Delphi’s supply pain: moral and business responsibility in the age of isolationism
Delphi, along with other auto industry players and the communities in which they operate, is being threatened by isolationist movements throughout the world (e.g., Brexit, NAFTA renegotiation/termination)
Delphi’s supply pain: moral and business responsibility in the age of isolationism
Delphi’s non-responsiveness to isolationism is concerning from a business and moral perspective.
After the introduction of NAFTA, Delphi, a UK-based global automotive components supplier, established operations in my hometown of Ciudad Juárez in 1995. The move allowed Delphi to transition from locations where it paid employees $30/hr to a location where employees earned $1/hr, thus increasing the company’s price competitiveness and allowing Delphi to maintain a favorable geographic presence.[1] Globalization, along with “Just-in-time” inventory management, and increased integration within the auto-component supply chain, enable Delphi to serve the largest 25 OEMs, operate 126 manufacturing facilities in 46 countries, and generate revenues of $16.6Bn in 2016.[2] Isolationist movements are putting the company’s promise is at risk.
Isolationist movements and their potential effects on the auto industry
The rise of isolationist movements across the globe, including Brexit and the renegotiation or termination of NAFTA, are raising fears that global auto industry supply chains, which have been optimized to accommodate an interconnected and globalized economy, will become less efficient and more costly due to added tariffs and increased consumer prices.
For example, the Financial Times recently reported that lorry fuel injectors produced by Delphi are produced with European steel, which is machined in the UK before receiving heat treatment in Germany. The final assembly of the injector takes place in Delphi’s UK plant in Stonehouse before being sold to truckmakers located in Sweden, France, and Germany, who in turn would sell the finished trucks in the UK. Thus, raw materials and finished goods crossed geographic borders several times during the procurement, production, and sales process on a tariff free basis. As a result, Brexit could result in tariffs on £12bn of annual raw materials utilized by the auto industry in the UK alone.[3]
With the election of Donald Trump, NAFTA has come under fire and is currently undergoing a renegotiation. Through this process, the Trump Administration is seeking to increase the amount of regional content (e.g., North American labor, raw materials, etc.) of vehicles produced in North America from 62.5% to 85%. In addition, the Trump Administration wants to require that 50% of that regional content be produced in the USA.[4,5] These changes are likely to introduce additional costs to auto-linked manufacturers and do away with estimated annual efficiencies of $10Bn created by the NAFTA agreement across the North American auto industry.[6]
Delphi’s response and potential alternatives
When questioned about his thoughts on the developing regulatory environment, Kevin Clark, Delphi’s President and CEO, mentioned during the company’s most recent earnings call (11/2/17) that “[Delphi operates] in a global industry. The supply chain is very global. The soft supply chain has been optimized, quite frankly, over the last 25 years. To the extent that gets affected in a negative way, I think it ultimately has implications for the cost of vehicles, which ultimately have implications for production and sale of vehicles. So that would not be positive.”
Members of the auto industry have launched the “Driving American Jobs” coalition to urge Trump not to withdraw from NAFTA, as withdrawal “would lead to a decrease in vehicle production, a decline in jobs and an increase in what our customers spend when buying a new vehicle. Not to mention this would also have an impact on our abilities to export vehicles to foreign markets.”[7]
Delphi has not spoken out directly against isolationist movements and has continued to focus its attention on positioning itself to provide high-growth/margin products (technology focused on increased safety, reducing emissions, and improving connectivity/infotainment systems) and has entered emerging markets such as China, where it has established 6 new manufacturing facilities since 2012.[2]
The uncertain regulatory environment creates an opportunity for Delphi to further explore the shortening its supply chains, while limiting disrupting at existing production facilities. For example, Delphi should consider working with other component suppliers to coordinate their supply chains to provide quality products and services to overlapping customers. Furthermore, Delphi should explore vertically integrating additional auto components that clients source from other providers or regions. Although these types of process and product integrations might be difficult to achieve in the short-term, the company could benefit in the long-term as it increases its capability of fulfilling client’s needs.
