Dennis Pawley knew the answer last June even before he asked his staff to assess Guide Corp.'s long-term prospects:
This dog won't hunt.
The parts maker is North America's largest lighting supplier with $600 million in sales last year. It is the sole source of 75 percent of General Motors' headlamps and taillamps. But it was locked into money-losing contracts and was being squeezed by GM for further price givebacks.
Now, after six months of negotiations with GM, the supplier is in turmoil and Pawley is gone; he quit as Guide CEO on Tuesday, Dec. 19. And GM - facing crippling shutdowns if its supply of lights is interrupted - once again must face a failure of its strategy of spinning off money-losing units.
Signs of progress
Pawley, the highly regarded former head of manufacturing at Chrysler Corp. who came out of retirement in January 2000 to lead Guide, had improved efficiency dramatically and had even negotiated a two-tier wage structure with the UAW. But it's not enough.
The key to Guide's survival, Pawley believ-ed, was a plan to move more manufacturing to Monterrey, Mexico, and move many of the U.S. employees back to GM's payroll, where they had been when the company was Delphi Lighting before its sale in 1998.
All Pawley needed was money - from GM and Palladium Equity Partners LLC, Guide's parent company. Without it, Guide had no future.
And the money didn't come.
This is the story of the collision between Guide Corp. and GM that now threatens to cripple virtually all the automaker's North American assembly plants.
A flawed plan
Marcos Rodriguez, managing partner of Palladium and Pawley's boss at Guide, is no stranger to the auto industry.
In the early 1990s Rodriguez worked at Joseph Littlejohn & Levy, a large New York private investment company. The company made a splash in the auto sector when it acquired Motor Wheel Corp. and subsequently merged it to form what is now wheel maker Hayes Lemmerz International Inc. of Northville, Mich.
Rodriguez quit Joseph Littlejohn & Levy early in 1997 to form Palladium Equity Partners, a small, private equity firm. Well-heeled investors provided him with more than $200 million for a fund he used to acquire underperforming companies. His first target was Delphi Lighting, a money-losing lamp-making operation formerly known as Inland Fisher Guide that Delphi chief J.T. Battenberg III wanted dumped before GM spun off its parts group.
Palladium obtained Delphi Lighting, which was renamed Guide Corp., on terms similar to those negotiated by buyers of earlier GM spinoffs. It would retain all existing contracts with GM and would have the right to match the best offer on future deals. Future contracts were not guaranteed.
GM also handed over a note worth $212 million to get the company through hard times.
Palladium inherited a challenge: The GM lighting business was losing more than $100 million annually on revenue of less than $700 million. The centerpiece of the operation was a 2.8-million-square-foot plant in Anderson, Ind., that was operating at slightly more than half capacity and had a long legacy of union unrest.
Michael Hammes, a former Ford Motor Co. and Chrysler Corp. executive, became Guide's first CEO in 1997.
Not enough seed money
Pawley believes Palladium underestimated what it would take to turn around Guide, with its aged plants in Indiana and Monroe, La., and high-cost union work force. He said the company needed a $500 million subsidy from GM, more than double the $212 million it got.
Since arriving, Pawley had made progress. He cut the bad parts rate from 500 per million to just 95 parts per million. He hired 250 engineers and refurbished plants and equipment. He got a two-tiered contract with the UAW. A plant was built in Monterrey, Mexico, to take advantage of a low-paid work force.
But by the middle of summer, Pawley said, he realized that ripping costs out of Guide was not enough. It needed far more capital than Palladium assumed necessary. Even Pawley couldn't make it work without a massive infusion of capital.
Pawley had studied GM's earlier spinoffs, such as American Axle & Manufacturing Inc. But he knew some had relied on massive private investment to resuscitate them. Guide's owners refused to make the commitment without new money from GM.
GM, meanwhile, was pressing all its suppliers for price cuts of up to 5 percent.
Guide's problems were compounded when Pawley underbid new GM business. Pawley said he assumed he could wring enough cost and waste out of the GM operations to make money.
Now, he says, Guide's high-cost structure and GM's future price concession demands doomed that effort.
Asking GM for help
Pawley and Rodriguez went to GM to seek a price increase on $85 million worth of existing contracts, arguing that the contract called for price increases if it could be shown that Guide was losing money. The choice, Pawley said, was simple: Either raise the price or give the work to someone else.
An answer was needed by Dec. 15. On Dec. 8, GM agreed to a temporary price increase that would be reviewed after three months. But Pawley said the temporary increase did not satisfy the contract.
Pawley had formulated a long-term plan for Guide, and he took his case to GM CEO Rick Wagoner and purchasing chief Harold Kutner just before Thanksgiving. GM, he said, could have the world's finest lighting supplier for an investment of $500 million. Pawley would move most manufacturing to Mexico and keep engineering in the United States. Many U.S. workers would receive buyouts or retire, and some would move back to GM.
But GM had unloaded the money-losing business to Rodriguez. It was his responsibility. Rodriguez realized he had bought a 'pig in a poke,' Pawley said.
GM turned Pawley down. He accepted the decision but told Kutner and Wagoner that GM must quickly find a new buyer to keep Guide viable. GM wanted a new owner for its spinoff. Palladium also wanted out, Pawley said.
GM will take Guide back but also wants the $130 million that remains from the original funding note. Guide has offered to go through arbitration on everything but the $130 million, a source said. GM wants everything on the table.
If the issue is not resolved quickly, Pawley said Guide's owners could halt shipments on products for which there is a dispute over the price increase.
Hopes for a successful arbitration have faded, Pawley warned. 'GM can't afford to take a shutdown; Palladium and Guide can outlast them,' he said.
GM likely will turn to the courts should its production be threatened - as it did when seat belt supplier CEO Johnnie Breed shut her plants for three days in August 1999 over a pricing dispute. The automaker sought a preliminary injunction against Breed Technologies Inc. to guarantee its source of belts.
And GM has a second, more powerful trump card: It has access rights to step in and operate Guide's plants should Palladium jeopardize production or delivery, a legal right is has rarely exercised.
Part of the GM-Palladium clash became public last week with Pawley's surprise resignation.
In a highly unusual move, Pawley publicly criticized his customer, GM. 'General Motors is willing to risk its lighting parts supply and union relationships over a dispute involving a few million dollars,' he said in a statement.
Pawley said he went public with the hope of getting both sides to resolve the crisis - for the sake of Guide's management staff and thousands of UAW members.