The cards have been shuffled and dealt, and the bets made. It's only one hand in what promises to be a long game, but the cards as they lay right now hold both promise and chance for North America's two largest automotive suppliers, Delphi Automotive Systems and Visteon Corp.
The cards are OK, but it's one of those hands with great potential for second-best. Here's what the cards show:
Two enormous companies that are becoming nimble and lean but still have pockets of inefficiency and some outdated facilities.
Two companies with higher labor costs, although the average has gone down significantly in the past decade. With their long United Auto Workers union relationships, Delphi and Visteon still pay their production workers, in some cases, twice what the competition pays.
Two companies that recently went public and are trying desperately to provide “shareholder value” at a time when Wall Street is lukewarm on the automotive sector in general and suppliers in particular.
What's unique about Delphi and Visteon is that within the past two years both have been spun off as wholly independent companies by their former parents. Still, most of Delphi's business is withCorp. and Visteon's with Motor Co. As those vehicle producers lose market share, their No. 1 suppliers are indelibly impacted.
So the correct strategy — aggressively pursued by both suppliers — is to find business with new customers because a decades-long relationship with the former parents does not amount to an entitlement for life. The strategy must work, as both GM andare constantly reviewing their purchasing strategies as they strive for greater profitability.
Delphi Chairman J.T. Battenberg III says his company all along has expected its GM business to decline at a rate of 3% a year.
“Our non-GM business will be growing at double-digit rates. In fact it's growing about 15% per year — to the point now where GM is only about 67% of our business,” Mr. Battenberg says in an interview.
In Europe, the ratio is reversed, as GM business (with Adam Opel AG and Saab Automobile) accounts for about 30% of Delphi's $5 billion in sales in the region.
Mr. Battenberg says his company embraces the notion of losing GM business because it must have a more diverse customer portfolio.
“We're not going to have 99% of the wiring business at GM anymore, we're not going to have 99% of the radio business from GM anymore. It's going to go down,” he says. “is going to have multiple suppliers; we're going to have multiple customers.”
Since their spin-offs, and even before, Delphi and Visteon have become more competitive. They have honed their product lineups and sold off or closed a number of businesses and plants that were noncompetitive or didn't fit with the companies' future plans.
Since 1992, Delphi has sold or closed 83 plants, including 23 in 1998 alone. Having started earlier, Delphi is further along in its restructuring than Visteon, although both still have plenty to do. In April, Visteon announced restructuring that would eliminate 1,900 jobs. Delphi is eliminating 11,500 jobs.
Despite Delphi and Visteon's attempts to get lean in recent years, the companies still are perceived by some in Japan, the birthplace of lean thinking, as being rooted in old ways.
Goldman Sachs auto analyst Kunihiko Shiohara says he believes the quality of Visteon and Delphi parts is poor, and their long-term survival could be in jeopardy because of it.
“I bet my career that he's wrong,” says Michael Johnston, who became Visteon president and chief operating officer last September, coming from Johnson Controls Inc. He says the company has a backlog of $4.5 billion in new business in the future, and it's new business that was obtained organically, rather than through acquisition.
“We're certainly expecting to be around,” he says. “When I look at our growth rate, you have to feel real good about the future.”
Mr. Shiohara's comments are somewhat puzzling because Japanese automakers are awarding Delphi and Visteon significant new business. In 1998, Delphi had $1.6 billion in sales with Asian car companies. This year, the figure is $2.2 billion. Within two years, Delphi expects to reach $3.2 billion in business with Asian vehicle makers, including all of the Japanese producers.
Delphi recently has landed contracts formotorcycle batteries and engine management systems for China Engine Corp. in Taiwan, while Visteon supplies the voice-recognition system for the new Infiniti Q45.
“I can assure you that the Asians would not be buying ignition systems and body security systems, telematics and climate-control systems, engine management systems and electrical architecture and gears and antennas and security systems and dampers and harnesses and halfshafts and batteries — they wouldn't buy this stuff from us” if they questioned the quality, Mr. Battenberg says. “We have some very high-tech stuff that's going into, , .”
At Visteon, Mr. Johnston dismisses the suggestion that some factions withinMotor Corp., a Ford affiliate, do not want to source parts from Visteon. He says Visteon's business with Mazda is up significantly over the next five years.
“I believe we have to increase the customer satisfaction portion of the relationship with, just as we have with Ford,” he counters.
Those efforts should advance nicely now that Visteon has a new president of North American and Asian operations. James Orchard comes to Visteon after serving as chief executive officer for the ZF Group North American and South American operations. He will be responsible for Visteon's Customer Business Groups that deal directly with automaker customers.
Both Visteon and Delphi say they have made great strides in improving quality. Last year, Visteon says it delivered 65 defective parts-per-million (PPM) company-wide, and that one climate system plant recorded zero PPM for the year. The company delivers 30 million parts a month from 56 facilities worldwide.
Go back a ways, and it's easy to see where the Japanese perception may be rooted. Several years ago, Visteon's PPM rate was more than 1,000, says Al Tervalon, Visteon's quality director. The figure has fallen consistently in recent years, from 200 in 1998 to 120 in 1999 to 65 last year. The goal for this year is 30. For a year, executive compensation at Visteon has been tied to these quality numbers. Hence, the company's commitment to the Six Sigma quality initiative, which is catching on throughout the industry.
Through April of this year, Delphi's worldwide PPM rate was 22. Last year, the figure was 47, and 58% of Delphi plants ran at less than 25 PPM. In 1997, Delphi's PPM rate was more than 300, says Donald Runkle, Delphi executive vice president and president of Delphi's Dynamics & Propulsion Sector.
