The Detroit Two-Step; Doublespeak About Delphi To Give GM Purchasing More Time To Save GM, Not Delphi, From Certain Disaster

Implications: Delphi is on life-support with no health insurance, and General Motors wants the world to think that it is offering to pay some of Delphi's bills out of the goodness of its corporate heart, and for old times sake.  The truth is that the sheer and massive incompetence of GM purchasing management has failed in 9 years to separate Delphi's fortunes from those of GM even though that was the actual reason that GM created Delphi nearly a decade ago.  

Analysis:  J.T. Battenberg, known as "J.T." to his subordinates was the GM group executive chosen by the GM Board of Directors in the late 1990s to lead out a ragtag pastiche of mostly money losing antiquated parts makers from their havens as GM operating units to the cold cruel world of independent operation.

Mr. Battenberg was very well paid for his final act as a loyal team player in what is essentially the same group of managers with the same leaders who are today running GM.

"J.T." lives on what can only be described as an estate in Michigan's toniest and most expensive city, exclusive Bloomfield Hills. His palatial home on several very valuable acres overlooks the Bloomfield Hills Country Club. His reward was in this life.

To be fair it is probably true that neither JT, nor GM's Board, knew of the siamese twin relationship between Delphi purchasing and GM, i.e., that the one wasn't viable without the other, but that means it is also fair to say that none of the creators of the deal knew what they were really doing.

The Detroit Three were declining rapidly by the end of the 1990s but true to their historical arrogance they convinced themselves that the situation was merely the trough of a cycle through which the American industry had been many times before. This was not true and what they didn't know was that they would never be able to recover from the low point this time, because for the first time in American OEM automotive history foreign competition was making better cars and parts and doing both profitably and even doing it in the USA!

GM, itself, had a near death experience in the early 1990s; it was already preparing a bankruptcy filing when its then purchasing manager in Europe, Ignacio Lopez, told the Board that he could save a billion dollars from reductions in the cost of purchased parts and service in just six months if they would give him the chance. Seeing a way to deflect at least some of the blame for their impending failure the GM Board decided to let Lopez have a go at it.

Lopez strategy, which was, in fact, the beginning of the end for not only GM but for the entire North American OEM automotive industry was, literally, to 'pay less' for parts. Struck dumb (or dumber) by how well this 'brilliant innovation' worked GM's board quietly put away the bankruptcy petition and once again began ordering vintage Dom Perignon rather than domestic sparkling wine at the Forest Oaks Country Club in Bloomfield Hills.

By the end of the 1990s Lopez, who turned out to be a not very ethical guy, was abruptly gone, along with years worth of proprietary GM future product plans, to a higher bidder in need of his brilliance. But supplier bankruptcies and low quality due to aneed to cut corners had by then resulted in low quality cars and trucks at a time when Japanese quality was surpassing American across the board and, even so, the Japanese were selling cars, made anywhere in the USA where there was no closed shop rule, at lower prices than the American OEMs.

It was then in the late 1990s that the mantra, legacy costs, began to be heard. Soon all of the American car companies not facing imminent bankruptcy, i.e. GM and Ford, were adding 'head count reduction' and "China pricing" to the mantra and the idea of creating and letting Delphi and Visteon (the future name then for Ford's parts manufacturing hodgepodge of moribund factories) go their separate ways became good reasons for not worrying about quality.

GM's Board hoped that by 1999 everyone would have forgotten that the mess that was to become Delphi was born from GM's original envy of Henry Ford I's method of operation, Total Vertical Integration. When GM acquired the Dayton Electric Company (Delco) it got that company's single most important asset, Charles F. "Boss" Kettering, the man who invented the electric starter and colored exterior paint, among others, both of which were marketing tools of pure genius. Naturally that was then as opposed to now; that was Alfred P. Sloane and Charles F. Kettering, not Rick Wagoner and Bob Lutz.

By the time that Delphi was christened 75 years later GM (and Ford) parts operations consisted of an unrelated, other than through ownership, group of companies the profits from which when and if they occurred were simply absorbed by the parent company which dictated budgets for research, facilities, and head count based on corporate earnings and needs rather than by the individual unit's success or needs.

