Perfect storm: the fate of U.S. manufacturing lies in the hands of CEOs like Delphi's J.T. Battenberg

Chief Executive, The, Oct, 2004 by Dale Buss

J.T. Battenberg, chief executive of Delphi, laid it right on the line in a recent speech to his peers at an automotive industry conference in Traverse City, Mich. "There's a 'perfect storm' facing the automotive world," Battenberg said. "Hyper-competition, deflationary OEM pricing to the consumer, breakneck globalization, tough environmental and efficiency mandates, stifling regulations, exploding peripheral costs, imploding profitability, massive overcapacity, rising pension costs, rising health care costs and runaway commodity-price increases--particularly for steel and resins--are all critical issues that continue to shake our foundation. This business is not for the faint of heart."

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Battenberg conceded that to survive Delphi and its competitors would have to rethink their business models. Since Delphi, with $28 billion in annual sales, is the largest parts supplier to General Motors, and because the auto industry is at the heart of U.S. manufacturing, his warning seems to apply across the board to many industries.

The 61-year-old Battenberg faces the fight of his life, with huge liabilities that are largely the result of Delphi's birth as a spin-off from GM in 1998. The company, for example, simply can't de-emphasize vehicle parts making as quickly as Battenberg would prefer, meaning that the biggest portion of its business is stuck in a deflationary vortex. Even the third quarter ending Sept. 30 was a reminder of that: Delphi said it expected to post a loss because of GM's substantial production cuts during the period. The third-quarter performance also underscored that Battenberg has yet to get Delphi's top and bottom lines to reflect the turnaround that seems to be under way. Delphi's revenues actually dipped to $26 billion in 2001 from $29 billion the year before. And last year, though revenues were back up to $28 billion, the company posted a net loss of $56 million, the second year in the red of its five years of independence.

Like its former parent, Delphi remains saddled with huge retiree pension and health-care costs that, at best, it can only contain. Over the next several years, Battenberg concedes, Delphi will be whacked again as a wave of retiring white-collar baby boomers take their expertise and ideas out the door with them.

But what Battenberg already has achieved with Delphi is noteworthy, considering what he inherited. After World War II, GM's far-flung network of captive parts-making operations helped it leapfrog rivals. But in the 1970s, it faced serious competition from Japanese imports, and in the '80s, sky-high union wages became an albatross for GM against cheap Asian manufacturing. Vertical integration had turned against the industrial behemoth, and parts operations had become GM's embarrassing stepchild. In the early '90s, the decision was made to spin it off.

Since Battenberg took over, Delphi has made significant inroads in the rapidly consolidating ranks of Tier One automotive suppliers, which have direct contact with the car companies. Delphi has multiplied its business with other original equipment manufacturers (OEMs) as well as preserved GM as its No. 1 customer. Battenberg also has led the company through an inexorable expansion across China and other emerging markets and diversification way beyond the automotive industry. Dependent on its old parent for nearly 80 percent of its revenues at the time of the spinoff, Delphi expects to hit 50 percent non-GM business by the end of this year--exactly what Battenberg initially committed to.

Today, because of Battenberg's unrelenting focus on diversification, Delphi is dominating new markets for electronic devices ranging from Segway scooters to satellite radios to state-of-the-art wheel-chairs, which was one reason the company dropped the word "automotive" from its name. Because Battenberg has created a culture that cherry-picks the best of Delphi's 16,000 scientists and engineers, the company has emerged as a redoubt of high technology in the industrial Midwest. Battenberg also managed to get the United Auto Workers to agree to an unprecedented two-tier wage system that will greatly ease labor-cost pressures on Delphi in the future. "He has delivered so far," says Stephen Girsky, a Morgan Stanley analyst who has been following Delphi for several years. "He's well-connected to his business. He delegates a lot to his guys and surrounds himself with very bright and motivated people. And he empowers his people. Especially given the deck that he was dealt, he has performed pretty well."

In every dealing, Battenberg projects the confidence and smoothness of a born salesman, which distinguished him among the gearheads and bean counters as he rose within GM. The native Missourian started his GM career in high school as a production worker at a Chevrolet plant in Kansas City. He climbed his way up the management ranks to posts such as vice president of the company's former large-car division. Battenberg's reward was to be charged by his superiors in 1992 with the task of getting GM out of the mess that their parts operations had become. "The bottom line was that the GM board was really questioning if GM shouldn't just get rid of the whole shootin' match," says Alan Dawes, a financial executive who worked for Battenberg in Europe and currently serves as Delphi's vice chairman and CFO.