Delphi takes an overkill approach to quality, encouraging customers to take note of even the most minor infractions. “The only way to know what's happening to the customer is to ask them for lots of complaints,” Mr. Runkle says.
He says Delphi's quality stacks up well against the Japanese, and he credits them for setting the auto industry on the path to lean. The Delphi Manufacturing System, for instance, is based on the heraldedProduction System. Mr. Runkle says Japanese critics are taking a cheap shot when they attack Delphi quality. “Europeans say it, too,” he says. “But there are bad Japanese suppliers in quality and good ones, just like in the U.S. and in Europe.”
So how does the customer size up the quality of Delphi parts?
“Delphi is the best in the world on wiring harnesses,” says Bo Andersson, GM's executive-in-charge of Worldwide Purchasing. “And they're very good on entertainment systems and good on powertrain controls. I could give you three areas where I don't think they're very good.”
He will not elaborate, but he says GM is pleased to be sourcing more parts from Denso Corp., a key Japanese competitor of Delphi's. Denso's business with GM has grown from $250 million to $1 billion over four years, Mr. Andersson says.
Labor analyst Sean McAlinden says some of the Japanese perception of Delphi is based on past performance. He recalls in the mid-1990s when the president ofMotor Corp. made an emergency trip to the U.S. because its joint venture vehicle assembly plant, New United Motor Mfg. Inc. in Fremont, CA, shut down for a day. Corollas were sagging because of defective rear struts — supplied by Delphi. The supplier quickly provided a fix.
“They don't forget that stuff,” says Mr. McAlinden, director of the economic and business group at the Center for Automotive Research in Ann Arbor, MI. “When the line must go down, it's not good.”
Mr. McAlinden credits Mr. Battenberg with achieving UAW labor peace, despite closing down more than a dozen UAW plants within a few years of his arrival in 1992. Delphi recently closed another — a steering systems plant in Saginaw, MI — and moved some employees to another plant nearby. Union officials say they support the move, because the new plant is dedicated to a product with a bright future: electrically assisted steering.
The UAW represents about 35,000 of Delphi's 50,000 U.S. hourly workers and 23,200 of Visteon 28,200 hourly workers in the U.S. At Delphi, the UAW workers are Delphi employees, but at Visteon, the union members get their paychecks from Ford. Consistent with the rest of the UAW, a three-year production worker is paid $23.50 an hour, Mr. McAlinden says.
By comparison, JCI and Magna International Inc. pay their production workers — mostly nonunion — between $10 and $11, while Lear Corp. pays its UAW-represented production workers $13 an hour. Mr. McAlinden says the higher wage rate does not make Delphi and Visteon non-competitive. Instead, it provides a highly trained workforce for manufacturing highly technical products.
Worldwide, the UAW represents about 20% of Delphi's workforce. But those employees produce about 50% of Delphi's $29 billion in global revenues. On average, worldwide, Delphi's wage rate is $16, compared to $27 eight years ago.
“The assumption that we're an expensive-wage UAW company is absolutely wrong — 180 degrees wrong,” Mr. Battenberg says.
GM also is rethinking the way it sources parts. It has a new purchasing alliance withAuto SpA, Suzuki Motor Corp., Isuzu Motors Ltd. and Heavy Industries Ltd. (see WAW, May '01, p.53) allowing all of the partners to leverage their consolidated purchasing power on a global scale.
Mr. Battenberg says the strategy is not a threat to his company because Delphi already has considerable business with, Suzuki and Isuzu.
GM also plans to outsource significant design responsibility for vehicle interiors to suppliers. JCI and other interior systems integrators selected by GM to work on future vehicles will have some influence in helping GM decide which companies will supply interior components for those vehicles.
It's too early to say if Delphi loses a big chunk of business in this scenario, but JCI and the other interior suppliers are becoming more competitive with Delphi in a key product segment: instrument panels. For the new Jeep Liberty, JCI is shipping a complete instrument panel, and Lear does it with the PT Cruiser.
“You can speculate all day long,” says Mr. Battenberg, who adds that the best product prevails. He notes that Delphi is the world's largest producer of car radios — the same claim that Visteon makes. “And we're going to continue to be the world's largest,” he says. “I don't think you're going to see a headliner manufacturer suddenly become the world's best radio manufacturer tomorrow.”
He says Delphi did not attempt to become one of GM's interior integrators, having sold the seating and other interior components business. Instead, Delphi is content to serve as a Tier 2 supplier for the high-tech side of the interior — the air bags, seat sensors, electronics and telematics.
Interestingly, Visteon sees opportunities at GM with its new interior sourcing strategy. Unlike the top interior suppliers such as JCI, Lear and Magna's Intier Automotive, Visteon — as well as Delphi — supply climate control systems, a key component for an instrument panel.
That's not to say that Visteon wants to pass on business with its biggest customer, Ford. “We want to win all the Ford business that we can, and it's not a matter of shrinking our Ford base to reduce the dependence. It's a matter of growing our non-Ford base to reduce the dependence,” Mr. Johnston says.
“And we're finding that we're net positive on our business case with Ford. So our volume continues to go up with them,” he says. “We know there are areas we need to improve, and we are working on it. We look at Ford as, ‘Thank God we have 'em.’”
Back at the card game, the stakes are going up. But Delphi and Visteon are staying in, betting on a winning hand.
Delphi Automotive Systems
Independence Day: May 28, 1999
NYSE Symbol: DPH
Sales: $29.1 billion
Non-GM business: 33%
U.S. UAW employees: 35,000
2000 PPM Rate: 47
Independence Day: June 29, 2000
NYSE Symbol: VC
Sales: 19.5 billion
Non-Ford business: 20%
U.S. UAW employees: 23,200
2000 PPM Rate: 65