Can Delphi Tune Up In Time?

Its GM spin-off is nearly complete, but its turnaround isn't

When 600 top executives of Delphi Automotive Systems Corp. gathered in December to plot their future as an independent company soon to be spun off from General Motors Corp., they took their inspiration from a group of Temptations lookalikes hired to perform a remake of the Motown classic, Get Ready, Here I Come. The musicians changed the lyrics to celebrate Delphi's birth as a new $28 billion auto parts company, which sold 18% of its shares to the public in early February. Before the tune ended, Delphi Chairman and CEO J.T. Battenberg III leaped onstage and joined the dance number.

It was a sight few would have expected from the straitlaced exec, a 38-year GM veteran. But Battenberg wants the world, and Delphi's employees, to see him in a new light. As GM prepares to spin off the rest of Delphi later this year, Battenberg must hustle to transform his low-margin GM albatross into a nimble competitor capable of holding its own in the fast-consolidating auto-parts industry.

To succeed, Delphi will need to drum up contracts from other auto companies while also protecting its lifeblood GM business. But Delphi is no Lucent Technologies Inc., the telecom-equipment company that AT&T spun off to win more business from rival phone companies. Instead, GM is dumping Delphi because it is saddled with low productivity, high labor costs, and strife with the United Auto Workers (UAW).

So is Battenberg on a Mission: Impossible? "This is a chance of a lifetime to redesign a whole company," says the 55-year-old executive, who benchmarked the best companies across many industries to set new standards for Delphi. His game plan is to forge a partnership with the UAW, much as GM itself is trying to do. Battenberg hopes to persuade union leaders that Delphi can become competitive through joint labor-management efforts to lift productivity rather than by slashing jobs or pay. He already has made progress in winning over some local UAW leaders.

"JUGGLING ACT." But Battenberg will be tiptoeing through a minefield. The UAW is gearing up to bargain for a new GM labor pact in September. UAW President Stephen P. Yokich is intent, union insiders say, on locking in Delphi's current pay-and-benefit levels by keeping the company under GM's contract for as long as possible. Yokich is even willing to consider giving GM a six-year pact instead of the typical three--something GM has long desired--to keep Delphi's GM-level benefits.

If GM goes along--it still owns 82% of Delphi--Battenberg will have his hands tied for years. Publicly, he insists that "Delphi's relationship with the UAW is good." Privately, though, Delphi insiders say, the company will demand a separate agreement, with lower wages for new hires and more flexible work rules. Says one top Delphi executive: "It's a juggling act of epic proportions."

Battenberg had better be an expert juggler. He presides over an empire that exemplifies some of GM's worst traits. With 80,000 workers sprawled across 48 U.S. and Canadian plants, Delphi's productivity is among the lowest in the industry. Its employees earn the same as GM assembly workers: $20 an hour, vs. $13 at rival unionized auto-parts makers and $10 at nonunion ones.

Delphi's drive to become competitive has fed endless battles with the UAW, sparking most of the 19 strikes that have plagued GM since 1993. Battenberg himself has often seemed part of the problem. With his tailored suits, gold cufflinks, and blunt talk about high union pay, Battenberg has been an easy target for UAW leaders lashing out at GM's hard-line labor stance ever since he took over the money-losing unit in 1992. In 1995, he threatened to sell or close 14 Delphi plants if the UAW didn't make major changes. Battenberg has also cut the UAW out of Delphi's expansion: 60% of its 200,000 workers are outside the U.S. and Canada today, mostly in low-wage countries, vs. 38% in 1992. Three years ago, Yokich snapped that the only way Battenberg could improve labor relations was "to quit."

Yet Battenberg's bold moves have begun to pay off. By shedding dozens of noncore assets and pushing remaining factories to adopt leaner manufacturing techniques, Battenberg has turned a company that lost $1 billion in 1991 into one that made a modest $370 million last year (before special charges). Battenberg also has bid successfully on non-GM contracts. Ford Motor Co. picked Delphi to build sliding doors for its 1999 Windstar. And Volkswagen recently awarded it a $20 million contract for steering wheels and airbags. Such moves have expanded non-GM sales from 13% of Delphi's revenues in 1993 to 21% today. Battenberg says Delphi's non-GM business can jump by 10% a year by 2002 if he can persuade the UAW to make further improvements. That would push the total to 33%.

MISTRUST. He may yet succeed at bringing the UAW on board. He managed to patch up bitter relations at Delphi's brake plant in Dayton, Ohio, where a 1996 strike shut GM's entire North American carmaking operation. GM gave some ground there, but the mistrust lingered. Union leaders, who feared that Delphi wanted to close the plant, were skeptical last year when the company said Dayton was losing money. So Battenberg allowed the union to bring in an independent auditor to examine the factory's books. "I'll do anything to improve communication," he says. "It's important that people have trust."

The gesture worked, says Joseph Buckley, head of UAW Local 696 in Dayton, where workers have since begun to collaborate with management to boost efficiency. "Frankly, it caused us to come to the realization that some of the things we did in the past to retain work were not in the best interests of the business," says Buckley. "Now, we can better help them run the business."

Battenberg is sending other such signals. To give workers a stake in the new company, he borrowed an idea from Lucent and awarded each of Delphi's 200,000 employees worldwide 25 to 100 "founders' grants," or stock options, during the February IPO, worth a total of $480 million. Battenberg, who gets a big chunk of those grants himself, also reserved employees 5 million shares of the 100 million issued. More than 50,000 workers snapped up even more, for a total of 8 million shares, valued at $148 million. And nearly two-thirds of the buyers were union members, Battenberg notes proudly.

So while Battenberg has begun to forge a new relationship with the UAW, he'll still need to do some fancy footwork to maneuver through the spin-off and fall labor talks. It could be a while before he's joining in any chorus of another Motown oldie, Dancing in the Streets.

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