Visteon Corp., the US automotive parts supplier, which was spun off from Ford Motor Co. last June, is in great difficulty, according to an article in the 7 May, 2001 issue of Business Week.
Visteon, …
Visteon Corp., the US automotive parts supplier, which was spun off from Ford Motor Co. last June, is in great difficulty, according to an article in the 7 May, 2001 issue of Business Week. Visteon, which makes everything from vehicle climate controls to navigation systems, started off alone with underperforming businesses and the priciest labour contracts in its field, with terrible timing Just months after going public, the auto industry crashed. Critics say Ford cut off Visteon before the parts maker had a chance to fix its problems. Even worse, the separation agreement required Visteon to hand over immediate 5% price cuts to Ford, its biggest customer. Then came the Bridgestone/Firestone tyre crisis, while Ford halted production of its popular Explorer SUV, costing Visteon, which supplied Explorer parts, an estimated US$ 16 to US$ 18 million in lost profits. The result for Visteon was predictable – and indicative of the tough times ahead as it tries to lose a legacy of being just a Ford supplier. Visteon lost US$ 87 million in the fourth quarter of 2000, followed by earnings of only US$ 31 million in the first quarter of 2001. That was better than analysts expected, and along with interest rate cuts, it helped the stock, which was badly hit late last year, climb from US$ 10 to a recent US$ 17. Still, first-quarter earnings were down 75% from the year-earlier period. For the full year, analysts project profits of only US$ 183 million, a 30% decline from last year. Says Visteon CEO Peter J. Pestillo: “I don“t think any of us thought that things would get so hard so soon.” But even if Pestillo, a former Ford vice-chairman, broadens Visteon“s customer base, cuts costs, and comes up with the flexible labour agreements needed to unload its weaker operations, it may be years before Visteon is a solid corporate performer. To start, the company is working to reduce its dependence on Ford by competing for business from other vehicle manufacturers. Before the spin-off, few auto companies were willing to share their product plans with a supplier that was owned by a competitor. That isn“t the case now, so Visteon is broadening its customer base, especially overseas, selling to GM, Nissan, Fiat, and Volkswagen among others. At the end of 2000, about 16% of Visteon“s sales were to non-Ford customers, up from 12% before the spin-off, and Visteon wants to make that 25% within the next four years. That will, however, still leave Visteon largely dependent on Ford, which, like the other auto makers, has become a hard bargainer. It will continue to squeeze Visteon for price cuts of at least 3.5% annually – or about US$ 600 million in 2001 alone, by one estimate. Ford has already dictated the right to shop for lower-cost suppliers on future components, although it has given Visteon the right to match competitors“ for three more years. For Visteon, then, the challenge is simple. Says Deutsche Bank analyst Kenneth Blaschke: “They have to prove over the next few years that they can reduce their cost structure much faster than they reduce their prices to Ford.” So far, Visteon has cut 1,800 salaried jobs, equal to 2% of its total workforce. The company figures that the lay-offs plus other restructuring moves will reduce costs by 15% a year. Visteon is also looking to sell as much as US$ 2.5 billion worth of underperforming businesses. In glass, seating, steering systems, and air bags, it simply isn“t big enough to make participation in those markets worthwhile. But with the auto market in a slump, Visteon will be competing with some US$ 30 billion worth of other auto parts businesses already up for sale. Some buyers have been scared away by expensive restrictions in Visteon“s United Auto Workers (UAW) labour contract. The agreement requires Visteon to match Ford“s high pay scale for at least the next decade, even though most other suppliers pay 40% less than the Big Three. Already, one buyer, Pilkinton PLC, walked away from a deal to buy Visteon“s US$ 750 million glass business because of those costs. When it failed to sell its glass business, Pestillo appealed to the UAW for help, and in the past two months, he persuaded local union leaders to accept more flexible work rules at the affected plants in Nashville and Tulsa, making the glass business more viable. Ford gave Visteon many of its problems in its haste to match the successful 1999 spin-off of General Motors Corp. component maker Delphi Automotive Systems Corp. But GM gave Delphi six years to get its business in shape. “We used that time to streamline our portfolio and lay plans to separate quickly,” says Delphi CEO J.T. Battenberg III. Ford didn“t give Visteon nearly as much time. As it was contemplating the divestiture, Ford was also troubled by the threat of a strike by the UAW, which feared jobs would be lost in a Visteon spin-off. That put Pestillo, then Ford“s chief labour negotiator, in difficulty. Ultimately, he agreed to the unusually generous contract to win union support for the deal. Although critics contend Visteon wanted to push ahead. Visteon can take some solace knowing other auto parts suppliers share its misery. Even Delphi is in the middle of another restructuring, but Visteon is apt to have an even harder time coping than Delphi. To help this situation Pestilo also recently named Michael Johnston, a top executive at Johnson controls Inc., to be president and chief operating officer. One of Johnston“s first moves was to create regional customer teams in a bid to win more non-Ford business. That“s a start, but there“s a lot of work ahead if Pestillo and team are going to turn this slow moving operation into a well established company.