The competition is licking its chops in anticipation of a seemingly magical date that is only a few months away.
On Jan. 1,Automotive Systems loses its right of last refusal for replacement business in the U.S. and Canada with its former parent, Corp. It's spelled out in the “Supply Agreement” clause buried in the 151-page prospectus issued in January 1999 before Delphi's spinoff from GM a few months later.
It's better known as “Appendix L,” the job-protection provision included in GM's labor agreement with the United Auto Workers union in the early 1980s. These clauses are common when a company is spun off.
Corp. has a similar right of last refusal with its former parent, Motor Co., expiring May 31, 2003.
Here's how Appendix L works:has a contract to supply, let's say radios, to GM. Another supplier offers GM a new design for a radio, and GM wants it. It costs less than the unit Delphi currently supplies. Appendix L requires that GM seeks a competitive design from Delphi. If Delphi can't meet the request — at the lower price — it loses the business.
This very scenario surfaced four years ago over a GM brake contract that Delphi held. GM wanted to source brakes from another supplier, and Delphi could not offer a competitive product. The end result: a UAW strike in Dayton, OH.
The concern among some suppliers is that the Appendix L process resurrects the Lopez purchasing era — that GM may take an innovative design from one supplier and expose it to Delphi, then give Delphi the contract. Hence, the claims that Delphi has an unfair advantage over other suppliers and why some of them won't share advanced technology with GM.
So a host of suppliers will toast more than Dick Clark's health on New Year's Eve.
Craig Stinson, president of ArvinMeritor Exhaust Systems, sees huge opportunities if GM business is up for grabs. About 67% of Delphi's $29 billion in sales is to GM.
“As of Jan. 1, Appendix L is no longer,” Mr. Stinson says with a grin. Currently, Delphi outsources catalytic converter substrates and has capacity to apply the washcoat, as well as to package or “can” the finished converter, before shipping it to the exhaust supplier (ArvinMeritor). After Jan. 1, ArvinMeritor can quote the canning itself and work directly with GM's designated substrate and washcoat suppliers.
“We look forward to competing on a more level playing field,” a supplier executive says.
ArvinMeritor's primary competitor,Automotive, seems less taken with the new possibilities at GM. “We've gained business at GM even with Appendix L,” says Timothy Jackson, senior vice president of global technology at Tenneco, referring to four new exhaust contracts since 1998.
From Delphi,also buys catalytic converters, which get packaged into full exhaust systems. “But we're capable of building our own converters,” Mr. Jackson allows.
The folks at GM Purchasing say Jan. 1 won't trigger a massive resourcing of business. All along, GM could take business away from Delphi because of quality, service or technology, although it will be a lot easier now. Delphi has admitted that it will lose GM business, which is okay if it can win non-GM business.
David Andrea, director of the forecasting group at the Center for Automotive Research, says Appendix L may be advantageous for Delphi — a convenient way for it to get out from under certain troublesome GM business and realign its product mix.
Jon Rogers, senior analyst at First Union Securities, doubts another supplier could simply take over GM business and be competitive. Delphi may have higher labor costs, but it's probably already paid for the manufacturing equipment. The capital investment for another supplier would be substantial.
The new year may not bring massive resourcing of GM business, but don't be surprised if suppliers are more eager to offer new technology for the No. 1 automaker.
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