The Rebirth of Delphi

Delphi has been offering satellite radio devices for a decade.

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There are times when Rodney O’Neal sounds more like a sailor than a CEO. “You have to be aware of what your North Star is and never lose sight of it,” he says, sitting in a Renaissance Center ballroom shortly after giving a recent speech to an auto industry confab. “Otherwise,” he cautions, “you’ll lose your way.”

There were plenty of times in recent years when the company O’Neal now runs did seem to have lost its bearings. Giant parts maker Delphi, once one of the world’s largest automotive suppliers, voluntarily plunged itself into bankruptcy in 2005. The company, O’Neal says, had been unable to resolve fundamental problems that threatened its survival and saw Chapter 11 as the only way to hammer out a painful — but consensual — restructuring. At least, that was the strategy.

But things didn’t quite work out that way. The mega-supplier found itself facing what O’Neal calls a “double-feature” — something those quick with a cliché might have dubbed the perfect storm. Delphi’s bankruptcy filing coincided with “the implosion of the global auto industry,” the executive recalls, a frown spreading across his face, capped by the meltdown of the global finance markets.

As Robert Burns said, the best laid plans of mice and men oft go astray. And the same can be said for corporations. So instead of the quick, surgical restructuring envisioned by former Delphi CEO Steve Miller, the supplier’s trip through the courts began to take on Kafka-esque tones that started to suggest a permanent existence in bankruptcy hell. By the time the courts finally signed off on the last legal documents four years later, what had been envisioned as a surgical strike turned out to be the longest corporate bankruptcy in American history.

Yet, after all the miscues and false moves, industry analysts suggest the new Delphi bears a striking resemblance to the company that Miller and O’Neal envisioned when they first filed for court protection. Today, there’s more than just the word “automotive” missing from the post-Chapter 11 Delphi. Gone, as well, are the old-style component operations, like steering gear, that were cobbled together a decade ago by Delphi’s former parent, General Motors, which originally used the spinoff as a way to get its own house in order.

“They’ve finally gotten rid of all the junk,” says NexTrend automotive analyst Joe Phillippi, referring to the truly ancient 20th-century legacy businesses that had collectively become Delphi’s corporate albatross.

But that’s only one of myriad reasons why Phillippi and other industry analysts are so bullish about the Troy-based supplier. The slimmed-down Delphi that’s emerged from bankruptcy is effectively debt-free and operating largely without the legacy labor costs and holdover wages that made it increasingly noncompetitive. And although it’s barely half the size of the company that entered Chapter 11, what remains offers Delphi the opportunity to tap into some of the industry’s most promising trends — and, if O’Neal and company can stay true to their North Star, generate sizeable profits.

A Troubled Birth

To get a handle on Delphi’s revival one must understand its troubled past, and to do that requires a brief analysis of GM’s history.
There was a sharp difference in the visions of the early auto industry’s two most successful pioneers. For the most part, Henry Ford chose to grow his company organically; Billy Durant, heir to a Flint buggy fortune, preferred amassing his vertically integrated GM empire by cobbling together promising auto brands like David Dunbar Buick’s auto company with the operations of parts makers like Fisher Body.

Indeed, for much of the 20th century, GM operated as a collection of interconnected but semiautonomous fiefdoms — at least until the radical reorganization that former chairman Roger Smith announced in 1984. Times had changed, and quite dramatically, with the arrival of Asian automakers like Toyota and parts suppliers like Denso. Suddenly, vertical integration didn’t work so well. Many of the components operations that had been fundamental to GM’s rise were suddenly an anchor threatening to bring it down.

In some cases, GM simply hadn’t made the investments necessary to compete in basic stamping, forging, and machining opeations. But there was also the issue of wages. While the automaker was paying its parts workers the same rates as assembly-line employees — a figure that in recent years approached $70 per hour in total wages and benefits — competitors were shelling out a fraction of that — in some cases, less than $10 an hour at nonunion plants in the States, and significantly less abroad.

By 1994, GM began looking for a way out. It organized a large chunk of its parts and components business into the new Automotive Components Group, assigning executive J.T. Battenberg III to figure out how to either salvage those operations or get rid of as many as possible. Battenberg, once considered a contender for GM’s top spot, knew he was being sidelined. But, as he said in an interview at the time, he saw “an opportunity” to create something bigger than initially perceived.

Battenberg’s first step with what, in 1995, was renamed Delphi Automotive Systems, was to divide the parts-making empire into three groups. Those operations given a red light were destined for sale or closure; those given a green light were deemed worth keeping. Yellow gave a reprieve, but only if a turnaround seemed feasible. By 1999, a pared-back Delphi was spun off through an IPO, with Battenberg as its first chief executive.

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