Delphi Corporation was established as part of General Motors. In 1999, seeking more strategic growth initiatives as an independent company, Delphi started its operation as a separate company. After a few years, it was on the Fortune 500 list. However, within the first two years of its separation from GM, the sales of the company began to decline and profits eroded. Delphi filed voluntary petitions under Chapter 11 of the Bankruptcy Code in October 2005. Now the company is in a position of deciding whether it should restructure or liquidate its value.
Kenneth M. Eades; Gaurav Gupta
Darden Business Publishing (Case F-1617)
March 31, 2010
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Case answers for Delphi Corporation
This case solution includes an Excel file with calculations.
Chapter 01 – Introduction – Delphi Corporation
1.1 Background of the Case
Delphi Corporation was established as a part of General Motors. In 1999 to pursue more strategic growth initiatives as an independent company, Delphi started its operation as a separate company and after a couple of years, it was considered as in position 63 on the Fortune 500 list. It focused on establishing a relationship with every major global automotive OEM, including Ford Motor Company, Daimler Chrysler Corporation, Volkswagen Group, Hyundai, and Renault/Nissan Motor Company.
Though Delphi has growth potential as an independent company, the first two years after separation from GM, sales of the company began to decline, and profits eroded. Delphi filed voluntary petitions under Chapter 11 of the Bankruptcy Code in October 2005. Now the company is in a position of deciding whether it should restructure or liquidate its value.
The report is basically based on a secondary database. All the necessary information to complete our analysis is taken from the main case of Delphi Corporation. And in case of unavailability of information, we make a realistic and educated assumption based on our judgment.
1.3 Objective of the Report
Objectives of this report include:
i) To analyze the current financial structure of Delphi Corporation based on its operation as a separate entity.
ii) To review all available options to Delphi Corporation including restricting and liquidation.
iii) To find out the best available alternative to pay back equity and debt holders of Delphi Corporation.
Chapter 2 – Profile of Delphi Corporation
Delphi Corporation is a global auto parts company, established as a part of General Motors, and worked as the largest auto parts of GM. The company had the ability and potential to create its own position as an independent company. In 1999, the top management of Delphi decided to continue its operation as an independent company.
Delphi Corporation soon became an important strategic partner of leading automobile makers including Ford Motor Company, DaimlerChrysler Corporation, Volkswagen Group, Hyundai, and Renault/Nissan Motor Company. Though the growth potential of the company seems to right, as Delphi was considered as a 63rd company in the Fortune 500 list, it became financially stressed.
Delphi filed voluntary petitions under Chapter 11 of the Bankruptcy Code in October 2005. The filing listed Delphi’s consolidated assets and liabilities as $17.1 billion and $22.2 billion, respectively. While in bankruptcy, Delphi continued to suffer losses and declining revenues.
By year-end 2007, the company had losses in excess of $3 billion on sales of $22 billion. It is safe to say that though the company had a strategic relationship with leading automobile makers and had a global presence, Delphi failed to generate the required revenue.
Chapter 3 – Economy analysis
The economy of the United States is a highly developed mixed economy. It is the world’s largest economy by nominal GDP and the second-largest by purchasing power parity (PPP). It also has the world’s seventh-highest per capita GDP (nominal) and the eleventh-highest per capita GDP (PPP) in 2008.
The US has a highly diversified, world-leading industrial sector. It is also a high-technology innovator with the second-largest industrial output in the world. In 2008, the Great Recession hit the US economy with a vengeance. The nation’s economy is fueled by abundant natural resources, a well-developed infrastructure, and high productivity.
It has the second-highest total estimated value of natural resources, valued at $37 trillion in 2008. Americans have the highest average household and employee income among OECD nations, and in 2010, they had the fourth-highest median household income, down from second-highest in 2007. It is the world’s largest producer of oil and natural gas.
In 2006, it was the world’s largest trading nation as well as its second-largest manufacturer, representing a fifth of the global manufacturing output. The U.S. also has both the largest economy and the largest industrial sector.
Chapter 4: Industry analysis
4.1 Porter’s five forces model:
Threats of New Entrants:
New entrants in the Auto Parts industry ensure innovation, new ways of doing things and put pressure on Delphi Corporation. Because of lower pricing strategy, reducing cost and production structure, and the presence of new value propositions, the threat of new entrants is higher in this industry.
In order to tackle the threat of new entrants can tackle the threats, Delphi can reduce the production of its non-core items and increase focus on satisfying old customers as well as satisfying new ones by enhancing the efficiency of existing core-product. In addition, by building economies of scale, it can lower the fixed cost per unit.
Bargaining Power of Suppliers:
Almost all the companies like Delphi Corporation in this industry purchase their raw material from some selected suppliers. So, in this industry, suppliers are in a dominant position and affect the margins of companies like Delphi. Powerful suppliers in the Consumer Goods sector use their negotiating power to extract higher prices from the firms in the Auto Parts field. The overall impact of higher supplier bargaining power is that it lowers the overall profitability of Auto Parts.
In order to deal with the higher bargaining power of suppliers, Delphi can focus on building an efficient supply chain with multiple suppliers. And also experiment with product designs using different materials so that if the prices go up of one raw material then the company can shift to another.
