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GM-Delphi’s Tumultuous History Plays Role in Switch Problem

Cutting costs at expense of quality common impacted ignition.

by on Apr.03, 2014

GM CEO Mary Barra told a Senate subcommittee yesterday that in the past that GM's focus was wrongly on cost instead of customers. The relationship between GM and Delphi was a prime example.

Lawyers and Congressmen looking for the answer to why General Motors decided not to fix the ignition switch that has now been implicated in at least 13 deaths may want to look more closely at the tangled history of GM’s spinoff of the Delphi Corp., the supplier of the defective switch.

In her congressional testimony, GM CEO Mary Barra said the company’s old culture emphasized cost cutting and cost containment over customer service and promised that was now changing.

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The critical Delphi-GM relationship was at epicenter of the cost-containment strategy pursued by GM’s senior management after the company ran into financial difficulties, which led to the removal of then-Chairman Robert Stempel. The physical separation of Delphi and GM was being carried out even as the switch was being designed for cars then on GM’s drawing board.

Former Delphi CEO J.T. Battenberg wrestled with GM over cost issues and reimbursing the automaker for problems with components.

During the 1990s, GM’s top management had come to believe the company’s dependence on in-house parts operations, which were being consolidated under the Delphi umbrella, were choking off GM’s competiveness. Spinning off Delphi would free up GM’s ability to obtain “competitive” or less expensive components.

At the same time, Delphi’s management thought a spinoff could open the door to new business.

But the 1999 spinoff – as a major federal case that ultimately resulted in heavy fines for top Delphi executives in 2011 showed – proved to be enormously contentious.

It was within the years right after the spinoff of this contentious atmosphere that the faulty ignition switch used in the Chevrolet Cobalt, Pontiac G5, Saturn Ion and Chevrolet HHR was designed. Even after the spinoff, Delphi was still responsible for a huge number of parts on every GM vehicle, noted Sean McAlinden, vice president of research for Center of Automotive Research in Ann Arbor, Mich.

But Barra’s testimony suggests, as well as the writings of former GM vice chairman and product czar Bob Lutz, the cost was a huge issue. Lutz has noted in his writings and conversations with reporters that he forced GM’s bean counters to spend more on polishing up the dowdy interiors of GM passenger cars in bid to boost sales.

However, it’s clear not everything was fixed. The fact an overweighted key chain could shut off an engine was actually well understood by engineers, service technicians and car buffs, who had even discussed the problem on internet bulletin boards.

But the friction over who paid for what was intense after the turn of the century.

Former Delphi Corp. Chief Executive Officer J.T. Battenberg III had to pay a $215,000 for violating U.S. securities laws after he was found responsible for misrepresenting a $237 million entry on the Delphi’s books.

During Battenberg’s civil trial in 2010, former Delphi financial staffers testified they were coached by senior executives on how to handle claims by General Motors.

The Securities and Exchange Commission (SEC) argued successfully that Battenberg violated federal securities laws through the improper accounting of a $237-million payment Delphi made to GM as part of a settlement involving warranty claims.

The cost of warranty claims, which were constantly a matter of dispute between Delphi and GM, according to the testimony heard in Battenberg’s civil trial, has now emerged as one of rationales senior GM managers used not to order a recall of the faulty ignition switches.

Delphi’s executives had been accused of trying to prop up the giant auto supplier’s stock even as Delphi slid steadily towards what would become the longest corporate bankruptcy reorganization in U.S. history.

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But the supplier also found it was steadily losing business from GM as the dispute dragged on, Battenberg said, when he took the stand in his own defense.

Delphi’s financial problems eventually drove the company to file for Chapter 11 reorganization in 2005. It did not finally emerge from bankruptcy until 2009 after a complete reorganization of its operations.

Battenberg’s trial ended with a jury clearing him of fraud – but it was still found him liable for misrepresentation and responsible for accounting errors that changed the character of a $237-million payment Delphi had been forced to make to GM. The payment should have been charged against income, but wasn’t.

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The SEC’s civil complaint against Battenberg also claimed that the former Delphi CEO had tried to hide Delphi’s financial condition in order to improve its financial performance.

Two other former Delphi executives, Milan Belans, a former director of capital planning and pension analysis, and Catherine Rozanski, a former accounting director, settled with the SEC during the trial. Belans agreed to pay $87,500 in disgorgement, interest and civil penalties, court filings show. Rozanski agreed to a $40,000 civil penalty.

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Meanwhile, Barra is promising to deliver a full, public accounting of why the ignition-switch recall was never allowed to go forward 10 years ago and also vowing that GM is well on its way to becoming a very different company.

“The issues raised in the hearing were tough but fair,” Barra said after appearing before a Senate panel. “I appreciate the intense interest by the senators to fully understand what happened and why. I am going to accomplish exactly that, and we will keep Congress informed. Meanwhile, we will continue doing all we can to repair our customers’ vehicles and rebuild their trust in GM.”

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