Delphi Automotive: Building A Bridge To The Future (NYSE:DLPH)

Jul 22, 2023

Recently, I had discussed the mega trends driving the automotive OEM market in Part 1 of this series on automotive OEMs. In Part 2, I wish to dive deeper into one OE manufacturer - Delphi Automotive (NYSE:DLPH) - to assess its strengths in relation to the mega trends.

Electrical & Electronic Architecture - The Foundation for Success

Delphi has built a strong foundation in the electrical and electronic architecture. This segment provides a complete design of the vehicle's electrical architecture, including connectors, wiring assemblies and harnesses, electrical centers and hybrid power distribution systems. The products in this business segment provide the critical electrical and electronic backbone that supports increased vehicle content and electrification, reduced emissions and higher fuel economy through weight savings (Source: Company Filings).

Exhibit: Delphi Halogen Free Ultra Thin-Wall Cables Reduce Space Requirements And Are Environmentally Friendly

Source: Delphi Cable & Wiring

One would never realize that electrical cabling and connectors for cars could be a multi-billion-dollar business until you look at Delphi Automotive. The world is slowly moving towards a zero-emissions environment by adopting electric cars. But that future is at least a decade away. According to IHS, the majority of the cars sold will be powered by either gasoline or diesel in 2025.

Exhibit: Majority of the Vehicles Sold Will Be Based On Internal Combustion Engine In 2025

Source: Company Filings, IHS

But today auto companies have stringent government fuel economy and emissions target to meet. So, they are continuing to invest in new technologies to improve the efficiency of the gasoline vehicles that would help achieve those targets. Companies like Delphi are bringing vast innovation to auto parts as mundane as cables to reduce weight, improve fuel efficiency, and make products that are friendly to the environment.

Exhibit: Delphi Aluminum Cables

Source: Delphi Automotive

Today's vehicle has about 1.5 miles of cabling per vehicle.

Exhibit: Foundation Components Of Electrical And Electronic Architecture Are Critical For A Vehicle

Source: Company Filings

Future vehicles could have up to 2.5 miles of cabling! The need for more cabling is driven by increased number of sensors, diagnostics, and power management functions that needs to be managed. In essence, a strong electrical and electronic architecture supports the following functions:

Even in vehicles powered by internal combustion engines, components such as connectors, wiring assemblies and harnesses, electrical centers and hybrid power distribution form the critical backbone to support increased vehicle content and electrification, reduced emissions and higher fuel economy (Source: Company Filings).

The electrical and electronic architecture business segment is Delphi's largest by revenue.

Exhibit: Delphi's Electrical And Electronic Architecture Business Segment

Source: Company Filings

If cabling is important in today's internal combustion engines, it becomes even more critical to the operation in electric vehicles. Price of batteries is one major factor that is holding back sales of electric cars, even though that price has seen a sharp drop due to technology breakthroughs and scale of production.

Exhibit: Battery Cost Per Kilowatt Hour

Source: Investors Get Ready for Coming Electric Car Revolution, The Wall Street Journal

GM's (GM) Chevy Bolt EV has gotten a lot of positive press for beating Tesla (TSLA) in bringing an affordable electric car with good range to the market. But, it turns out GM may lose money on each of the Chevy Bolt it sells. The loss may be partly attributable to low volume production of the Bolt, which is set at 30,000 per year, which in turn increases the price for the batteries. It is clear that the sales of fully electric vehicles are not growing fast enough to help meet emissions targets. Auto companies are improving fuel efficiency by making incremental improvements to the gasoline engine. In 2016, Delphi announced that it would introduce a 48-volt mild hybrid technology.

The 48-volt electrification would minimize the demand on the engine load and thus help in reducing emissions. This technology would be a stopgap arrangement designed to assist with meeting the fuel efficiency mandates. But the added cost of this technology in a car is a concern given that potential efficiency gains are estimated at 10%.

Exhibit: Plug-in Electric Vehicle Sales In The U.S.

Source: Electric Vehicle Sales for 2014 and Future Projections, Electric Vehicle Transportation Center

Definitions (Source: Electric Vehicle Transportation Center):

Plug-In Electric Vehicle (PEV)

This refers to any vehicle that plugs into the electric grid for all or part of its power source. PEVs are battery-electric vehicles (BEVs) such as the Nissan )(OTCPK:NSANY) Leaf, plug-in hybrid electric vehicles (PHEVs) such as the Chevy Volt, or extended-range electric vehicles (EREVs).

