 1998.
Despite declining prices, some rival suppliers suspect that Delphi still has not felt the full brunt of GM's cost-cutting campaign. That is a key issue, because GM will remain Delphi's biggest customer well into the next decade.
If GM pays prevailing market prices for Delphi components, 'Delphi will have no problem doing well,' Healy said. 'But if Delphi has had cozy pricing above market rates, they'll have a hard time.'