Back to the Future at Valeo

The struggling auto-parts maker unretires a fierce leader

For years, auto makers considered Valeo one of the best European suppliers. When other car-parts manufacturers balked at demands for price cuts and productivity gains, Volkswagen held up the ultra-efficient, Paris-based Valeo as a model. The world's No. 10 supplier, Valeo produced innovative and quality components at attractive prices.

No longer. Since Valeo's formidable Noël Goutard retired as CEO on May 25, Valeo has run into problems integrating new businesses and meeting delivery deadlines. Now VW expects to slash Valeo's share of contracts for headlights and interior lights across its model range to 20% from 70%. The German carmaker plans to cut big orders for windshield wipers, too. "We're very concerned about what's happening there," says a senior Volkswagen official.

VW isn't the only company alarmed by the deterioration at Valeo. Just about all its customers worry that the problems at the $8 billion company, Europe's No. 2 supplier, will shift the delicate balance of power in the industry. The main fear is that if Valeo loses its edge or falters, Stuttgart-based Robert Bosch, Europe's leading parts maker, with $20 billion in sales, will emerge with an even stronger bargaining position. Meanwhile, Valeo's investors are worried about the outlook for the company, whose profits sank 35% in 2000, to $326 million. The stock has sunk nearly as much over the past year.

TOO SLOW. Granted, it has been a miserable spell for all auto-parts suppliers. CEO Andre Navarri, Goutard's hand-picked successor, took over at a treacherous time, with raw-material costs rising just as carmakers stepped up demands for price cuts. But company insiders say Navarri floundered, responding too slowly to quality problems in the lighting division and leaving key slots unfilled. That was also the view of French holding company CGIP, Valeo's biggest shareholder, with 20%. It forced the issue at a Mar. 21 board meeting that led to Goutard's comeback and Navarri's ouster after only 10 months on the job. "The board felt that Navarri wasn't reacting fast enough to the pressures on prices, volumes, and the worsening conditions in the sector," says Christine Dutreil, spokeswoman for CGIP, the holding company for the interests of Ernest-Antoine Seilliere, head of the powerful French employers' federation.

Goutard, 69, is jumping at the chance to return, though he won't be coming back as CEO. For that job, the board tapped Thierry Morin, Valeo's chief operating officer and Goutard's former right-hand man. But the board will propose to shareholders on May 9 that Goutard head a new supervisory board overseeing corporate strategy. One of France's toughest business leaders, Goutard transformed Valeo from a sleepy $1 billion supplier dependent on the French car industry into a global player with $6.8 billion in sales. His biggest deal, the $1.7 billion acquisition of ITT Electrical Systems in 1998, positioned Valeo as one of the leaders in the fast-growing and lucrative business of automotive electronics.

But that deal turned into a disaster for Navarri. The U.S. business dragged down Valeo's results as Navarri struggled to restructure ITT's bloated and inefficient factory in Rochester, N.Y. According to investment firm Morgan Stanley Dean Witter, the absenteeism rate at the Rochester factory was at least four times higher than that of Valeo's operations in Mexico. Its quality performance was 10 times lower. Investors hope Morin will move quickly to cut costs at ITT--with help from Goutard, who is respected for his focus on cost and quality controls.

BOSCH BASHER? European auto makers, too, are pleased with Goutard's comeback. They think that a revitalized Valeo will reduce Bosch's dominance of the European auto-parts market. Bosch's clout became painfully evident over the past year when auto makers rushing to build diesel-powered cars had to abide by the German company's timetable for delivering direct-injection systems, which no one else in Europe makes now. Renault, for one, shifted some business from Bosch to Delphi Automotive Systems Corp., the global leader. "In diesel, Bosch has been ruling the roost," says John K. Lawson, auto analyst at Schroder Salomon Smith Barney.

Auto makers don't want Bosch to gain the same clout in automotive electronics. It's already the leader in Europe after developing huge hits such as an electronic stability program to keep vehicles from rolling over. One of Goutard's priorities will be to refocus Valeo on electronics while shedding some of its more prosaic businesses, which include clutches and door locks. Goutard is back in the fray. Now he must make sure Valeo prevails.

By Christine Tierney in Frankfurt

    Before it's here, it's on the Bloomberg Terminal.