Is Delphi Responsible For GM's Ignition Recall? Mary Barra Doesn't Think So

Jul.30.14 | About: Delphi Automotive (DLPH)


Rodney O'Neal, CEO of Delphi, appeared to testify for the first time in the ongoing GM ignition switch investigation before congress on July 17th.

Questions to Mr. O'Neal added clarity to some lingering questions about Delphi's involvement in the manufacturing process.

No executive at the hearing was willing to place blame on Delphi for deaths related to the faulty switches.

On July 17th 2014, the CEOs of General Motors (NYSE:GM) and Delphi (NYSE:DLPH), along with several other important figures in the ongoing investigation into the recall of GM vehicles with faulty ignition switches appeared before Congress to testify and explain the steps being taken to ensure such tragic oversight won't happen again. This was the first hearing on this topic the CEO of Delphi, Rodney O'Neal, was able to attend, and comments made by and about him and his company offer significant reassurance that Delphi will not be adversely affected in the legal realm or the court of public opinion. Here is a portion of Mr. O'Neal's opening statement:

Rodney O'Neal, CEO Delphi

"The vehicles that were recalled went out of production several years ago. As a result, it has been a monumental task to build over two million switches in a matter of months. We've ordered new tooling, we've installed three new production lines, and we trained additional workers. At this time we've shipped over one million new switches, and we're on track to deliver more than two million switches by the end of August. We've done all this so the consumers can have their vehicles repaired by General Motors as quickly as possible."

"We have conducted a thorough review of our current policies and procedures related to product safety, which we believe are robust and which we are continuously working to improve. For example, and at my direction, we have re enforced to our global engineering team the importance of raising safety concerns so they can be handled promptly. We have strengthened our procedures to ensure that safety concerns are communicated across all relevant functions within our company, and that includes reports to our senior management and to our customers. We are committed to acting upon all such concerns in a timely manner. The industry has created a new standard to focus on how these complex safety systems work together, instead of looking at safety on a part by part basis. We support this new standard, and given what we've learned from these tragedies, this new standard should be very helpful going forward."

Of course it is great to see the lengths to which Delphi has gone to assist GM in replacing faulty switches, but more important is the emphasis on a new comprehensive analysis of how components work together in, for instance, a vehicle's ignition system. This new standard, among several other factors, places the responsibility for ensuring the safety of the vehicles in question squarely on GM.

Some may remember a discussion over the decision to change specifications on the ignition switch without making a change in the part number from my previous article on Delphi. Similar questions were raised by Joe Thune, a congressman from South Dakota; I found the answers provided by Mr. O'Neal to be instructive and satisfactory:

Rep. Joe Thune, R-South Dakota

"In 2006 GM authorized a change in the ignition switch but didn't change the part number. As a supplier, is it a common practice for Delphi to allow a manufacturer to change a part and not change the part number?"

Rodney O'Neal

"In 2013 we had about 120,000 engineering changes, and only about 40% of those actually had a part number change, so it's quite normal not to change the part number."

As previously expressed, Delphi acted entirely in accordance with their standard procedures and the instructions they received from GM. Further questioning by Dean Heller from Nevada contributed additional clarity into the manufacturing process and the involvement of Delphi's employees:

Rep. Dean Heller R-NV

"The complaints, as they started piling up in the mid-2000s on your product, did Delphi conduct any internal investigation to determine whether your part was at fault?"

Rodney O'Neal

"We were not aware of the situation in terms of deaths until February of this year, 2014."

Rep. Heller

"Was there any reason to believe that anyone in your company may have known?"

Rodney O'Neal

"No. In the exhaustive review we've done of our documents and talking with individuals it was clear the Delphi team, in working with the General Motors team in this situation were very concerned with customer satisfaction, warranty costs, and quality issues. No safety issues."

Rep. Heller

"Is there a possibility that any individual in your company just simply didn't take it to the top?"

Rodney O'Neal

"We looked deep. We looked very very hard and there's no evidence of that because it's quite clear the mindset was based on information that they were given that they were working on quality issues, not safety issues."

Rep. Heller

"Did anyone ever raise concerns about keeping the model number the same with this part, or was that a decision to just unanimously follow GM?

Rodney O'Neal

"Well standard protocol in our industry is that the original equipment manufacturer, the car manufacturer, in this case General Motors, they determine that part number and they control that part number. And so if that part number is ever to change, the car manufacturer would dictate that change, and we will automatically upgrade it."

Rep. Heller

"Do you feel that Delphi shoulders any responsibility here?"

Rodney O'Neal

"Our products met the requirement of the customer."

Rep. Heller

"So no responsibility?"

Rodney O'Neal


To summarize, Delphi employees were not even aware of safety concerns until early 2014 and were accordingly focused on various other adjustments to the product. In addition, since Delphi followed procedures designed to leave the safety requirements in the domain of the car manufacturer, Rodney O'Neal doesn't believe the company shoulders any responsibility for the deaths caused by the faulty system. But what do representatives from GM think? Anton Valukas, lead attorney of GM's internal investigation, was also questioned by Rep. Heller during his allotted time:

Rep. Heller

"Mr. Valukas I understand there was a sharing agreement with Delphi that wasn't as forthcoming as you would have liked it to have been. Do you think the limited information you received from Delphi and their employees prevented you from providing a complete report?"

Anton Valukas, GM Internal Investigation Lead Attorney

"No. I believe at this point, having had the chance with the extra six weeks or month that's involved here in looking at what we have in the way of materials so far I think our report is complete. I feel comfortable that in this aspect, the Delphi aspect, that we have that information."

"Do you feel that Delphi shoulders any responsibility for the 13 deaths?"

"I can tell you that we, GM, approved the switch knowing that it was below torque values, and that was an approval Mr. Degiorgio gave to Delphi, and Delphi manufactured a switch in accordance with that approval."

So, the internal investigator is not confident enough to give any kind of affirmation that Delphi is responsible for the deaths; consistent with the story up until now, the responsible party was a GM employee who willfully mislead members of his own company and outsiders with whom he worked.

Finally, Rep. Heller turned to Mary Barra, the CEO of GM, with the same line of questioning. If anyone at the hearing had a vested interest in shifting some of the blame away from GM, it was Mrs. Barra:

Rep. Heller

"Mrs. Barra do you believe Delphi shoulders any of the responsibility for the 13 deaths?"

Mary Barra, CEO GM

"We are the OEM, we're the company that's responsible to integrate the parts to the vehicle, so it's our responsibility."

Consistent with all statements before her, even Mrs. Barra believes Delphi is effectively absolved given the nature of the manufacturing relationship and the safety standards of the industry.

The bottom line is I am now more confident than ever that Delphi will avoid the vast majority of negative impact from litigation or bad PR related to the ignition switch recall. My investment thesis predicting 30% upside for Delphi represents a compelling buying opportunity before the company announces 2Q earnings on July 31st.

Disclosure: The author is long DLPH. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.