Visteon's Last Lifeline

At the end of 1995, as North America's two largest auto makers contemplated spinning off their parts-making operations, Frank Macher knew Ford Motor Co. needed to exit component sectors in which it was uncompetitive.

“We're either going to improve or get out,” Macher, then general manager of Ford's Automotive Components Div., told Ward's in an interview at the time. “The non-core businesses have to make money.”

Macher made it sound simple, but 10 years later the parts operations show “spotty” improvement (according to an insider), and profitability has been painfully elusive.

Over the past decade, Ford's parts operations have taken a corporate odyssey, weathering four chief executives and going public as Visteon Corp. on June 29, 2000. Since then, the supplier has suffered Wall Street scorn, failed to ever post an annual profit (losing a staggering $1.48 billion in 2004) and struggled with its United Auto Workers wage structure to compete against non-union suppliers, especially those Ford's purchasing arm finds enticing in low-cost countries.

The journey is not over, and a happy ending is far from certain. In the latest chapter, the uncompetitive facilities (24 in total) return home to Ford ownership after five hard years under Visteon, and Macher's mission remains unfulfilled.

On May 25, after several months of closed-door negotiations between Ford, Visteon and the UAW, the parties emerged with a deal that allows Visteon to separate fully from Ford, compete more aggressively with lower-cost suppliers and diversify its geographic and customer base. The supplier's average North American wage rate drops from $38 an hour to a more moderate $17.

Overnight, Visteon exits its least competitive sectors (including powertrain, chassis and glass), hones its focus on three core segments (electronics/lighting, climate control and interiors) and drops several notches from the No.2 U.S. supplier position, going from $18.7 billion in 2004 revenues to $11.4 billion expected for 2005. Visteon now has 36 plants in North America, down from 63 five years ago.

Bigger certainly was not better, in the eyes of Michael Johnston, Visteon's chairman-elect and CEO. “We did give up some scale when we decided to move those plants back (to Ford),” Johnston tells Ward's. “But it was profitless volume, and we made the decision that wasn't the driving factor for our future success.”

Visteon also becomes significantly less reliant on Big Three business in North America — dozens of weary suppliers would take a similar agreement in a heartbeat, if given the opportunity. Sales to customers other than Ford jump immediately to 50% of global revenue, from 30% in 2004.

More than half of Visteon's revenues will come from North America, while 44% will be derived from Europe and South America and 3% from Asia, which is a strong growth market for Visteon. Before the Ford deal, 77% of Visteon's sales were in North America.

Meanwhile, Ford finds itself essentially in the same position as a decade ago, the parent whose prodigal son has returned after wandering aimlessly. There is no celebration in Dearborn, however, and no fatted calf for the banquet.

Finally, the parent has no choice but to confront the problems that have plagued the operations returning to Ford. Twenty-four facilities (including 14 with UAW master-agreement pay rates) revert from Visteon ownership to a limited liability company (LLC) that Ford will manage until it sheds, closes or absorbs the operations by 2009. Visteon could end up competing with the facilities it formerly owned.

Macher almost had a crack at righting the ship himself. Ford initially tagged him to head its new parts subsidiary. But the two parties couldn't agree to terms, and that opened the door for Ford's longtime manufacturing executive Al Ver to step in as chief of the new LLC.

Ideally, Ford will find other suppliers to buy its reclaimed parts units, although failed efforts in the past to sell some, namely the glass business, have demonstrated the operations have scant curb appeal.

“Who would buy them?” asks a skeptical Ron Harbour, president of Harbour Consulting. “I think Ford's trying to make the best out of a situation they can't walk away from.” Corporate responsibility aside, one expert sees the 24 facilities holding certain attraction for overseas suppliers.

“I think we could see a Chinese supplier interested in purchasing a Visteon facility as a way of breaking into the U.S. market,” says an analyst who follows Visteon.

To sweeten the deal, Ford has said it will pay part of the wages for the 14 UAW plants, should any suitors be interested. That enticement could mean the difference between a plant staying open or dying (see sidebar, p.40).

Who's to blame for the state of the parts operations? Some could argue Ford erred by neglecting them and sidestepping the delicate — and difficult — issues of rationalizing the labor force and shuttering the weakest plants a decade ago. The UAW says Visteon dropped the ball by failing to upgrade the facilities during its control.

David Healy, auto analyst at Burnham Securities, agrees the plants suffered from high labor costs and underinvestment. “They didn't invest in modern production technology or manage it very well,” Healy says of both Ford and Visteon.

