Are GM and Ford Playing High-Stakes Poker Disguised as Delphi and Visteon?
By Fred Leeb
Have GM and Ford developed a grand strategy designed to flush out their high union cost structures so they can be competitive again in North America? Are GM and Ford, disguised as Delphi and Visteon, sitting at the poker table with the unions to accomplish this? Or, are many pundits correct who see Delphi and Visteon merely as independent companies suffering from the continuing pressures of the extremely competitive automotive industry?
The purpose of this article is to begin to provide an alternate view on the following issues:
1. Do GM and Ford want to resolve their own labor cost issues by working them out first at Delphi and Visteon?
2. Do GM and Ford want to protect their own images as caring members of the community from the screaming and finger-pointing they expect to occur prior to a labor settlement with the unions (by keeping the media spotlights at Delphi and Visteon)?
3. Will manipulating Delphi and Visteon to do their bidding enable GM and Ford to protect their own cash hordes and other assets from the union negotiators?
4. Are GM and Ford using Delphi and Visteon to bring employee costs to a crisis now so that they can replicate the newly competitive cost structures in their own companies before it is too late?
In other words, is this really a game of high-stakes poker where GM and Ford are sitting at the table dressed up as Delphi and Visteon betting with the stockholders money of their “independent” suppliers rather than their own?
The facts indicate that both GM and Ford (at roughly the same time in the 1990’s) saw that they were losing market share in North America and that their labor costs (current wages, benefits, pensions and retiree health care) were significantly higher than their competitors. In addition, the UAW had conducted work stoppages in June/July 1998 in Flint that had an unfavorable after-tax impact on GM of about $2.0 billion. In the 1990’s, GM and Ford’s own parts operations were clearly the most obvious targets for both cost-cutting and for out-sourcing to other low-cost manufacturers. In addition, these parts operations were perfect candidates for a “grand strategy” because they had large numbers of union employees.
It is quite possible that GM and Ford’s turnaround experts not only identified the critical need for labor cost reductions but they also developed a process as to how it could be accomplished. They could have realized that they needed a dramatic and fundamental change in their cost structure to again approach future profitability. It is likely that they knew that the more fundamental the change, the greater is the opportunity for improvement. With fundamental change, however, comes great risk. They could well have thought that they could accomplish almost as much (and insulate themselves from most of the risk) by taking bold action to initiate and manage the process elsewhere first (Delphi and Visteon), the grand strategy.
By using Delphi and Visteon, GM and Ford also could develop a clear-cut economic case where there would be only one solution—cutting union costs dramatically. They would not want to negotiate with the union using their own complex financial situations to justify their maneuvers. GM and Ford, in this manner, also could protect their huge cash hordes. As of September 30, 2005, GM had cash and short term investments of $35.1 billion and Ford had $36.8 billion.
GM and Ford established separate corporate entities (Delphi and Visteon) by spin-offs of these companies to their stockholders. Delphi was spun off from GM in 1999; Visteon was spun off from Ford in 2000. GM and Ford, thereby, not only could accomplish the goals discussed above but also immediately became free to buy parts from other lower cost global suppliers and reduce their own exposure to the union’s counterattacks. For example, a “joint Ford-Visteon competitive pricing study intended to make Visteon’s prices competitive with third party competitors” enabled Ford to cut by 5% the prices it paid to Visteon for almost all parts just prior to Visteon’s spin off.
Because of the spin-offs, however, GM and Ford could no longer control the stock of either Delphi or Visteon. But GM and Ford still had their own former executives running these new companies. For example, at December 31, 2000, five of the top seven Visteon executives were previously top Ford executives. In addition, GM and Ford still could control Delphi and Visteon’s profitability through their purchasing power. This is because the majority of the parts produced by Delphi and Visteon are sold to GM and Ford. For example, GM’s Supply Agreement with Delphi provided that GM has the right to move its business with Delphi to other suppliers in the event that Delphi is not competitive.
Therefore, by working through the process using Delphi and Visteon, GM and Ford could distance themselves and still bring labor cost issues to a boil. The impact on Delphi and Visteon has been severe. Since mid-2001, Delphi’s stock price has dropped by over 90% and Visteon’s has dropped by about 50%. Delphi has lost about $3.4 billion since it was spun off from GM in 1999 through June 2005. Delphi also filed for bankruptcy on October 8, 2005. From October 8, 2005 to November 30, 2005, Delphi lost $127 million and incurred $23 million in professional fees. Visteon has lost about $4.1 billion since it was spun off from Ford in 2000 through September 2005. These losses have impacted Delphi and Visteon’s shareholders, not GM and Ford. In fact, a case probably could be made that GM and Ford benefited from Delphi and Visteon’s poor financial results. GM and Ford paid lower prices and reduced the volume of business that they previously had with Delphi and Visteon, as they increased their sourcing to other cheaper global suppliers. Both Delphi and Visteon had been profitable prior to the spin-offs.