Delphi’s community impact and moral responsibility
As manufacturers such as Delphi created 250,000+ jobs in Juárez[8], my home has become the second largest exporting entity of the country, contributing ~10% of Mexico’s exports, of which 55% are related to the manufacturing of machinery, electronics, and auto sub-assembly parts.[8,9]
In the face of these challenges, should Delphi do more to ensure that the communities through which it has built its brand and reputation continue to thrive? Should the company be more vocal against isolationist movements? Will my city survive a Trump-influenced NAFTA?
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[1] Kate Linthicum, “What happened when factory jobs moved from Warren, Ohio, to Juarez, Mexico,” Los Angeles Times, November 14, 2017, http://www.latimes.com/world/mexico-americas/la-fg-mexico-us-factories-20170217-htmlstory.html, accessed November 2017
[2] Delphi Automotive Plc, 2016 Annual Report (Gillingham, Kent, 2017), p. 4-5 https://www.sec.gov/Archives/edgar/data/1521332/000152133217000013/dlph1231201610k.htm#s7451F8BD837B3E3223B89C37D4CC6239
[3] Peter Campbell, “UK car industry fears effects of Brexit tariffs on supply chain,” Financial Times, October 16, 2016, https://www.ft.com/content/c397f174-9205-11e6-a72e-b428cb934b78, accessed November 2017
[4] Video conference with Kenneth Smith (Lead NAFTA Negotiator for Mexico), Boston, Massachusetts, November 13, 2017
[5] “NAFTA Negotiation Update: Auto & Parts Sector Implications,” October 13, 2017, Center for Automotive Research, http://www.cargroup.org/nafta-negotiation-update-auto-parts-sector-implications/, accessed November 2017
[6] Ryan Beene, “Auto Industry Sees Threat to Jobs and Profits From Trump’s Nafta Push,” October 12, 2017, https://www.bloomberg.com/news/articles/2017-10-12/auto-industry-sees-threat-to-jobs-profits-from-trump-nafta-push, accessed November 2017
[7] ”American Auto Industry Unites to Defend NAFTA and Preserve American Jobs,” October 24, 2017, Driving American Jobs, https://globenewswire.com/news-release/2017/10/24/1152521/0/en/American-Auto-Industry-Unites-to-Defend-NAFTA-and-Preserve-American-Jobs.html, accessed November 2017
[8] ”Programa de la industria manufacturera, maquiladora y de servicios de exportación (IMMEX) – 2007 en adelante,” 2016, Instituto Nacional de Estadística y Geografía, http://www.inegi.org.mx/est/contenidos/proyectos/registros/economicas/manufacturera/default.aspx, accessed November 2017
[9] ”Exportaciones por Entidad Federativa,” 2016, Instituto Nacional de Estadística y Geografía, http://www.inegi.org.mx/est/contenidos/proyectos/registros/economicas/exporta_ef/default.aspx, accessed November 2017
Companies such as Delphi that have global supply chains are faced with a problem in which they seem to lose regardless of their solution. It likely becomes financially unsustainable to operate in countries in which high tariffs will be required to export goods. Therefore, even those who believe that the company has a moral responsibility to maintain jobs in vulnerable communities in which it exists today may concede that remaining in its international plants would not benefit its employees in the long-run. If high tariffs from international plants threaten the viability of the business, employees are not necessarily better off. In a world where expensive tariffs are the reality, Delphi should seek solutions that maintain the longevity of the company and support employees. For example, it might be most beneficial for the company to relocate operations but help transport employees to new locations. In addition, the company should strategize about other jobs or capabilities that can be done internationally without necessitating expensive tariffs.
Given that Delphi, its employees and its customers have so much on the line with the renegotiation of NAFTA, it might actually be advantageous for Delphi to refrain from taking a vocal position on the agreements. Delphi is likely lobbying along with the auto industry to provide an agreement that is beneficial for them. Coming out publicly might hurt their behind the scenes negotiations or make them a target in a very harsh and controversial political climate. It’s a fine line for Delphi to walk in order to stand up for their brand and what they believe in while also ensuring the best outcome for the long term.
