Delphi Targets Sandusky Hub Plant for Sale or Closing

Delphi Corp. (USA), operating under Chapter 11 bankruptcy protection since October 2005, revealed its proposed restructuring plan, to be reviewed by the court on May 9. The plan proposes selling or closing 36 of its 44 plants in the United States, leaving only a select group of proprietary high-value-added operations with strong futures and limited competition. Delphi also announced its intention to renegotiate labor contracts for the workers who remain, cutting or freezing pension and healthcare benefits for both current and retired employees. And approximately 25%, or 8,500 people, would be cut from its salaried workforce worldwide. But the most enlightening portion of Delphi's filings is its novel petition to void thousands of contracts under which Delphi admits it is supplying parts to General Motors at substantial and "unsustainable" losses. In the reorganization plan, Delphi identifies as non-core businesses which it will exit. Wheel bearings are one of the non-core businesses. That is, Delphi believes it can no longer afford to manufacture bearings under any circumstances, and that bearings and related technologies no longer provide a competitive advantage. Rodney O'Neal, Delphi's President and COO, said: "Non-core product lines include Brake & Chassis Systems, Catalysts, Cockpits and Instrument Panels, Door Modules and Latches, Ride Dynamics, Steering and Wheel Bearings. We believe many of these product lines have the potential to compete successfully under new ownership that has the resources and capital to invest in them." Mr. O'Neal said Delphi continually re-evaluates its product portfolio and could retain or exit certain businesses, depending on market forces or cost structure changes. The target date for selling or closing the non-core product lines and manufacturing sites is January 1, 2008. This means one of the plants targeted to be sold or closed is the Sandusky, Ohio operation, where Delphi manufactures roller clutch bearings and wheel bearing hub assembly units. Sandusky is part of the Delphi Energy and Chassis Systems division and currently employs more than 1,200 workers, represented by UAW Local 913. Local 913 is an amalgamated local, including Delphi, Martin's, Lear, Sandusky Ltd., and Vacationland Credit Union. In 2005, Delphi said the Sandusky bearing plant lost more than $34 million, on sales of $361 million. The factory's losses have widened in recent years as critical volume declined and sales were siphoned off. GM now sources more hub units from manufacturers such as SKF and Timken; at the same time, overall demand from GM has dropped off along with its car and truck sales. At one time, in the late 1970's and early 1980's, the wheel bearing hub units produced by General Motors in Sandusky were considered a huge breakthrough in chassis development, packaging, servicing, and undercar technology. While similar integrated wheel bearings had been available, none had ever been applied in such a wide array of applications, on such a massive scale. For several years, Sandusky's hub unit production ran 24/7, at full capacity, as GM's front-drive platforms sold in record numbers and hub assembly unit applications spread across the line, later to rear-drive and four-wheel-drive cars and trucks. Roller clutch bearings are supplied to other Delphi facilities and for inclusion in other products, most of them also identified as money-losing. Delphi's history begins in 1991, when GM put its component manufacturing operations under the Automotive Components Group Worldwide (ACGW) a new business division. GM hoped the division would be able to improve its competitiveness with outside suppliers and increase its business with other automakers and in other industries. ACGW was renamed Delphi Automotive Systems in 1995; Delphi began separate financial reports in 1997, and the decision to spin it off entirely was made in mid-1998. Delphi was spun off from General Motors in 1999, but retained its former parent's labor contracts, underperforming plants, and supply contracts requiring yearly price reductions. At the time, Delphi head J.T. Battenberg III said: "Delphi's complete separation from GM through the spin-off provides Delphi the opportunity to achieve the full benefits of an independent company. We believe that we will have greater opportunities as a fully independent company to leverage our technical expertise in a broad range of product lines, our strong systems integration skills, our expansive global presence and our significant scale advantages." In its filing, Delphi continues the history: Delphi was profitable immediately following the Spin-Off, earning approximately $2 billion on a consolidated basis in its first two years as an independent company. Delphi's international operations remain profitable to this day. Delphi's U.S. operations, however, have become increasingly unsustainable. As a result of losses in the U.S., Delphi has not earned a net profit since 2003, suffering net losses of $4.8 billion in 2004 (including special items) and $2.8 billion in 2005. Without modifications to its labor agreements or to its retirement obligations, according to Delphi's most recent financial projections, Delphi would suffer operating losses ranging from approximately $6.1 billion to $8.1 billion, and net losses ranging from approximately $11 billion to $13 billion, over the next five years. 9. The mounting losses in Delphi's U.S. operations are attributable to three principal factors: (a) the labor agreements have caused an enormous increase in Delphi's labor and benefit costs, including the legacy retirement liabilities arising under those agreements, and have limited Delphi's ability to respond to economic changes by selling or closing facilities, or by laying off excess employees, (b) competitive conditions in the U.S. automotive market have greatly reduced GM's sales and profitability since 1999, resulting in reduced business and greater pricing pressure for Delphi, and (c) commodity costs have risen rapidly in recent years, and Delphi has been unable to pass along those costs to its automaker customers. Most analysts were critical of Delphi's existence from the outset. Too closely bound to GM, it was unable to keep pace with other suppliers, reacted too slowly to the changing market for automotive components, and was unable or unwilling to shutter uncompetitive facilities. Delphi's petition to annul thousands of unprofitable GM supply contracts includes ten contracts for bearings, comprising the majority of Sandusky's production. Delphi said the Sandusky plant is losing money on contracts for the following bearings (by GM part number): 930660, 930706 7467157, 7467181, 7470511, 7470587, 7470597, 7470617, 7470619, 7470625, 7471001, 7471009 12413037, 12413045 15839050, 15839051 21012556, 21013003 22701516, 22701520, 22703526, 22715554, 22715555 88957259 In addition to the higher raw materials and energy costs Delphi claims are impacting profitability, wage and benefits packages are a significant issue. Today, Delphi's labor cost for a UAW employee is $67.79 per hour, as calculated by The Wall Street Journal ... $37.25 for wages and $30.54 for benefits. For comparison, eBearing reviewed wage and benefit packages at alternative OEM sources for hub assemblies produced in the United States. The highest would be in the $25 to $30 range, confirming many critics' claims that Delphi's labor and overhead costs are often double their open market competitors'. In 2004, Delphi's audit showed Sandusky had an operating loss of $5.7 million on revenues of $376.7 million, for a negative margin of 1.5%. In 2005, the site generated an estimated operating loss of $34.4 million on estimated revenues of $360.8 million for a negative margin of 9.5%. The bankruptcy court is set to review Delphi's petitions on May 9, 2006.