Lesser Than the Sum of Its Parts

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					Lesser Than the Sum of Its Parts . . .
By JOHN SCHNAPP           Commentary     Wall Street Journal
April 4, 2006; Page A22

When General Motors spun off its $30-billion partsmaking business to shareholders in 1999, it rationalized the
consequent creation of Delphi Corp. as a measure that would liberate the partsmaker to better pursue business
with other auto makers. Its real purpose, though, was to gradually withdraw its own purchasing favor from
factories that managerial negligence had allowed to become grossly cost-inefficient, and to impose a "sink or
swim" mandate on Delphi's management. The result has been "sink" -- as in October's bankruptcy; but it
occurred before GM could detach itself from the tar baby.

Now struggling to cap its own costs, GM is facing its long-standing failure to update a vertical integration
business model characterized to me nearly two decades ago by an engineering executive as "once our greatest
strength but now our biggest weakness."

Steve Miller, Delphi's CEO and an expert navigator of corporate crises, asked a bankruptcy court on Friday to
void its collective bargaining agreements. He has also requested voiding of more than $5 billion in contracts
with GM that Delphi asserts generate losses. This is an especially vexing claim to its former parent, which has
implied that doing business with Delphi involves prices typically 15% higher than available elsewhere in the
market.

Mr. Miller's broad objective is to shrink Delphi, exactly the sort of policy GM itself should have been following
in the 1980s and '90s. He aims to shut down the plants that produce generic components like spark plugs and
brakes, leaving behind only business sectors like electronics, climate control and engine management, where it
has some sort of proprietary edge. Sustaining these latter businesses would still require, according to Delphi
submissions, a cut in labor rates from nearly $27 an hour to $16.50 by September 2007. A prospective cut of
more than 35% in hourly earnings will send Delphi's already militant workers to the picket lines, even in the
unlikely case that their union leadership would regard this as the best of all possible bad deals. Delphi might
well be able to weather a strike, but GM cannot and it is hostage to Steve Miller and to his workers.

Despite its own substantial bleeding and sale of some of the family silverware, GM may well have to cough up
a considerable ransom, as considerable as filling the gap between what Delphi regards as an affordable wage
rate and its currently unaffordable one. This would raise the price premium GM claims it already pays for its
purchases from Delphi while allowing Delphi to offer low, competitive prices to all of its non-GM customers.
This would indeed liberate Delphi to pursue other customers, subsidized by GM.

Originally vertical integration seemed like a good idea. GM founder William Crapo Durant thought, reasonably
enough, that the more value that could be added to a vehicle within GM, the more profit the corporation would
harvest. So did his protégé Alfred Sloan, the managerial wizard acquired along with the Hyatt Bearing
Company, one of Durant's first initiatives to implement his strategy. Sloan's pursuit of this business model
through further acquisitions and internal start-ups of partsmaking units generated divisions whose gross
revenues ultimately exceeded $30 billion, making GM the most highly integrated auto maker on the planet, and
once greatly envied for it. But this all slipped into obsolescence; the twin flaws were complacency and
costliness.

Complacency was a natural outcome of having what amounted to captive customers. GM's auto making
divisions bought almost unquestioningly from their sister partsmakers; many on the purchasing staffs hardly
knew who alternative resources might be. Even if a buyer did shop an internal partsmaking division's price by
getting bids from independent suppliers, the corporate culture permitted the internal division to re-bid until it
won. Naturally independent partsmakers disliked playing stalking horse and were reluctant to participate in
these charades. The frustrated CEO of one asked me, "Can you think of another industry where your biggest
customer may also be your biggest competitor?"
While he was GM chairman in the '80s, Roger Smith challenged in-house partsmakers to demonstrate that they
were "world class" by gaining a modest percent of additional revenues from outside customers. No problem.
Auto makers affiliated with GM were "outside" enough and easy sales targets. José Ignacio López de Arriortua,
a charismatic Basque purchasing executive brought from Europe, launched a brief reign of terror in 1992-93,
tearing up valid GM supply agreements with independent partsmakers and forcing jump-ball rebidding. But he
never touched the internal suppliers.

The internal partsmakers were increasingly resented for unresponsiveness to their GM customer needs. They
were at least complicit in GM's late adoption of such key technologies as disc brakes, multivalve engines and
single rail fuel injection. Some of their plants were leading edge but some were far from world class. A
particularly Dickensian facility in Flint that is on Steve Miller's list for abandonment was full of hideaways
where production workers could, and did, catch a snooze or check the daily sports pages.

Worse, workers at the partsmaking units were included under GM's overall collective bargaining agreements,
enjoying the identical compensation and benefit packages as their counterparts in the assembly plants.
Independent partsmakers -- even those with UAW representation -- consistently enjoyed substantially lower
labor costs. This fostered the worst of all possible legacies for a free-standing Delphi -- a shrinking principal
customer and Delphi's own self-defeating history. The workers caught now in the considerable uncertainty of
the three-cornered negotiations among Delphi, GM and the UAW are understandably angry. They feel that they
aren't responsible for the business model that so greatly favored their interests but rather have now become its
innocent victims.

In many respects the spinning off of the Delphi divisions was a cynical attempt by GM to free itself from what
it had allowed to become a costly albatross. Now, at a time when the auto maker can least afford the price, it's
going to have to pay it, and probably big time.

Mr. Schnapp, a writer, was leader of the automotive practice at Mercer Management Consulting.

				
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