Hybrid Electric Vehicle (HEV)

HEV vehicles are those that combine a conventional internal combustion engine (ICE) propulsion system with an electric propulsion system. HEVs do not receive energy from the grid and do not have the ability for grid recharging. The traditional Toyota (TM) Prius is an HEV. HEVs are not considered in this analysis (Source: Electric Vehicle Transportation Center).

Total Plug-In Electric Vehicle Sales Represented Just 0.72% of the Total U.S. Light Weight Vehicle Sales in 2014.

Exhibit: U.S. Light Weight Vehicle Sales

Source: St. Louis Federal Reserve

Exhibit: Delphi Annual Revenue, Gross Profit and Gross Margin %

Source: Company Filings

Exhibit: Delphi's Competitors In The Electrical And Electronic Architecture Business Segment

Source: Company Filings

Acquisitions to Further Strengthen Electrical and Electronic Architecture

Electronics and Safety Business Segment

For the long-term success of Delphi, the electronics and safety business segment is absolutely critical. This segment provides critical components, systems and advanced software for passenger safety, security, comfort and infotainment, as well as vehicle operation. The products in this segment also help improve fuel economy (Source: Company Filings).

In terms of revenue, this business unit is not as big as the electrical and electronic architecture segment. But, as more safety and automation features are added, this business unit would be critical to driving revenue growth.

Exhibit: Delphi Annual Revenue From Electronics And Safety Business

Source: Company Filings

Electronically Scanning Radar (ESR) is an example of a product in this business segment. Enabling technologies such as ESR are key to building automation in vehicles and provide a stepping stone to full automation.

Exhibit: Impressive Form Factor For Delphi Radar Module Used For Features Such As Adaptive Cruise Control

Source: Delphi Automotive

Exhibit: Multimode Electronically Scanning Radar

Source: Delphi Automotive

Exhibit: Delphi's Competition in Electronics & Safety

Source: Company Filings

Acquisitions in Safety and Automated Driving Capabilities

Powertrain Business Segment

Maybe someday the electric car will make the internal combustion engine obsolete. But until then managing the gasoline and diesel engines is a good business to be in. As auto manufacturers try to make their engines cleaner and efficient, they have invested more in collecting and acting on the performance data generated by the sensors attached to the engines.

The powertrain business segment provides systems integration of full end-to-end gasoline and diesel engine management systems including fuel handling, fuel injection, and much more (Source: Company Filings).

Even though the powertrain business may not be central to the future growth of Delphi, it is critical to maintain customers and market share until alternative vehicle technologies attain mass adoption.

Exhibit: Delphi Revenue From Powertrain Systems Business

Source: Company Filings

Exhibit: Delphi Engine Management System (EMS) Portfolio

Source: Delphi Automotive

Exhibit: Delphi's Competition in Powertrain Systems

Thermal Systems

In 2015, Delphi had sold its thermal systems business segment to MAHLE for $660 million.

Exhibit: Delphi Revenue From Thermal Systems Before Being Sold To MAHLE

Source: Company Filings

Exhibit: Competition in Thermal Systems

Source: Company Filings

Gross Margins

Given the customer concentration and the competition in the auto industry, gross margins are low. But Delphi has managed to steadily increase its gross margins over the years.

Exhibit: Gross Margins By Business Segment 2010 and 2011

Source: Company Filings

Exhibit: Gross Margins By Business Segment 2014 and 2015

Source: Company Filings

This increase in gross margins could also be attributable to a steady increase in global sales of vehicles. The impact of lower vehicle sales on gross margins remains to be seen although the company contends that it could still be profitable with up to 30% lower global vehicle sales.

Conclusion

Delphi is well positioned to take advantage of the mega trends driving the automotive OEM business.

Exhibit: Electrical Architecture Is A Key Enabler For Targeting Emissions Goals, Safety, And Automation

Source: Company Fillings

The automobile manufacturers are standardizing their vehicle platforms across the globe to gain scale and to reduce cost. Consolidation in the automotive OEM market is inevitable given the pressure on pricing and the need for scale. Automotive OE manufacturers could acquire each other to expand their breadth of products and operations.

There is another possibility. As electric vehicles become more common place, auto manufacturers like GM and Ford (F) may not have the same competitive edge as they did with internal combustion engines. Besides that, OE manufacturers are collecting substantial intellectual property and expertise in the mega trends of environment, safety and intelligent driving, and bringing those capabilities in-house may be the only way for auto manufacturers to stay relevant. Readers might also remember that Delphi was once owned by GM, and Visteon (NYSE:VC) was once owned by Ford.

Exhibit: Delphi Estimates On Increased Content Per Vehicle (CPV)

Source: Company Filings

The prospect for increased content per vehicle driven by both electrification and intelligent driving also offers long-term growth potential for Delphi.

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