Bargaining Power of Buyers:
Buyers of this industry include motor car producing companies like Ford Motor Company, DaimlerChrysler Corporation, Volkswagen Group, Hyundai, and Renault/Nissan Motor Company. These companies often use the final product of Delphi as their raw materials. As per their strong and diversified supply chain management system, these companies (buyers) build a strategic relationship with multiple suppliers. So, it is safe to say that the bargaining power of buyers is high in this industry.
Delphi can deal with this problem by building a large base of customers. This will be helpful in two ways. It will reduce the bargaining power of the buyers plus it will provide an opportunity to the firm to streamline its sales and production process.
Threats of Substitute Products:
Though Delphi is operating in an industry where it faces intensive competition, its threat of substitutes is low because of its lower cost structure and lower pricing. In addition, Delphi is both service-oriented and product-oriented. In order to attract customers and reduce the threat of substitutes, Delphi Corporation focuses on understanding the core need of the customer rather than what the customer is buying and also increasing the switching cost for the customers.
Rivalry among the Existing Competitors:
If the rivalry among the existing players in an industry is intense then it will drive down prices and decrease the overall profitability of the industry. Delphi Corporation operates in a very competitive Auto Parts industry. This competition does take a toll on the overall long term profitability of the organization.
In order to deal with this competition, Delphi Corporation focuses on building a sustainable differentiation and building scale so that it can compete better.
4.2 PESTLE analysis:
Political factors play an important role and have a direct impact on the profitability of Delphi. Governments around the world (including the US) are favoring low emission vehicles. Moreover, taxes on luxury vehicles and fuel guzzlers have grown higher. The markets like the EU and UK are becoming harder for Delphi as it focuses on producing components of high-end vehicles.
Delphi is also receiving higher government support for its low environmental impact. As such the government rules and regulations heavily affect the revenues of the vehicle brands and also the profitability of Delphi.
The automobile industry was hit hard by the recent economic crisis. When the economic conditions are not good, the sales of vehicles fall. And the sales of automobile components of Delphi Corporation also fall. Moreover, the taxes on the high priced vehicle components and electronic systems are high in the EU and US markets. The developed markets see higher sales as the purchasing power of the customers is higher. In these markets, the sales of Delphi’s products are higher.
The automobile component industry is influenced deeply by the socio-cultural forces of different markets. The changing socio-cultural trends and people’s preferences are affecting the design and preferences of vehicles. Delphi has to adapt to these forces. Every year new models are released keeping people’s preferences in mind. Moreover, specific styles are preferred in certain cultures. As a result, automobile component producers are required to increase R & D expenses.
Technology and innovation have become important determinants of market share in the automotive component industry. The more innovative the company, the higher is its market share. Given this fact, all the major players like Delphi Corporation make huge investments in research and development.
Brands like Toyota, Hyundai, and Ford are investing in low emission and environment-friendly vehicles. Not just this, the major technological players are trying to enter this sector of the industry. In recent years technological innovation has remained a major basis of differentiation for the automotive makers. It is because the customers’ focus shifted towards fuel-efficient and high mileage vehicles.
The laws related to environmental friendliness and carbon emissions are growing stiffer around the globe. Given that all the major players in the automotive industry had to focus on low emission vehicles. The vehicles which are low on emissions and fuel consumption receive tax subsidies and are favored by the government and law. The pollution tests have grown stricter and the vehicles passing these tests only are allowed in certain markets including the EU and UK.
Environment friendliness has become an important test for the vehicle makers in the 21st century as governments have started focusing heavily on pollution control.
Vehicles and automotive components selling in the international market are subject to laws related to product quality and safety. The pollution laws have grown stricter. The vehicle components being exported overseas have to pass strict emission controls.
There have been similar cases in the past putting passenger safety under question. Apart from it, there are environmental laws, tax laws, and several other laws that the vehicle companies have to deal with while operating in the international market.
Chapter 5: Company analysis
5.1 SWOT analysis:
- Have a comprehensive product portfolio including core and non-core products.
- Relationships with every major global automotive OEM, including Ford Motor Company, DaimlerChrysler Corporation, Volkswagen Group, Hyundai, and Renault/Nissan Motor Company.
- Strong presence in worldwide locations. Maintain 290 sites, including manufacturing facilities, technical centers, customer centers, and sales offices in 34 countries. In addition, it has global headquarters in Troy, Michigan, and regional headquarters in Shanghai, Luxembourg, and São Paulo.
- Over 169500 people are employed with the organization.
- The non-core product line of the company failed to offer the expected amount of revenue.
- Operating expenses and other expenses are quite high relative to their benefits.
- Involved in various legal proceedings and claims.
- Difficulties in collecting required funds in terms of equity or debt.
- Driven by technology and a standalone company, Delphi is at the forefront of future technology.
- If the restructuring process will be successful, it will ensure growth potential to the company.
- Reduction in expenses in salary and benefits to employees, pension liability, and investment in non-core items will be quite helpful in increasing revenues.
- Higher dependence on GM for cost-related issues.
- The business relationship with GM failed to produce expected revenue to Delphi and the situation can become more severe.
- Raw materials being supplied from throughout the world, which makes it fragile if there is some disruption in supply.
- As the company operates worldwide, it is subject to exchange rate risk which can erode its value.
5.2 Ratio Analysis
Ratio analysis is a quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items in financial statements like the balance sheet, income statement, and cash flow statement. Ratio analysis gives a quick snapshot of the past performance of the company.
The most important ratios have been described below in brief: