Delphi Weighs Possible Partnership with Continental in Europe

Case Type: mergers & acquisitions; business competition.
Consulting Firm: OC&C Strategy Consultants final round job interview.
Industry Coverage: automotive, motor vehicles; manufacturing.

Case Interview Question #00211: The client Delphi Corporation is an automotive parts manufacturing company headquartered in Troy, Michigan, USA. Delphi is an original equipment manufacturer (OEM) and supplier of auto-dashboards to auto makers in the U.S. and Europe. “Auto-dashboard” refers to the display panel, and all the gadgets within, that is directly behind the steering wheel, and is a modular product.

Recently, one of the client’s leading competitors in Europe Continental AG (FWB: CON) has approached the client with a possible contract / agreement to jointly supply dashboards in Europe. The CEO of Delphi has hired you to help him analyze the pros and cons of a partnership with the competitor Continental AG. Specifically, he wants you to address two questions: 1. What’s the motive behind the competitor’s request? 2. Should Delphi partner with the competitor?

Additional Information:

• Client designs and manufactures instrument (dashboard) clusters.
• Client presence in North America, Europe and Asia. Competitor is present only in Europe and any partnership would be restricted to European region only.
• Customers are primarily auto manufacturers — Contracts are long-term in nature. For example BMW typically would work with the supplier for cars to be rolled out 3 years in the future.
• Product mix: 3 types of dashboards — high end, middle and low end dashboards. Maps to high-end, middle and low end autos — but car manufacturers may offer upgraded instrument panel on any car.
• The customer base in Europe can be categorized as 20% low end, 50% middle and 30% high end. Margins across these segments are low: ~0%, middle: 1-2% and high: 12-15%.
• The high end segment has the fastest growth.
• Competitor Continental AG has 50% of the high end market in Europe and no presence in low and middle end market. Client is primarily a player in the low end and middle market segments with 5% presence in the high end market.
• No big difference in quality, features and functionality between competitor and client’s car dashboard products.
• Industry trend to have same modular dashboard across different segments to have economies of scale. Low end BMW and High end BMW will have the same basic box, with the only difference being in some bells and whistles.

Possible Approach:

1. Structure the analysis using a 3-C or similar framework to methodically get all the required information.

2. Understand that low end is a commodity and client really is not making too much profits right now, while the competitor is — hypothesize that there must be a strong motive behind the sudden urge to ‘share’ profits!

3. Analyze the given facts and figure out that auto manufacturers have substantial bargaining power — and may be looking for same supplier for all 3 of their segments.

4. Competitor makes a pre-emptive move to partner with client to avoid auto manufacturers switching their high-end dashboard supplier to someone who can supply dashboards for all 3 segments, like our client.

Better Answers:

Additional questions and observations should include a clear discussion of the pros and cons of the partnership beyond the motive.

• Pros:
  • Economies of scale for client, but since this is an “arms-length” contract both parties may not merge operations.
  • End customer relationship may be better streamlined — one team per auto manufacturer instead of one team per segment.
  • Research & Design costs can be shared.
• Cons:
  • Lose opportunity to be a big player in the profitable high-end market.
  • Agency costs — competitor may not share its high end segment with us in a fair manner.

Outstanding Answers:

1. Candidate should recognize that a lot of operational synergies are not possible in an “arms-length” contract such as this one. So pros should be based on practical synergies in a partnership situation.
2. Recommendation can be either to partner or not, but should be based on candidate’s estimate of the advantages versus the disadvantages.
3. A nice way to understand the issue is to go through the value chain from design to manufacture to assembly to customer relationship and articulate what a contract will mean in each of these stages.
4. It is very important to understand the macro issue — auto manufacturers are moving to integration of the segments — before getting into the details of the case.