Delphi's overseas facilities are more profitable
The firm's workers earn about $7,000 a year in Mexico
By RICK POPELY
Chicago Tribune
4/2/2006
If Delphi Corp. is granted the right by a bankruptcy court to downsize, one big winner could be auto industry workers in other countries.
Delphi's operations abroad are more profitable than those in the United States and they are likely to stay that way, analysts said.
"The harsh, but simple reality of this is that no matter what, Delphi will have to close some plants," consultant Joseph Phillippi of AutoTrends said. "It can't sell spark plugs at $2 when the same plug can be bought in China for $1."
Delphi, which has about 120 plants in other countries, announced plans to close or sell 21 of its 29 U.S. plants Friday, eliminating about 17,000 union jobs. The plans were outlined by the company on a day it also filed motions with a bankruptcy court in New York to throw out its union contracts.
If Delphi's plans are approved, they will result in a smaller company in the United States focusing on high-tech electronic components like engine controllers and entertainment and communication, Rodney O'Neal, Delphi's president, said in a statement.
Joachim Ebert, a vice president with industry consultant A.T. Kearney in Chicago, said that as Delphi's U.S. operations shrink, the company would expand overseas in places like Mexico. Delphi has 184,000 workers worldwide, with about 70,000 in Mexico and 47,400 in the United States.
"Their overseas operations are more profitable, and their strategy is to make that more of the backbone of the company," said Ebert. "It would be relatively easy to move some things to Mexico from a logistical standpoint," Ebert said.
In a speech last fall, Chairman and CEO Robert S. "Steve" Miller illustrated why Delphi's U.S. wages are out of line in a global economy. He said workers at the auto parts supplier's Mexican plants earn about $7,000 a year.
Being paid at a rate of $27 an hour, a United Auto Workers member at a U.S. plant makes that much in seven weeks. Even the $26,000 a year Delphi seeks to pay some U.S. workers is still nearly four times as much as a Mexican worker earns.
In the plan outlined Friday, Delphi wants to keep only eight of its 29 U.S. plants; 21 would be closed or sold, and thousands of workers could lose their jobs.
The eight key plants, which employ 16,000 union workers, are in Kokomo, Ind.; Warren and Vandalia, Ohio; Grand Rapids, Mich.; Lockport and Rochester, N.Y.; and Brookhaven and Clinton, Miss.
Logistics explain why Delphi will maintain these U.S. plants, Ebert said. Components built at these plants such as electronic controls; safety, communications and entertainment systems; and engine management systems are shipped to assembly plants hours before they are installed on a vehicle, he said.
On the other hand, brake pads and door hardware are low-margin "commodity" parts that can be built anywhere and easily shipped from lower-wage countries and stored in boxes until needed.
That makes plants that produce them in Milwaukee; Dayton, Ohio; Anderson, Ind.; and Flint, Lansing and Saginaw and Coopersville, Mich.; and elsewhere expendable.
Another consideration in closing facilities was their proximity to other Delphi plants, according to David Cole, chairman of the Center for Automotive Research. That would allow displaced UAW workers to move to nearby jobs in states such as Michigan or Ohio, where there are several plants.
Delphi did not say Friday how many plants it would sell. Ebert thinks buyers from China or India would be interested, but only after wages are reduced in bankruptcy court or through negotiations.
"That is probably the biggest roadblock," Ebert said, referring to the current wages. "Turning around those plants wouldn't be easy."
Chinese or Indian suppliers could buy a few Delphi plants in the United States to gain a foothold here and establish relationships with U.S. manufacturers. "But no customer is going to buy based on their existing wage structure," Cole said, echoing Ebert.
One such company is Wanxiang America Corp., a Chinese-owned transplant based in Elgin, Ill., that has expressed interest in Delphi. Wanxiang aims to become one of the world's biggest auto-parts companies.
Another potential suitor for Delphi plants is billionaire investor Wilbur Ross, who is assembling a global supplier operation by buying distressed companies. He did a similar thing with bankrupt steel companies.
Delphi has 33,000 union workers in the United States, with 24,000 of those in the UAW. That number could be cut in half by the time Delphi finishes downsizing at the end of 2007.
Before stating its plans to close and sell plants, Delphi and General Motors Corp. have offered $35,000 retirement incentives to 13,000 UAW workers. GM also has agreed to take back 5,000 more to its plants. GM spun off Delphi in 1999, and most UAW workers at the supplier started with the automaker.
Delphi also said Friday it would eliminate 8,500 salaried workers globally, 5,250 in the United States, and trim its executive ranks by 40 percent.
Delphi is following a similar strategy to Visteon Corp., the former parts unit of Ford Motor Co. Visteon last year announced it would close or sell more than 20 U.S. facilities and return thousands of workers to Ford.
Chicago Tribune correspondent Jim Mateja contributed to this report.