FORT WORTH, TEXAS, USA - With the opening of a new plant here, Valeo executives had reason to hope they could solve their North American problems.
The electronics plant will be at full speed by year end to feed Valeo's growing North American business, which could reach $2.6 billion this year, up 24 percent from 1999.
North America is a key part of CEO Andre Navarri's plans to make Valeo among the world's five largest auto parts makers. But his demands for rapid, profitable growth here hit a problem three weeks ago. The company warned investors that it would not meet profit targets because of an 'unexpected accumulation of negative factors,' including difficulties in North America.
Not all of those factors were identified in the warning. But the Paris supplier of wipers, motors, lighting and electronics has been hit by slowed growth in its aftermarket business, and plant and labor troubles inherited from its 1998 acquisition of the electrical systems business of the former ITT Automotive. Moreover, Valeo's rapid switch to a new headlamp technology has been a massive and expensive exercise.
'Valeo is not the only parts maker citing weakness in the North American market,' says Zee Tull, a European analyst with Merrill Lynch. 'But it is also facing changes in the aftermarket and other areas.'
Valeo's biggest problems come from its acquisition in September 1998 of ITT Automotive's electrical systems business. Noel Goutard, Navarri's predecessor, agreed to pay $1.7 billion.
The deal turned Valeo from a small supplier with just $700 million in annual North American revenue to a major player in motors, actuators and wipers.
The deal with ITT brought 11 plants in Europe and North America, where Valeo already had 10 plants.
North America now generates 31 percent of the company's revenue. Business was up 11 percent last year.
New business has not been a problem. Valeo won a contract from Nissan via Zexel in air conditioning and wipers. It won a thermal systems contract from Chrysler and its first major alternator order from Ford Motor Co.
While the former ITT plants in Europe have been restructured and are running at full speed, the US operations centered in Rochester, New York, are lagging, says Stephen Reitman, a Merrill Lynch analyst.
Worse, the North American plants Valeo inherited were starved for new investment. Also, the Rochester plant, which employs 3,500, suffered from bitter labor relations.
'Shutting the plant was an option,' said Edward Planchon, senior group vice president for North America.
Reducing labor costs by shifting operations from high-cost countries in North America and western Europe to lower-cost central Europe, Mexico and Turkey is Valeo's strategy.
But with US vehicle production so high, the company could ill afford even a temporary shutdown for a Mexico move. So talks with its Rochester union led to a historic eight-year contract in August.
The agreement is expected to cut Valeo's costs, but Planchon said, 'We're not yet satisfied.'
Problems at Valeo's lighting division this year led to the firing of four Valeo managers and a reorganization, according to Reitman.
The problems arose from Valeo's rapid switch from traditional headlamps to the new clear-lens headlamp.
In early 1999 just 20 percent of the 25 million headlamps it produces involve the new technology. That has risen to 100 percent today, according to Merrill Lynch.
Delivering the flawless lamp demanded by automakers has sent costs spiralling.
Navarri, 47, acknowledged problems from the switch to a new headlight system.
'We are not yet satisfied with the level of efficiency of lighting, but we are improving,' he said.
Navarri says Valeo plans to strengthen North American operations with a new push in the North American aftermarket.
'We're not as strong in the aftermarket here,' he said, 'but this is the biggest market for aftermarket sales in the world. Wipers and lighting are good products for it.'
Navarri hopes to increase the aftermarket business because of its fatter profit margins and its ability to offset the cyclical original equipment business.
Valeo blamed its profit squeeze during second quarter 2000 on weakness in aftermarket demand in Europe and North America.
Valeo's annual aftermarket sales in the USA last year were $40 million.