Delphi’s emergence from bankruptcy gives birth to a brand new supplier and shows how painful the supplier spin-off can be.
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On October 5th 2005, Delphi filed for bankruptcy, the largest in the auto industry hitherto and the 13th largest in the US industry as a whole. This would have been surpassed by the magnitude of GM’s and Chrysler’s bankruptcies earlier this year. Nonetheless the Troy-based supplier’s exit from bankruptcy, which occurred on October 6th with the sale to a group of lenders, was far more tortuous as it took four years and a number of firesales and jobcuts in the US to emerge from Chapter 11.
There is little similarity between GM’s 40-day pre-packaged bankruptcy and Delphi’s protracted Chapter 11 proceedings that lasted four years. The length of Delphi’s bankruptcy is mainly linked to two factors – firstly, the negotiations with United Auto Workers and GM proved particularly difficult in bringing labour costs more in line with competitors. In doing this the public approach to negotiations with UAW by Delphi’s turnaround CEO, Steve Miller, certainly did not help. “Paying $65 an hour for someone mowing the lawn at one of our plants is just not going to cut it anywhere in industrial America for very long”, he once said to media, expectedly causing anger among trade unions. Another factor which postponed the exit from bankruptcy was recession. Despite having won court approval to exit bankruptcy in January 2008, this did not materialise, as the group of investors on whose support the emergence from Chapter 11 was based withdrew their offer in April 2008. In hindsight, this was not a major setback, because there would not have been a worse time than mid-2008 for a supplier to emerge from bankruptcy.
One objective which was achieved since the spin-off and bankruptcy was the reduction of the company’s reliance on its former parent. When the spin-off was completed, GM declared its intentions to remain an important customer, while “Delphi’s independence would substantially help it attract additional business from automotive companies other than GM” as stated in the press release issued in August 1998. This actually happened, as its reliance on the Detroit automaker gradually declined from 82% in 1997 to 31% in 2008 and 27% in the first half of 2009. But it was simply not enough to guarantee the viability of Delphi, which was able to stay afloat as a captive supplier of GM for only six years, posting increasing losses quarter after quarter. The supplier was saddled with inefficient plants and high labour costs of up to $65 per hour, including benefits, basically three times what other US automotive suppliers had to cope with. The bankruptcy allowed the supplier to address the labour cost issue, though not without harsh negotiations with the UAW, as well as disposing most US plants.
The new Delphi, which changed its name to Delphi Holdings LLP, emerges as a brand new company with strategic traits totally different to former Delphi Corp. First the ownership, with two hedges funds Elliott Management and Silver Point Capital winning the auction which allowed them to trade their credit towards the bankrupt supplier for a stake in the newco. In term of size the new company is smaller and more focused, greater even than the 20% shift in its turnaround CEO Steve Miller hoped for when he took the reins of the supplier. The supplier’s geographical spread also changes significantly. 36 of the 40 US plants it operated when entering bankruptcy have been already wiped out. By the end of the year only three will remain, with the obvious consequences on US workforce which was reduced from 50,600 to 14,000.
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By GlobalDataA different customer base will be targeted by the new Delphi, with sales to GM in continued reduction, although the supplier had already started this process. All non-core and money-losing business lines have been either sold – like interiors and brakes – or disposed in the case of “bad company” DPH Holdings Co. Delphi’s steering business, whose survival was fundamental to avoid supply chain disruption at GM, has been reacquired by GM and re-branded Nexteer Automotive. This is planned to be sold once market conditions improve. The new Delphi will therefore focus on four business lines; electronic components, one of the most competitive parts of the supplier’s business; powertrain; thermal systems; and safety systems.
There is a clear lesson the new GM and other car makers should learn from the Delphi case, particularly in the management of the spin-offs and outsourcing. When an automaker does not have or fails in defining a long-term strategy with regards to its outsourcing and vertical integration, then its supplier strategy can drift. So much so that an OEM can find itself first outsourcing the entire component manufacturing to a new supplier entity only to then re-integrate it in the OEM ranks when the automaker realises that certain areas should not be outsourced. It is important to identify the component areas and operations where it is vital to retain expertise and avoid reliance on external suppliers because of strategic matters as well as to avoid potential disruption to production.
An ever-charging and unclear outsourcing policy, as happened to GM and Fiat most notably, often leads to significant losses and to bankrupt spun-off suppliers as Delphi and Visteon. Chapter 11 does not come for free. Delphi paid about US$400m in costs associated to filing, while its captive customer GM – which created Delphi with the spin-off in 1994 and made go public in 1999 – shelled out more than US$14bn over the four years of bankruptcy, US$11 of which went into restructuring, US$1bn in obligations undertaken and US$2bn in claims waived, as agreed in the bankruptcy court. That is not all – GM has already planned to invest US$1.75bn to support the new corporate entity and new loans are under consideration. Delphi may have seen the day it exited Chapter 11 as a new dawn. For GM though, discontinuing some deeply rooted bad habits is still not in the company’s agenda.c
Matteo Fini
Lead Researcher, SupplierBusiness.com
matteo.fini@supplierbusiness.com
This article was supplied to just-auto by SupplierBusiness, an IHS Global Insight company.