But finding buyers for the plants is not out of the question, he asserts.

“Somebody like a Johnson Controls (Inc.) can come in with a big checkbook, invest in new technology and new equipment, and with the subsidy from Ford for the labor costs, make the thing viable,” Healy says. “There's a good chance some of these plants will survive, even prosper under new management, especially since Ford is paying the difference in employment costs, which is critical.”

Keith Wandell, president of JCI's automotive group, says it is too early to discuss whether the Milwaukee-based interiors specialist is interested in any of the 24 facilities. “We're like everybody else,” Wandell tells Ward's. “We saw this announcement that came out. We're just trying to digest that, figure out what this means. You know certainly we have some businesses that are similar to theirs.”

Four of the plants reverting to Ford produce interior components.

The restructuring gives Visteon a whole new lease on life. Healy likens it to lifting “a 900-lb. gorilla off the back of Visteon.”

Likewise, Visteon must stand on its own now and should expect no more lifelines or cash infusions from its former parent after the agreement closes, likely by Sept. 30.

As recently as March, Visteon negotiated more attractive financial terms with Ford, with Dearborn picking up a bigger share of the wages paid to the 17,400 UAW employees at the 14 master-agreement plants that now revert to Ford ownership.

“Both parties came to the conclusion that we needed a permanent solution to the problem that we had in front of us,” Johnston says. “And we feel that this puts us on a permanent solution path.”

This last lifeline from Ford, however, is sizable: Ford erases at least $800 million in post-employment benefits owed by Visteon, while promising an additional $550 million in restructuring assistance and a $250 million loan to repay debt set to mature in August.

Ford also promises to accelerate payments through 2006 for components purchased for U.S. facilities, in addition to providing $300 million for the inventory included in transferred operations.

Ford expects the new arrangement with Visteon to result in a special charge in the $450 million to $650 million range in 2005. Ford also will offer 5,000 of the 17,400 hourly UAW employees buyout packages that will cost the auto maker $300 million to $500 million between now and 2009.

So what's in this deal for Ford, besides a lot of cost? Ironically, Ford Chief Financial Officer Don Leclair says the company eventually will benefit from lower-cost parts. The auto maker expects to see cost savings in the range of $600 million to $700 million annually by decade's end.

The new arrangement does open up opportunities for Ford to source parts from new suppliers. “Today, there's a book of business that was historically Visteon's,” says Tony Brown, Ford's vice president-global purchasing. “Tomorrow, since that is part of the LLC, that business commodity portfolio is now open to the market. We're not looking for something for nothing.”

Ford will source about 10% of its North American components from Visteon, down from 25% before the deal, Leclair says. Although the Ford-Visteon relationship is scaled back significantly, Visteon remains Ford's largest supplier.

“And strategically important,” Brown says. “And their future viability is still critically important. We are committed to their success now, just as we were in the past.”

An industry analyst has a less rosy assessment. “There's always been resentment from Ford because they were forced to work with Visteon and vice versa,” he says. “But if the opportunity exists for Ford to source from elsewhere they will.”

Johnston says his company's relationship with Ford has not been dysfunctional. “I think there is a lot more collaboration at the top of the two corporations than most people can appreciate,” he says.

“You have intelligent folks looking at a mutual problem and trying to come up with a creative solution,” he says. “I think the agreement we just reached couldn't have been reached if you didn't have a collaborative approach. A confrontational approach wouldn't have got us to this kind of agreement.”

Burnham's Healy says part of the problem has been Ford's lack of resources or management to succeed in the parts business. He views American Axle & Mfg. Inc., a conglomeration of former General Motors Corp. axle plants with UAW labor, as a turnaround success story worth copying.

“Some of these turnarounds took place by having the acquiring company close the plant, let go all of the workers and start over again with a new workforce with more competitive costs,” Healy says. “That's a really vicious way to do things, but that's the only way some of these plants were made viable. That option wasn't open to Ford.”

How Ford will integrate these component plants in the near term remains unclear. “In terms of the pure purchasing aspects of what will happen, we will certainly populate that organization (the LLC) with some of my people who are experienced in the various areas,” Brown says.

Ford is not known for coddling parts makers, and this experience may force the auto maker to rethink its supplier relations model, says John Henke, president of Planning Perspectives Inc., whose studies find Ford unpopular among suppliers

“If they're going to take over these businesses and they're going to treat those former Visteon businesses the same way that they're treating their current suppliers, they're not going to do anything to enhance the value of those businesses,” Henke says. “In effect, what they're going to continue to do is create an adversarial relationship.”

