DELPHI 2014 Annual Report Download - page 56

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OEMs are increasingly looking to their suppliers to simplify vehicle design and assembly processes to reduce costs. As a
result, suppliers that sell vehicle components directly to manufacturers (Tier I suppliers) have assumed many of the design,
engineering, research and development and assembly functions traditionally performed by vehicle manufacturers. Suppliers
that can provide fully-engineered solutions, systems and pre-assembled combinations of component parts are positioned to
leverage the trend toward system sourcing.
Engineering, design & development. Our history and culture of innovation have enabled us to develop significant
intellectual property and design and development expertise to provide advanced technology solutions that meet the demands of
our customers. We have a team of more than 20,000 scientists, engineers and technicians focused on developing leading
product solutions for our key markets, located at 15 major technical centers in Brazil, China, France, Germany, India,
Luxembourg, Mexico, Poland, South Korea, the United Kingdom and the United States. We invest approximately $1.7 billion
(which includes approximately $400 million co-investment by customers and government agencies) annually in research and
development, including engineering, to maintain our portfolio of innovative products, and owned/held approximately 8,000
patents and protective rights as of December 31, 2014. We also encourage “open innovation” and collaborate extensively with
peers in the industry, government agencies and academic institutions. Our technology competencies are recognized by both
customers and government agencies, who have co-invested approximately $400 million annually in new product development,
accelerating the pace of innovation and reducing the risk associated with successful commercialization of technological
breakthroughs.
In the past, suppliers often incurred the initial cost of engineering, designing and developing automotive component parts,
and recovered their investments over time by including a cost recovery component in the price of each part based on expected
volumes. Recently, we and many other suppliers have negotiated for cost recovery payments independent of volumes. This
trend reduces our economic risk.
Pricing. Cost-cutting initiatives adopted by our customers result in increased downward pressure on pricing. Our
customer supply agreements generally require step-downs in component pricing over the periods of production and OEMs have
historically possessed significant leverage over their outside suppliers because the automotive component supply industry is
fragmented and serves a limited number of automotive OEMs. Our profitability depends in part on our ability to generate
sufficient production cost savings in the future to offset price reductions.
We are focused on maintaining a low fixed cost structure that provides us flexibility to remain profitable despite decreases
in industry volumes and at all points of the traditional vehicle industry production cycle. We believe that our lean cost structure
will allow us to remain profitable at all points of the traditional vehicle industry production cycle. As a result, approximately
94% of our hourly workforce is located in low cost countries. Furthermore, we have substantial operational flexibility by
leveraging a large workforce of temporary workers, which represented approximately 26% of the hourly workforce as of
December 31, 2014. However, we will continue to adjust our cost structure and manufacturing footprint in response to
continued economic uncertainties, as evidenced by our on-going restructuring programs focused on aligning our manufacturing
capacity and footprint with the current automotive production levels in Europe and South America. As we continue to operate
in a cyclical industry that is impacted by movements in the global and regional economies, we continually evaluate
opportunities to further adjust our cost structure. Assuming constant product mix and pricing, based on our 2014 results, we
estimate that our EBITDA breakeven level would be reached if we experienced a 42% downturn to current product volumes.
We have a strong balance sheet with gross debt of approximately $2.5 billion and substantial liquidity of approximately
$2.4 billion of cash and cash equivalents and available financing under our Revolving Credit Facility (as defined below in
Liquidity and Capital Resources) as of December 31, 2014, and no significant U.S. defined benefit or workforce postretirement
health care benefits and employer-paid postretirement basic life insurance benefits (“OPEB”) liabilities. We intend to maintain
strong financial discipline targeting industry-leading earnings growth, cash flow generation and return on invested capital and
to maintain sufficient liquidity to sustain our financial flexibility throughout the industry cycle.
OEM product recalls. There has been a significant increase in the number of vehicles recalled globally by OEMs in 2014.
In the U.S., a record number of vehicle recalls were initiated in 2014. These recalls can either be initiated by the OEMs or
influenced by regulatory agencies. Although there are differing rules and regulations across countries governing recalls for
safety issues, the overall transition towards global vehicle platforms may also contribute to increased recalls outside of the
U.S., as automotive components are increasingly standardized across regions. Given the sensitivity to safety issues in the
automotive industry, including increased focus from regulators and consumers, we anticipate the number of automotive recalls
may remain above historical levels in the near future. Although we engage in extensive product quality programs and
processes, and have not experienced any significant impacts to date as a result of the recalls that have been initiated, it is
possible that we may be adversely affected in the future if the pace of these recalls continues.
Efficient use of capital. The global vehicle components industry is generally capital intensive and a portion of a supplier’s
capital equipment is frequently utilized for specific customer programs. Lead times for procurement of capital equipment are