In the meantime, GM and Ford have continued to say that they are good negotiating partners with their unions. GM and Ford also have agreed to maintain many of the benefits for employees transferred to Delphi and Visteon. If this is put into perspective, however, these costs could be a very small price to pay. If Delphi and Visteon reach an agreement with their unions and set a precedent of dramatically lower employee costs, there will be a working model for both GM and Ford to copy in the future (with much larger numbers of union employees and much greater potential savings). Delphi worldwide employment at December 31, 1998 was approximately 198,000 (33,000 salaried and 165,000 hourly), 33% of GM’s total worldwide employment. In 2005, Delphi claimed that it paid its workers about $65/hour including benefits, more than double the amount paid by the competition. Delphi has taken advantage of its position in bankruptcy to act very aggressively. For example, Delphi proposed cutting hourly base wages from $27 to $12.50 (the original demand was $9.50) but is now seeking a negotiated settlement, with GM’s assistance.
Is there a grand strategy to dramatically reduce union costs not only for Delphi and Visteon but more importantly, for GM and Ford too? Have GM and Ford set processes in place causing Delphi and Visteon to do their bidding? Did GM and Ford turn the screws on Delphi and Visteon through tough purchasing tactics to force the issue because they knew they couldn’t wait any longer? Did GM and Ford have to precipitate crises with Delphi and Visteon now so that they could move on to breaking the union at their own companies before it is too late?
We are not sure yet of the answers to these and many other questions. We can only analyze the facts and speculate on managements’ strategies. We will wait and see how the hands play out.
Highlights of the events leading up to today’s poker game:
- GM reported that Delphi’s net income had dropped from a profit of $853 million in 1996 to a loss of $93 million in 1998 (the year before the spin-off).
- The UAW conducted work stoppages in June/July 1998 in Flint that had an unfavorable after-tax impact on GM of about $2.0 billion.
- GM’s “competitiveness studies” caused GM to record pre-tax charges against income for Delphi of $310 million in 1998 and $1.4 billion in 1997. GM’s Supply Agreement with Delphi provided that GM has the right to move its business with Delphi to other suppliers in the event that Delphi is not competitive.
- Delphi worldwide employment at December 31, 1998 was approximately 198,000 (33,000 salaried and 165,000 hourly), 33% of GM’s total worldwide employment. About 93% of the hourly employees were represented by unions (43,000 of these were in the US and represented by the UAW).
- Delphi management personnel were predominantly long-term GM executives.
- Delphi (conveniently for GM) embraced the strategy of reducing its reliance on GM business because, now that it was independent, it must have a more diverse customer portfolio. GM was pleased to source parts from other suppliers.
- In 1998, Visteon was almost totally reliant on Ford since 88% of Visteon revenue came from Ford; 81% of Visteon’s business was in North America.
- A “joint Ford-Visteon competitive pricing study intended to make Visteon’s prices competitive with third party competitors” caused Ford to cut by 5% the prices it paid to Visteon for almost all parts just prior to Visteon’s spin off. In 2000, Visteon net income fell to $270 million (partially due to this pricing adjustment).
- This price decrease in 2000 dramatically changed the Ford/Visteon relationship. Previously, in 1999, Visteon’s net income had increased to $735 million from $511 million in 1997. Visteon estimated that, had the 5% price reduction effective January 1, 2000 been in effect for 1999, sales [and presumably profits] in 1999 would have decreased by $690 million.
- Ford retained liability for all product liability, warranty or recall claims that involve parts made or sold by Ford for 1996 or earlier model year Ford vehicles. Visteon became responsible for these types of claims relating to 1997 or later model year Ford vehicles.
- At December 31, 2000, Visteon had approximately 18,000 salaried and 64,000 hourly workers. Of the hourly workforce, approximately 24,000 were Ford employees in the US covered under the Ford UAW Master Agreement. At December 31, 1999 (prior to the spin off of Visteon), Ford had a total of 364,550 employees.
- At December 31, 2000, five of the top seven Visteon executives were previously top Ford executives.