Hopes were high when General Motors spun off its giant parts operation to create an independent Delphi Corp. in 1999.
But it didn't take long for the enthusiasm to fade, says Don Runkle, Delphi's former vice chairman. He joined Delphi from GM as part of the spinoff.
The spinoff had two fatal flaws, Runkle says:
1. Delphi inherited GM's package of wages and benefits for unionized workers. So Delphi's labor costs were more than $70 an hour, compared with about $20 an hour at rival suppliers.
2. GM immediately began undercutting Delphi contracts by sourcing the work to other suppliers.
"At the time, Delphi thought it would be a lot better off," recalls Cal Rapson, vice president of the UAW's GM department. "But as it turned out, early on, it was an ugly divorce."
GM is still dealing with its problem child. In 2005, Delphi's U.S. operations entered Chapter 11 reorganization, where they remain. Creditors assume GM will have to provide more assistance to Delphi, and that continues to weigh on GM's stock price.
Goal: More sales
Runkle says Delphi was born of a noble purpose. He says he, J.T. Battenberg III (Delphi's first CEO) and four other high-level GM executives pushed hard for the spinoff starting around 1995.
They believed GM's ownership was limiting growth because competing automakers would not buy parts from GM. At the time of the spinoff, Delphi was almost wholly reliant on GM for sales.
In 1999, the UAW signed its first contract with Delphi. Then-UAW President Steve Yokich insisted on a benefit guarantee from GM. In the event of a Delphi bankruptcy, it required GM to pick up pension and retiree health care for Delphi UAW members. It was binding for eight years after the spinoff.
Ultimately, those guarantees would cost GM billions of dollars.
Delphi's success as an independent company would depend on how quickly it could diversify its customer base and improve productivity, Runkle says. Delphi did both.
In fact, the company was saving $600 million to $800 million a year through manufacturing improvements and better purchasing, he says. Delphi raised sales to non-GM customers from almost nothing at the time of the spinoff to about 47 percent by the time of the Chapter 11 filing in 2005.
But GM was taking business from Delphi and giving it to lower-cost suppliers, Runkle says. That created a huge problem. Delphi had to put the displaced UAW workers in a Jobs Bank, where they collected almost full wages and benefits for not working. Ultimately, the Jobs Bank cost Delphi about $500 million a year, erasing the cost savings.
GM purchasing chief Bo Andersson says the automaker paid Delphi more than the supplier's rivals for similar parts. And Delphi enjoyed a "right of last refusal" on GM business that allowed the parts maker to match competing bids.
"Having that option gave Delphi an opportunity to sustain its business model as long as it did," Andersson says.