A Wrench For Parts Suppliers

Labor and legacy pension costs from GM and Ford are hurting Delphi and Visteon

Editors Note: On Mar. 4, after the following BusinessWeek article went to press, Delphi Chief Financial Officer Alan Dawes resigned after directors "expressed a loss of confidence in him," the company said in a statement. Delphi also said it would restate results from 1999 through 2004 due to errors in past statements. Including the losses on Mar. 4, Delphi shares are down roughly 39% over the past year.

Back in 1999, General Motors Corp.'s (GM ) plan to spin off the Delphi parts division looked like an all-around great idea. By carving out its components business, GM reckoned to shed nearly 43,000 union workers and trim supply costs. To make Delphi attractive to investors, the auto giant blessed it with a clean balance sheet and billions of dollars in contracts. If Delphi could cut costs and win sales from other carmakers, executives figured, it would prosper.

That expansive vision proved short-lived. Both Delphi Corp. (DPH ) and Visteon Corp. (VC ) -- spun off from Ford Motor Co. (F ) in a parallel exercise in 2000 -- have been unable to repeat their initial profit bursts after the spin-off. And now, as domestic auto makers face deep cuts brought on by their own sales declines over the last several years, the pressure is getting worse. With sales at GM and Ford down again in February -- for the second straight month -- Ford will slash production 10% in the first quarter, and GM plans equally deep cuts in the second. That means more trouble for Delphi and Visteon, which still sell about 50% and 70% of output, respectively, to their former parents. Hamstrung by a legacy of hefty labor and retiree costs, shares of both are off 30% in the past 12 months, to less than $7 a share.

Delphi and Visteon are grabbing new business and diversifying. But to survive, they must speed efforts to cut costs and shed bad businesses. "Neither is sustainable in the current form," says David Leiker, senior auto analyst at Robert W. Baird & Co. in Milwaukee.

Like other parts makers, Delphi and Visteon have been battered by rising commodity prices. But labor is their main problem. Thanks to their ties with GM and Ford, the two pay most of their United Auto Workers employees wages and benefits totaling about $70 per hour. That's equal to pay at car plants -- and up to 60% more than at rival suppliers such as Johnson Controls Inc. (JCI ) and Lear Corp. (LEA ) Delphi's 185,000-strong global workforce includes some 25,000 UAW members in the U.S., while Visteon employs 18,000 UAW members.

Factory closings don't offer an easy solution. UAW contracts require union approval for shuttering a plant. The company would also have to transfer affected workers, rather than let them go. The only way either could fully shed the high-priced workers would be to buy them out -- but with losses piling up, that's a costly option. Instead, idle workers at both companies draw some 90% of their salary and benefits. J.T. Battenberg III, Delphi's chairman and CEO, figures that's about $130,000 per worker. So, if Delphi keeps all 3,000 of its recently laid-off workers idle for a year, "that's $390 million off the bottom line," says Battenberg, who announced he'll retire this year. Analysts say Delphi should hire an outsider, since a non-GM veteran might be better at developing new markets.


The suppliers' current contracts make it tough to grow at home. Big Three purchasing agents use the threat of low-priced Mexican and Asian parts to get lower cost contracts. And in the U.S., Japanese and Korean auto makers simply won't buy parts from union plants.

Meanwhile, mounting retiree costs are adding to the pain. Following a $600 million pension contribution it will make this year, Delphi will have to add a further $1.1 billion. It may sell assets worth $400 million to avoid eating into its $1 billion cash reserve. Since sales to GM and Ford have slackened, Delphi has borrowed heavily to cover rising health-care costs and Visteon suspended its dividend last month.

The question is whether the two companies can build new business and restructure old units fast enough to stave off a full-blown financial crisis. Delphi expects to earn $100 million this year from its auto-parts operations in China, where Visteon also is growing. Both parts makers are pushing harder into electronics and satellite radio. But none of that will be enough to cure what ails both companies. Visteon is negotiating with Ford to help it sell off nonperforming businesses like auto glass and chassis, which account for 30% of revenue but up to two-thirds of its union work force. Battenberg says Delphi, too, has a list of weak operations to sell. But the way Ford and GM are headed, they had both better move fast.

By Adam Aston in New York and David Welch in Detroit

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