Ford hopes to find buyers for the 24 component facilities soon, which could be best for their viability, Henke says.

“In that sense, if a company that has a more proactive approach to its supply base takes over, I suspect that they're going to be able to do incredibly well,” he says. “Visteon started doing that, and they forged very good relationships with a number of their suppliers. I think if that can continue under a new owner, the businesses can do very well.”

While Ford sheds its parts burden in coming years, Visteon — under Johnston and new president Donald Stebbins — begins to rebuild.

When Johnston arrived in 2000, the company was expanding its product range and focusing on electronics and advanced technology. It also was making low-value components such as alternators, with high-priced labor. Still, at the time, he figured that economic model could work long-term for Visteon.

“I think there's always products — isolated lines and isolated factories — that you know can't compete long-term, and you expect to be able to evolve out of those products,” Johnston says. “Coming into it, yeah, I think it was a viable business when it was spun out.”

Significant loss in volume with Ford, however, changed Visteon's outlook. “You take out 1 million vehicles, that's a lot of revenue, a lot of operating margin at the factories,” Johnston says. The value of Visteon content per Ford vehicle in North America as a result of the deal will drop precipitously from about $3,000 to well under $1,000, the supplier says.

“The ability to transition out of maybe illogical product lines into a more acceptable structure wasn't there,” Johnston says in his defense. “Every company will tell you, ‘If only I didn't make this part or didn't have that factory or didn't have that customer, my results would be exponentially better.’ It's true in any company.”

Of Visteon's 36 remaining North American plants, some are outstanding, says Harbour, an expert on manufacturing efficiency. He singles out Visteon's new plant in Canton, MS, which supports Nissan Motor Co. Ltd.'s new vehicle assembly plant. Nissan set up the plant and runs it with Visteon, Harbour says.

“Visteon learned from that, and it's a good operation,” he says. “It proves that if you set the operation right, it's not who your parent is — it's just good manufacturing.”

Today, Visteon looks to its future, eager to make a fresh start but aware that significant challenges lay ahead, including restructuring what remains of the company and further reducing headcount.

All of Visteon's salaried employees — many of them residing at the new Visteon Village complex in Van Buren Twp., MI — remain Visteon employees, but some will be leased to Ford during the transition period.

“We're going through a process right now of identifying all the services that Visteon does provide to Ford and who provides them for the businesses that go back (to Ford) so that we can make an intelligent decision about the services that Ford needs to retain,” Johnston says.

Visteon's Technical Center in Dearborn reverts to Ford ownership, but only the building. “The test equipment, all the tooling is ours,” Johnston says. “Some of that will be relocated here to the Village depending on which product grouping it was associated with. Part of the agreement is we have the right to remain in that facility for a number of years at a nominal charge to allow a transition to occur.”

The Village, which serves as Visteon's world headquarters, does not revert to Ford ownership.

With the latest Ford deal focused heavily on the manufacturing facilities, Visteon's upcoming restructuring is bound to reduce the number of salaried workers. Johnston says the company needs to “rightsize the engineering” and white-collar headcount for an $11.4 billion company instead of one significantly larger. Benefit reductions are likely, he adds.

A week before the deal with Ford was inked, Visteon hired Stebbins as president and chief operating officer. He came from Lear Corp., where he held the same position for Europe, Asia and Africa. Much of the restructuring to come will fall on his shoulders.

“What we need to do is make sure we have that competitive global footprint and a competitive global SG&A (sales, general and administrative) structure that supports the new business,” Stebbins tells Ward's.

He wants to continue cultivating a solid working relationship with Ford. “I think it's the same across all customers. We want to be their supplier of choice, and the way you do that is you earn it every day through your costs, through your innovative ideas,” Stebbins says. “We see Visteon as a survivor, a top 10 automotive supplier going forward.”

As for profitability, Visteon Chief Financial Officer James Palmer has said near-term prospects are “essentially break-even, assuming we can get all the cost out that we think is possible.”

How likely is it Visteon would reacquire any of the 24 facilities reverting to Ford? “I guess it's possible, not probable,” Stebbins says. “But anything's possible.”

For now, what Visteon needs most, for the sake of employee morale, is stability. “We owe it to our people to let them get on with their lives,” Johnston says.
— with Christie Schweinsberg

Plants and Facilities Transferring to Ford