Delphi, Visteon: What happened
Delphi Corp. and Visteon Corp. - North America's two largest auto suppliers in 2004 - spun off from General Motors and Ford Motor Co. with the hopes of launching innovative businesses and growing away from their parents' automotive heritage.
They tried with limited success; but in the end, it didn't work.
Delphi, of Troy, Mich., sought Chapter 11 bankruptcy protection on Oct. 8; and Visteon, of Van Buren Township, Mich., completed a massive bailout from Ford on Oct. 1. Billions of dollars in annual business and tens of thousands of jobs are now at risk at Visteon, Ford and Delphi. GM also faces liabilities of several billions of dollars.
So what went wrong?
In short, Delphi and Visteon failed to generate enough business away from their former parents to build a new profit base. This is a closer look at what happened.
DETROIT - Delphi Corp. never kept its long-term problems a secret.
Company officials knew in 1999 that they had to expand their business after spinning off from General Motors or face serious problems. The company's first prospectus included this warning: "We may be unable to meet our future capital and liquidity requirements.
"A substantial portion of our cash flows from operations will be dedicated to meet our pension funding obligations and to the payment of principal and interest on indebtedness from time to time," the prospectus said. "As a result of these obligations, our liquidity position may be adversely affected if we fail to realize our expected cash flows from operations."
While public companies routinely disclose all their risks in these kinds of reports, Delphi's turned out to be prophetic. Six years later, Delphi filed for Chapter 11 bankruptcy protection largely because of these liabilities.
"The sharp decline in GM market share has reduced GM North American production volumes by a million units per year, from 5.5 million to 4.5 million units, in the last three years," Delphi CEO Steve Miller said at an Oct. 12 press conference in Troy, Mich.
"The impact on Delphi has been to reduce revenues by several billion dollars a year worth of parts," he said. "Given our high fixed costs and inflexible labor costs, the result has been devastating."
The net reduction in Delphi's North American auto business from 2003 to 2004 was $1.9 billion.
No outrunning costs
Delphi's overseas growth and expansion into nonautomotive sectors failed to override the plunge in North American parts sales.
Delphi also was unable to expand or diversify its business fast enough to outrun the massive labor and legacy costs with which GM saddled it.
The numbers tell the story:
Most of Delphi's growth in plants and people has come in its Europe and Asia operations, which Miller says are profitable and growing. They are not included in the Chapter 11 reorganization. The company also invested heavily in nonautomotive projects, adding or acquiring plants and employees.
One analyst who tracks Delphi - and who did not want to be identified because his company does business with Delphi - said it is not Delphi's expansion into nonautomotive sectors and overseas growth that caused the company's financial crisis. "That's small potatoes," he said.
"The real issue is not too many employees. It's too many high-cost employees. Market pressures and annual cost reductions have eroded Delphi's profitability," the analyst said.
Last year, Delphi booked about $4 billion in global sales of parts for motorcycles, waterscooters, snowmobiles, medical equipment, consumer electronics parts, satellite radio receivers and other items. Delphi even makes some of the electronic parts for the offbeat Segway scooter.
Company spokeswoman Andrea Knapp said Delphi doesn't break out profit and loss results for individual divisions. She declined to say whether Delphi's nonautomotive business is profitable.
Miller would not say specifically which businesses it would exit by selling or closing plants. But he did say that Delphi plans to remain a leader in developing new technologies.
Miller said Delphi wants to unload the auto parts it makes, such as spark plugs, which have become commodities that are produced in low-cost countries.
The analyst said Delphi likely would work first to reduce wages in plants where it has direct competition from other companies producing the same parts at lower wages. If that fails, Delphi might move production to a low-cost country.
Closing plants and laying off workers, the analyst said, are the last resort because then those employees might be added to the pool of workers who get paid nearly full wages and benefits for not working.
The analyst said Delphi also likely will keep any parts lines that are profitable, high-tech and too complex to be shipped from another country.