Delphi's Report Card

Wall Street and much of the auto industry have failed to take notice, but Delphi Corp. has come a long way since it won independence five years ago from General Motors Corp. on May 28, 1999.

Since that time, the Troy, MI, supplier has jettisoned dozens of operations that were non-competitive while investing heavily in more promising sectors such as electronics.

The company also has improved its parts-per million (PPM) defect rate by more than 85%, expanded its sales inside and outside the U.S. to customers other than GM, reorganized business units, boldly targeted new markets such as diesel fuel-injection and 4-wheel steering and has contributed to the success of GM's OnStar high-tech roadside assistance service.

Plus, Delphi has managed to keep labor peace — albeit fragile — despite its goal to significantly reduce pay and benefits. Since 1999, Delphi has cut by nearly 30% its United Auto Workers union headcount. Still, the supplier has not suffered a single UAW work stoppage since independence.

Delphi formed an Automotive Holdings Group to fix, close or sell its troubled operations. Originally, the group had 12 plants, but one was closed last year in Moraine, OH. Delphi is attempting to consolidate four of the remaining 11 plants (in Alabama, California Kansas and Michigan) into two.

Through 2004, Delphi plans to cut its U.S. hourly workforce by 5,000. Some 1,600 jobs were eliminated by the end of 2003, and more reductions are coming as employees retire at both Delphi and GM. GM retirements free up positions for Delphi employees to transition back to GM, if they so choose.

The 5,000 are in addition to the 11,440 jobs Delphi eliminated in 2001. Add to that the estimated 20,000 positions the component operations eliminated before they were renamed Delphi in 1995. Since 1992, the company has closed or sold off 128 facilities or business lines.

Delphi was overstaffed when GM handed over the reins in 1999. GM's component facilities, such as those sold off to become American Axle & Mfg. Inc., needed attention that GM couldn't afford to give.

But it is not fair, says industry expert Sean McAlinden, to compare Delphi with American Axle, which quickly whipped into shape five GM drivetrain plants and developed a global growth strategy in the process.

Delphi is entrenched in several highly competitive sectors, while American Axle has enjoyed a lock on axle business for GM pickups, says McAlinden, chief economist of the Ann Arbor, MI-based Center for Automotive Research.

“What is a successful spinoff? American Axle, which faced no competition, or Delphi, which has faced competition and survived and is adapting?” McAlinden says.

He suggests Delphi's brightest days lie ahead, especially now that Delphi and the UAW — as well as competitor Visteon Corp. — agreed in late April on a 2-tier wage structure that will slash pay for new hires.

Average Delphi workers make about $25 per hour, the same as their GM union brethren. With the new 2-tier wage structure, new hires will start at $14 per hour, going up to about $16.50 for production workers and $18.50 for semi-skilled workers. Employees also will shoulder increases in co-pays for prescription drugs.

The new pay structure is competitive with other UAW supplier plants in the U.S. owned by companies such as Lear Corp., Johnson Controls Inc. and Dana Corp.

For years, Delphi has said it cannot compete with lower-wage suppliers. Now it can. The new wage structure, says Delphi Chief Financial Officer Alan Dawes, allows the supplier to be more aggressive in bidding for future work.

“What it means is that for existing facilities, they have hope,” Dawes tells Ward's. “We'll be bidding at about the same basis as our competition is bidding, with a certain level of assets and certain labor cost. That's all we've been asking for.”

It will take until approximately the end of the decade for Delphi to convert the bulk of its workforce to the lower-tier wage. Such a projection seems optimistic, except that 60% of UAW members at Delphi (and GM) are eligible to retire within five years.

Until the higher-tier wage earners either retire or return to GM, the new wage rate “won't be meaningful in terms of our cost structure until the latter part of the decade,” Dawes says.

McAlinden calls Delphi “absolutely correct” in its argument in favor of 2-tier wages. He considers Delphi “undervalued” on Wall Street and says the supplier deserves more respect than it gets.