In the late 1990s GM decided that it could cut  'head count,' reduce maintenance costs, and reduce administrative costs by simply forcing its parts group to 'go it on its own." One immediate advantage was to be that Delphi's financials could be simply taken out of GM's balance sheet. Interestingly enough this meant that Delphi was to be valuable simply because it was not! Clearly GM must have believed and or known that Delphi would have been a drag on the parent company's operations if it were not excised.

GM's management overlooked one important factor in its rush to get this doddering old mess into the home for worthless companies. It overlooked the linkage between GM purchasing with its specialized staffs, such as its foreign exchange traders, and its clout and expertise in commodity purchasing. Delphi was immediately doomed; it would pay more for such financial services and more for commodities than it ever had and be expected at the same time to lower its prices to GM within 3 to 5 years of the separation.

GM purchasing began to plan for resourcing all of its business with Delphi immediately after the separation, but rather than accomplish this in an orderly fashion GM purchasing got sidetracked, fatally, it turned out, for Delphi, and maybe, in the long run for GM, also.

Harold Kutner, GM's purchasing czar in 1999, had done his best to make the separation of Delphi beneficial to GM. He set up, for example, a system whereby people under his direction bought copper at the best possible price for Delphi's Packard Electric Division, which made 6 billion dollars a year worth of wiring harness for GM; his people also bought the platinum group metals for Delphi's Exhaust Business Unit. This saved GM and Delphi hundreds of millions of dollars per year.

There was a lot more such work to be done when Kutner rather abruptly 'reached retirement age' in 2001, and GM had the misfortune to replace him with a person with less skills and no foresight.

The new purchasing manager at GM was obsessed with getting the suppliers, including Delphi, to absorb any and all price increases due to commodity price inflation. He decided that he would give every blueprint for every GM purchased part to Chinese companies for quoting even if the Chinese company his staff 'chose' did not know how to make the part, had never made anything like it before, or did not even know what it was!

Delphi, like all of GM's suppliers, was then informed that it would have to meet whatever price the chosen Chinese supplier had come up with or lose the business. Delphi had a slight edge; it was allowed to continue charging a higher than the China price until 5 years after the separation at which time it would have to meet the China price or be desourced on the part.

Things began to go to hell for Delphi when the five year price guarantee expired in 2004.  From then on Chinese suppliers began to replace Delphi rapidly Delphi began to hemorrhage money and close or sell operations.

GM was at first ecstatic, but soon poor quality, rising costs for raw materials and labor in China, and the strengthening of the Chinese currency against the dollar, none of which had been planned for, caused GM's savings due to the China price system to turn south dramatically. 

By 2006 Delphi had already decided to remake itself as an Automotive electronics company specializing in entertainment products.

GM panicked when Delphi told it that it, Delphi, could not any longer 'insource' the products that GM had outsourced from it to China. Delphi had simply lost the people or the skills or the facilities to do it.

Delphi then went into bankruptcy allowing both it and GM to hide some of the mismanagement.

As Delphi has continued to seek financing to come out of bankruptcy GM has been seemingly generous with its offers to commit to a larger and larger part of the refinancing. 

Finally a large financial institution has noticed that Delphi is not viable simply as some version of the old Delphi, with captive GM business. Appaloosa Capital is worried that GM will continue to try and resource anything and everything it still has with Delphi, and when it does, it will drop out and absorb any remaining losses to terminate the possibility of further losses.

The American OEM automotive industry has been dealt I think a mortal blow by its legacy of short term planning and its total ignorance of currency and commodity risk management. Delphi cannot survive in the face of competition from profitable Denso, Siemens, and Magna all of which already have significant operations in the US and or Canada. 

Some former Delphi units may survive and even prosper under capable management. Umicore of Belgium for example has bought Delphi's catalyst coating plants and they are already profitable under Umicore. It is absolutely incredible that Delphi could not make money in the catalyst coating business. This failure alone took a great deal of lack of financial skill.

It wouldn't surprise me now if GM offered to take Delphi back into its fold, because GM is finding it impossible to insource those parts that Delphi is supplying. GM may well be desperate at this point.

I will be very surprised if private equity tries to rescue Delphi after Appaloosas departure.