By Jeff Bennett
A decade ago, U.S. auto supplier Delphi Automotive employed
47,000 people in its home market, and its revenue--nearly $30
billion--topped the global car parts industry. Today, its U.S.
workforce has shrunk to 5,000, aided by the shedding of 42 of the
47 factories it once ran here.
Spun off from General Motors Co. in the late 1990s, Delphi once
sold everything from steering wheels to brake pads. Since emerging
from bankruptcy in 2009, the company has slimmed down to
concentrate on supplying systems to improve fuel economy, auto
safety and self-driving technologies.
That focus will get even slimmer as Delphi has agreed to sell
its lower margin automotive heating and cooling business to German
competitor Mahle GmbH for more than $700 million, according to
people familiar with the matter, a move that caps several years of
refashioning the old-line U.S. parts maker to a more narrowly
focused technology company.
Delphi also reached a separate deal to sell its Shanghai Delphi
Automotive Air-Conditioning System Co. to Mahle although financial
details weren't immediately clear, these people said. The deal for
the China business likely will raise the total value.
The sale of Delphi's thermal systems operation, representing
about $1.6 billion in annual sales, will include 13 manufacturing
sites in eight countries employing about 6,700 full-time employees.
Details of the sale could be announced as early as Thursday, these
people said.
The divestiture is the latest in a series of moves that Delphi
has taken to focus on higher margin products, including fuel cells
and navigation systems, where it believes it can have a strategic
advantage. Cash from the Mahle deal could further boost that
portfolio, the people said.
After a four-year bankruptcy, Delphi return to the public market
in 2011 and its shares have jumped, pushing its market value to
$22.8 billion, nearly as large as electric-car maker Tesla Motors
Inc. Its shares have more than tripled since the IPO. The stock was
off six cents at $78.44 on Wednesday and jumped in after-hours
trading to $79.90.
The deal comes just ahead of a leadership transition at Delphi.
Rodney O'Neal, the auto supplier's longtime chief executive, is due
to retire on March 1. His replacement, Kevin Clark, 52 years old,
likely will use proceeds from the sale to further bulk up the
company's now electronics-heavy product line.
A decade ago, proceeds from a similar transaction would likely
have been earmarked for worker buyouts, pension payments or
health-care obligations.
Delphi filed for bankruptcy in October 2005 just as America's
biggest auto suppliers were struggling. Auto makers were squeezing
for price concessions and the economy was headed toward a financial
crisis. Since then, the top tier of parts makers have roared back.
Companies like Visteon Corp., Lear Corp. and BorgWarner Inc. are
posting big profits, returning billions to shareholders and
expanding geographically.
Delphi is a proxy for the transformation. Where it once provided
heating and air conditioning for most GM cars on the road, it now
gets just 17% of its revenue from Detroit auto maker, compared with
76% when it was first spun off.
The remaining revenue is split between eight other auto makers
ranging from Daimler AG to Volkswagen AG.
Earlier this month, Delphi posted a 15% jump in fourth-quarter
profit, topping analysts' estimates. For the year, net rose to
$1.44 billion on sales of $17 billion. The results underscore its
newfound margin strength. In 2000, it generated a profit of $1.1
billion on sales of $29 billion on 119 products.
Delphi earns most of its money from products that help make
engines more fuel efficient and vehicles capable of operating more
autonomously. Cameras, sensors, emissions systems and safety
equipment are staples of today's product line.
"We believe Delphi has potential to become one of a handful of
global suppliers that can become so powerful that they can add more
value to the car than the [auto maker]," said Adam Jonas, a Moran
Stanley analyst.
In Vienna, Ohio, a factory spanning the length of two football
fields churns out 2.1 billion electrical connectors annually for
companies including GM and Tesla. Much of the work is done by
unmanned robots called "froggers" scurrying among bins and rows of
machines.
Six years ago, production of these parts was spread among this
plant, another in Ohio and one in Mississippi. Today, the Vienna
factory and two others in Mexico handle most of the work.
Delphi now concentrates on 33 different high-tech product lines
ranging from diesel injection systems to active safety parts. It
closed or sold its 86 other products ranging from steering wheels
and bearings to batteries and brakes.
"We picked 33 out of 119 based on one rule--all divisions and
all regions would carry their own weight and perform at the same
high level, no excuses, no ifs or buts," Mr. O'Neal said in a
recent interview. "Everything we picked was picked for a reason and
each of them has to make money."
Today, fuel efficiency accounts for half of the company's sales
with electronics another 30% and safety equipment 20%.
"We underwent a complete model redo: wall-to-wall,
floor-to-ceiling and top-to-bottom, there was nothing that wasn't
touched," Mr. O'Neal said. "Culturally, structurally, emotionally,
you name it, it got banged on. All the sacred cows were turned into
fantastic steaks."
"If these technologies aren't embraced like they think it will,
that could be a huge problem," Morningstar Inc. auto-parts analyst
Richard Hilgert said. "While auto makers have talked about adding
more, adoption rates could be slower than expected and some
products not adopted at all leaving the suppliers to hold the bag
on research and development costs."
Mr. O'Neal and his successor, Mr. Clark, have said Delphi is
flexible enough to roll with the punches.
But that flexibility has come at a price.
Its overall payroll has been trimmed to 117,000 from 211,000. It
also managed to cut the hourly wage it was paying in the U.S. to
between $14.50 and $18 from $27.
Delphi consolidated its North America campus in Troy, Mich.
Employees there are now housed in two office buildings instead of
three. The third building sits empty.
In Ohio, the company closed six plants and cut hundreds of
workers. The 160 unionized workers who remain at its Plant 47 fight
every day to remain competitive.
Rick Ames, 57, a manufacturing supervisor who has been a Delphi
employee for 34 years, said the remaining staff "work every day to
stay competitive."
For Mahle, the purchase is a strategic move to bolster its Behr
GmbH & Co. KG business. Stuttgart-based Mahle took control of
Behr--which makes heating and cooling systems--in May 2013 when it
became the majority shareholder in the company. Behr is the fourth
largest supplier in that thermal space followed by Delphi. Japanese
parts maker Denso Corp. is the leader.
Delphi's thermal systems business provides heating and air
conditioning systems to most global auto makers. It contributed
$1.56 billion, or 9% of the company's overall sales last year.
Write to Jeff Bennett at jeff.bennett@wsj.com
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