Delphi's initial public offering on the New York Stock Exchange was held Feb. 5, 1999, at a price of $17. Over the past five years, the share price has exceeded $20 a few times, but the price has been in steady decline since the spring of 2000. It was trading around $7 per share in early 2003, and for most of 2004 has hovered around $10.

When Delphi prepared for its initial public offering in the late 1990s, the company had a decided swagger because of its size and No.1 status. Delphi wanted to appear strong and self-confident — like the Internet whiz kids — but that attitude fostered the notion that Delphi was a lazy rich kid living off the fat of its deep-pocketed parent.

Today, that swagger has been replaced by a more humble view of the world, thanks to a stock price that has lost half its value in five years and a realization that leaving the nest often causes a few bumps and bruises.

It's not all that important that Delphi retain its crown as the world's No.1 supplier, says Chairman, President and CEO J.T. Battenberg III. “If we were just trying to be No.1 and be big, we certainly wouldn't be getting rid of a lot of business, closing and selling plants,” Battenberg tells Ward's.

As part of Delphi's “fix-close-sell” strategy, Battenberg estimates one-third of its troubled operations have been fixed, one-third have been closed and one-third have been sold over the past decade.

He says 85% of the company is “running on eight cylinders,” while the remaining 15% “is dragging us down, no question.” Delphi's Automotive Holdings Group is addressing that lagging 15%.

“Even if we get out of some businesses, we still are able to grow our business because of our double-digit growth rate in non-GM sales,” Battenberg says. In 1997, Delphi counted only 18% of its revenues from customers other than GM. This year, the figure is expected to reach 43%, and the 50% threshold is attainable next year.

Delphi's transformation is not complete, but Battenberg knows it is well under way because his company is received more warmly today than several years ago, when it made sales calls on other auto makers. He serves on Ford's International Advisory Council, along with representatives of only nine other suppliers in the world.

“I was never even close to that council when I was part of GM,” Battenberg says.

Even before there was a Delphi — in the 1980s — GM's component operations were on the cutting edge as the auto industry went global. Delphi is the largest supplier in China, with 14 operations there, and the fifth largest in Europe. Some 70% of its employees are based outside the U.S.

“They blazed the outsourcing trail for the whole industry — first near-shore to Mexico, then far-shore to China,” McAlinden says. He says the U.S. imported $2.8 billion worth of auto parts from China last year, up from $830 million in 1997. “A good hunk of that came from Delphi's operations there,” McAlinden says.

As Delphi leverages its global capabilities, it simultaneously is emphasizing the need to get lean. Still, Donald Runkle, Delphi's vice chairman-enterprise technologies, concedes low-hanging fruit remains unpicked at a number of Delphi plants.

“We have some facilities that are still a bit erratic, in terms of making steady progress on productivity. To me, those facilities basically need manufacturing 101,” Runkle says. “We have another group that's in steady continuous improvement.”

The third group of Delphi plants — seven of them — are the company's shining stars, recipients of new lean operating systems. “These are all really good plants, and we saw improvements of remarkable scope, like 50% inventory reduction and 25% productivity gains,” Runkle says. These plants are serving as models for upgrading dozens of other Delphi facilities.

Runkle says some Delphi facilities rate among the world's best, even compared with Japanese competitors.

Battenberg bristles at the suggestion that the component operations are in better hands with Delphi than they were with GM. He's more diplomatic.

“I think the business is getting a lot more focused, a lot more attention, a lot more capital than it would have under a parent who was cash-strapped and who had allocation issues,” Battenberg says.

Delphi is carrying its lean message to its suppliers. It now purchases parts and materials from 4,000 suppliers, but the company now is actively bidding only about 1,200 for future work.

“We have more suppliers than we can manage right now,” Runkle says. “We have some things mixed up — some things we're making that we should be buying and some things we're buying that we should be making.”

Whether it is the management of suppliers, the future of its stock price or the conversion to a lower-wage workforce, Delphi hopes the transformation continues.