IMI Magazine

IMI Magazine

News Analysis

Will Delphi prove to be the final straw?

Several years from now, the financial collapse of Delphi, one of the world’s biggest suppliers of motor industry components, could well be seen as a turning point for the US auto industry. Whether this proves to be the case is dependent on two questions: Will Delphi’s bankruptcy prompt an acceleration in the competitive decline of US-based vehicle manufacturers and their suppliers? Or will the shocking magnitude of Delphi’s predicament trigger a new mood of realism?

Pessimists will point out that two other major US component groups – Tower Automotive and Collins and Aikman – were forced to seek Chapter 11 protection (from creditors) earlier this year, along with a string of smaller companies. And the prospect of Ford and/or GM having to pursue the Chapter 11 route appears less fanciful with each passing month. Both groups posted serious financial losses for the third quarter and are currently experiencing a meltdown in North American sales, with demand for high-margin SUVs especially depressed. A measure of GM’s desperation is its apparent resignation over the need to sell its finance operation, GMAC, which traditionally has provided a cash reserve when the going got tough.

On a more positive note, there will never be a better time for the entire US motor industry to rebase its operations on more solid footings. Delphi’s collapse represents the purest example of raw economics at work. First, it took on the burden of healthcare and pension commitments inherited from its former parent, GM. Then it had to contend with shopfloor pay rates averaging $25 an hour, while customers were demanding ever lower unit prices.All at a time of intense competition from emerging players in Eastern Europe, South America and the Far East.

Survival will depend on slashing labour costs by at least 50% and renegotiating benefits. Significantly, the reaction of the all-powerful UAW union has been muted.

Enter the quick buck players

The failure of Delphi and Visteon to survive and prosper as independent publicly quoted groups, along with other pointers such as the collapse of Federal-Mogul and the dismemberment of TRW, highlights the changing pattern of ownership among the component sector’s manufacturing assets.

In particular, there are clear signs that private equity will take centre stage in a shake-up of the components industry. This is evident from events in Europe where private equity investors have been the dominant force recently in motor industry merger and acquisition activity, and also in North America where heavyweights like Carl Icahn, Bruce Kovner and Wilbur Ross are lining up to pick up the pieces from the carnage.

Private equity group WL Ross is in the process of acquiring the European assets of Collins and Aikman and is teaming up with Lear to establish a leading position in automotive interiors. Ross has made no secret of its ambition to become a key player in the automotive supply industry and is watching events at Delphi with keen interest.

Private equity is devoid of sentiment, interested only in how much money can be generated and how soon the investment can be sold for a handsome profit. Under these circumstances no one – least of all employees – should be under the illusion that things will be allowed to drift.

In no mood for nonsense

Is Land Rover’s workforce afflicted by a death wish? How else could one interpret its rejection of a two-year pay agreement between management and unions?

This snub raises the prospect of industrial action, perhaps one-day stoppages which bedevilled the company during 2004. The setback comes just over a year after the workforce endorsed the ‘road map’ aimed at improving competitiveness at Land Rover’s Solihull facility through changes to working practices.

For the sake of all concerned – not least the West Midlands components community which has already suffered a serious bodyblow following MG Rover’s collapse – the hope now must be that the union is able to persuade the lemmings who rejected the deal to come to their senses and embrace a spirit of cooperation rather than confrontation.One thing is certain. Parent company Ford is in no mood for nonsense and the threats of closure at the time of last year’s troubles are likely to top the agenda once again in the absence of a clear way forward towards sustained profitability.

Habits die hard

Whatever the bar-room moans, higher fuel prices appear to have little effect on motoring habits. According  to a recent survey carried out by KPMG, 83 per cent of car users have no intention of switching to more fuel efficient vehicles. It appears also that most motorists are blissfully unaware of their vehicle’s fuel economy credentials, let alone day-to-day operating costs.

But these findings could be misleading. Motorists have probably been influenced by media reports on the impact of Hurricane Katrina on oil production to believe that things will soon be back to normal with supermarket fuel stations leading the way on price cuts. Attitudes could change if present price levels continue into next year. Moreover, consumers may economise in other ways – for example through deferring vehicle replacement (already evident) and cutting back on servicing.

Then there’s the creeping impact of congestion charging. It’s soon to be extended in London – with the prospect of eventually covering all areas within the M25. Exemption for hybrid vehicles is worth almost £2,000 a year post-tax to a commuter.

But why not extend the concession to clean diesel vehicles? And does the London mayor really mean to favour a hybrid SUV in preference to a petrol-powered Smart car?

Join the club

The decision by vehicle importer International Motors to supply independent garages with original equipment parts is another sign of the growing acceptance of the independent trade as a bona fide member of the servicing and repair sector. The importer of the Daihatsu, Subaru and Isuzu marques aims to boost parts sales by encouraging its franchised dealers to communicate more openly with local independent garages.

The idea is that independents will be ‘kept in the loop’ through receiving information on product promotions, deals and developments for all three brands. Importantly, the parts will be supported by a three-year manufacturer’s warranty covering material defects which should add still further to customers’ peace of mind when using an independent garage.

More and more, the smaller marques are realising the imperative of enlisting the support of the independent trade in order to provide customers with convenient servicing points. Consumer surveys indicate that people are prepared to travel far and wide to source their vehicle but are alienated by the thought of being dependent on a distant servicing centre. No wonder then that IM regards working with the independent sector as critical to future growth.