O'Neal's goal: Smaller but stronger Delphi

Retired CEO bet on promising technology with high margins

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O'Neal: "I put my money where my mouth was."

When Delphi Automotive took journalists for rides in its driverless Audi SQ45 this winter during the International CES, the retrofitted crossover wasn't restricted to the highway.

The vehicle ventured onto Las Vegas' urban streets for encounters with taxis, buses, limos and pedestrians. It handled them all nicely.

Other major suppliers have rolled out driverless prototypes to showcase active safety technology.

But Delphi is getting contracts. And it's a good example of CEO Rodney O'Neal's core business strategy in his eight years at the helm: Shed slow-growth businesses and invest in promising high-margin technologies.

"We think [active safety] is the future," O'Neal said in a Feb. 27 interview. "I put my money where my mouth was, and we backed it up with investments."

That strategy had its risks. O'Neal, who retired on March 1, had to perform radical surgery to eliminate Delphi's underperforming divisions. During his stints as COO and CEO, Delphi shut or sold 45 plants.

Last year, sales totaled $17.02 billion, compared with $26.95 billion in 2005.

For years, O'Neal has been placing his bets on promising technology. Just after Delphi emerged from bankruptcy in 2009, for example, O'Neal sold Delphi's airbag-and-seat belt operation but kept radar. Today radar is the centerpiece of Delphi's active safety portfolio, which is growing rapidly.

Delphi has become solidly profitable since bankruptcy. Net income totaled $1.35 billion last year, and Delphi's stock is trading at almost $80 per share -- nearly four times its price in November 2011, when the company went public.

Now Delphi has just three divisions: wire harnesses and connectors, powertrain components, and electronics and safety.

The list of more traditional products that O'Neal has shed is long. The most recent example was a long-term bread-and-butter product line at Delphi, the operations that produced heating, ventilation and air conditioning, or HVAC, products. Last year, that unit generated sales of $1.56 billion -- 9 percent of Delphi's revenues.

Other product lines that Delphi has sold or closed since 2005 include cockpits, steering systems, chassis components, door panels, brakes, airbags, seat belts, instrument panels, spark plugs and compressors.

There was nothing flashy about O'Neal's steady march to transform Delphi into a smaller but better supplier.

O'Neal is a GM lifer, but his involvement in the auto industry was almost an afterthought. As a high school student in Dayton, Ohio, he wanted to study computer science, but his school counselor advised him to enter General Motors Institute, now called Kettering University.

After he graduated, he joined GM in 1976 as a production engineer in a steering wheel factory. "I loved being on the factory floor," O'Neal said. "It was vibrantly alive. Every day was different. You knew what had to be done that day, and you either did it or you didn't. Instant feedback."

He worked his way up through GM's in-house parts operation, and stayed with Delphi when it was spun off in 1999. By the time he was named Delphi's COO in 2005, O'Neal had an insider's knowledge of the company's products, factories and technology.

When Delphi went into Chapter 11 bankruptcy in 2005, O'Neal used that knowledge to figure out which products to keep, and which to shed.

As its portfolio shrank, the company closed dozens of plants and eliminated thousands of jobs.

In 2007, the UAW accepted wages as low as $14 an hour, down from $27. But most jobs disappeared anyway. Today, Delphi has five plants and 5,000 employees in the U.S.

Meanwhile, 94 percent of Delphi's hourly work force is in so-called low-cost countries such as Mexico, China and Poland.

The company's remaining product lines have strong growth prospects, O'Neal said.

Delphi's biggest division is electrical components, an $8.27 billion operation that includes traditional products such as wire harnesses, connectors and other components of a vehicle's nervous system.

But the company's fastest growing product line is active safety -- the array of radar, cameras, control units and software that make up collision avoidance systems.

That portfolio generated $160 million in revenue last year, and annual sales are expected to grow 50 percent this year.

In Europe, automakers need collision avoidance technology because it's required for a five-star crash rating, notes Scott Pagington, Delphi's global product manager for electronics and safety.

In November, Delphi signed a deal with Ottomatika Inc., a Pittsburgh startup that develops software for automated driving. That collaboration bore fruit in January when Delphi unveiled its driverless vehicle.

Software will be a key differentiator for other smart technologies such as fuel injectors, which require sophisticated control units to produce low emissions.

In the auto industry, hardware is a commodity with declining prices. Software is where the profits are.

"We began the conversion to smart products over a decade ago," O'Neal recalled. "We wanted to sell sophisticated black boxes -- 'thinking' products. We've done a great job adding intelligence to our products."

You can reach David Sedgwick at dsedgwick@crain.com.

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