I hope that your city can survive! If Delphi adopts smart strategies, I’m sure that they can. From reading your response and hearing about the issue, it sounds like there are a few major tactics – 1) Invest in your largest customer base and try to localize manufacturing as much as possible, 2) Stand with the rest of your industry to try and combat isolationist approaches and 3) look at other markets which value either lower cost products or higher technology products. In some ways, I think the extent of globalization existing in the supply chain will help Delphi ride this wave, particularly in the short term, and they should push heavily on tactic 2. There are few companies that have a supply chain and manufacturing base that is entirely within one country. Therefore, as you point out, the auto industry needs to really push on this leverage to prevent isolationist tariffs from going into place in the first place. If the resulting tariff does nothing to differentiate among auto companies, but just passes higher prices to customer across the board, Delphi may not have as much to worry about. In the long term, I think they need to start looking at diversifying their customer base and prioritizing countries that value a globalized supply chain. There are several countries looking to capture economic power that the US and UK are turning away and would be happy to incent Delphi to sell into their markets with more favorable tax structures. They might find more value and economic success in looking at trying to serve the emerging markets rather than fight the trends in developed markets.
Thought provoking article, AMM. Your concern over the effect to the community of Juarez if Delphi closes down operations would have a serious and devastating effect on the local community. [1]
In fact, in 2008, when Delphi closed their plant in Dayton, Ohio because GM plants had closed down, the disastrous effect on the community was compounded. [2] On the one hand, I would say that Delphi would be sensitive to the huge negative impact they could have on Juarez if they were to close down their plants there. They have seen firsthand not just the devastating effects they left behind. On the other hand, Delphi would also be aware of the magnitude of financial benefits of moving. They have experience weighing the costs and benefits of shutting down operations and setting up in other locations. Unfortunately, I suspect it will all come down to maximizing profit, with less thought to human issues.
This article makes me draw parallels to the rising costs of labor in China. I have heard first hand from multiple manufacturers there that they are investigating options for cheaper labor – with Vietnam first on their list. As countries move to cheaper and cheaper options, eventually they will run out of places to go with cheaper conditions.
http://www.mydaytondailynews.com/news/local/throwback-thursday-delphi-plant-before-was-dayton-raceway/PkW4POzyj0qSlXerET9fVP/#DTnbieRXQaua4jj-far0rw
http://www.cnn.com/2008/US/11/19/ohio.plant.closing/index.html
I do believe that companies like Delphi have a moral obligations to their employees and to the communities that they are a part of. Unfortunately, as we’ve seen all too often, focus on financial performance oftentimes overshadows doing what’s “right.” Companies also put themselves at significant risk by speaking out in situations like this, particularly if it’s a non-U.S. based company such as Delphi.
Luckily, the NAFTA renegotiation is likely to take time – a year or possibly longer, according to some sources: http://money.cnn.com/2017/08/16/news/economy/trump-nafta-steps/index.html. Moreover, just like how the current administration is working to make changes to NAFTA, there is a possibility that the next administration will work to overturn the changes if such changes are enacted. While the automotive manufacturing community in Juárez won’t be able to do much except hold their breaths, the outlook may not be as bleak as first imagined.
This is tough. Generally, I believe the world would be a better plan if companies had a responsibility to better the communities in which they exist beyond paying their workers. However, government is a wildcard here. If government actions make it increasingly difficult (in fact hostile) to operate a business, either domestically or abroad, I am not sure how many bonafide options the company has.
I empathize with the concern such political moves lead to. Highly appreciate you bringing this topic! Delphi can either choose to succumb to such changes or may push its creativity/innovation to reduce the costs in other areas and try to maximize value. While Delphi may not be able to serve other countries through use of resources from Mexico, it can look to create a strong customer base in Mexico, keeping in mind the customer demands & affordability. I still believe that government decisions are not that irrational in the mid to long term, though companies and ecosystem may have to adjust accordingly.
I could not stop thinking about the visa restrictions in US for Indians in tech companies. Prima facie, this looks as a move to discourage Indians from contributing in US, but there is also the point to push IT companies in US to pay Indians at par with US employees and stop exploiting cheap labor. I am sure there is more to it to fully understand.
In the short term, Delphi must start looking for supplies locally as the business continuity plan. And, for moral responsibility towards Mexico, Delphi can explore to develop products to be sold in Mexico or keep exporting at high prices.