Time and Patience Run Out at Delphi
By David Welch
The United Auto Workers couldn't give enough and General Motors (GM ) was unwilling to bail out Delphi (DPH ), its former parts unit, fast enough. So on Oct. 8, Chairman and CEO Robert "Steve" Miller decided to file for Chapter 11 protection. Through bankruptcy, Miller reckons, he can get what he needs from the UAW and GM to make the money-losing company profitable again.
Delphi's failure means a massive and painful overhaul, possibly for all parties. The move by Miller, who has been involved in bankruptcy filings by Bethlehem Steel, United Airlines, and auto parts maker Federal Mogul Corp., has grave consequences for Delphi's 24,000 UAW workers and another 11,000 retirees. GM also has a dual stake in Delphi's fate because the auto giant gets about $14 billion worth of parts from the supplier every year -- and also because it could be on the hook for some of Delphi's retiree obligations.
Miller told Business Week Online in an interview just hours after the filing that he needed to move quickly. Delphi, which has $16.5 billion in assets, lost $741 million in the first six months of 2005 on $13.9 billion in revenue. That has come on top of $4.9 billion in losses in 2004.
Miller, who took the top job in June, has said repeatedly that the outfit's $65-an-hour per-worker labor costs -- about $23 an hour in wages and the rest in benefits -- weren't sustainable (see, BW, 3/14/05, "A Wrench for Parts Suppliers").
He asked the union for major cuts. They included: wages reduceded to $10 to $12 an hour, less vacation time, slashed medical benefits, modified pensions to reflect lower wage rates, and elimination of the JOBS bank, which effectively pays workers at least 75% of take-home pay when laid off.
UAW President Ronald Gettelfinger was clearly upset by Delphi's filing. He called the move a "bitter pill" for workers, especially since Delphi sweetened severance packages for executives only the day before the filing. "The UAW is committed to doing everything we possibly can to protect the interests of our active and retired members and their families," Gettelfinger said in a statement. "Unfortunately, this is not the first time that the UAW has had to deal with a court-ordered corporate restructuring, and we will vigorously use our experience, expertise, and resources to represent the interests of UAW-Delphi workers and retirees throughout this process."
Miller said that despite constructive talks that ran as late as Oct. 7, the UAW, GM, and Delphi could not come up with a deal. With new bankruptcy laws taking effect Oct. 17, Miller didn't want to wait any longer. "Between the three of us, we didn't find satisfactory common ground," he said.
For UAW leaders, their worst nightmare has come to pass. Ford (F ) bailed-out its former parts unit, Visteon (VC ) in May, 2005, by taking back 24 of its North American factories and assuming responsibility for some 17,000 union workers. But Delphi workers will almost certainly face jobs lost and reductions in pay and benefits. "Miller has clearly chosen bankruptcy over collective bargaining to restructure the company," says Harley Shaiken, a labor economics professor at University of California-Berkeley. "Delphi is using a bankruptcy judge to begin moving in the direction of Chinese wages and benefits."
MUCH ON THE TABLE.
When the dust settles, Delphi will likely look more like Visteon. Having given back the bulk of its North American operations to Ford, most of the parts maker's operations are now in Europe and Asia. Similarly, Delphi will likely emerge from bankruptcy with a smaller U.S. presence -- only its U.S. plants are covered by the bankruptcy filing -- and more operations in low-wage countries.
GM, which has lost $2.5 billion pretax in North America in the first half of this year, was unwilling to move with the speed that Miller needed if his outfit was to avoid bankruptcy. That means the UAW and Delphi will have to renegotiate compensation, benefits, and job numbers while the company is in court. Jobs will be lost and plants will close, Miller said Oct. 8, adding that "a substantial" portion of U.S. operations would be shuttered or sold.
Trouble is, most of the plants in question will have a difficult time finding buyers, says former Wall Street analyst Joseph S. Phillippi, president of AutoTrends, an auto industry research firm. Even though private equity concerns and foreign parts makers are combing the U.S. industrial base for cheap acquisitions, Delphi's unprofitable plants are among the least attractive. "Most of these businesses make products that could be made by a host of other suppliers for less money," Phillippi says. "They won't be missed."
For GM, the bankruptcy filing means the auto maker could be on the hook for up to $11 billion in retiree obligations if Delphi stops paying those benefits. GM believes the actual obligation may end up being less than that. As part of the 1999 spin-off agreement with the UAW, GM agreed to cover UAW pension and health-care benefits if Delphi suspended its retiree-benefit plans.
Under the terms of the deal, the U.S. Pension Benefit Guarantee Corp. will pay for some of the pension benefits. GM would assume the rest and also cover health-care obligations. While Delphi is obligated to pay back GM, the auto maker would be classified as an unsecured creditor. GM's potential liabilities remain unclear, as does the sum it might recoup.
Miller says Delphi will continue to pay benefits until a deal is worked out with the union. If no bargain can be struck, Delphi can ask the bankruptcy court to reject the union agreement, meaning Delphi could pay workers whatever it chooses -- though the risk of a strike looms large if the union refuses to accept new terms. "We each have ways we can harm each other if we so choose," Miller says, adding. "In almost every case, you end up with a settlement."
What about GM's parts? Miller has said in the past that he needs GM to pay more for some parts or a bankruptcy judge could nullify the contracts. For now, however, Miller says he will keep all plants running.
NO MORE DELIVERIES?
While GM said in a statement that production at its plants could be interrupted, it also indicated that it has no interest in paying more for parts. In the statement, GM said it pays around $2 billion more for its parts than would be the case if it shopped for them on the open market.
In the meantime, Miller plans to come up with a five-year package aimed at making Delphi competitive while continuing to supply GM. If Delphi and GM can't reach an agreement, Delphi could eventually stop supplying parts. But Miller emphasized strongly that cutting off GM is not his intention.
Union leaders say members are unhappy with the current state of affairs. They expected the UAW would give health-care concessions to GM, something the auto maker badly needs. In exchange, the UAW wanted GM to help bail out Delphi by taking back some workers and helping to fund buyouts for others.
Now that union workers are unsure of their fate, some say there might be wildcat strikes at select Delphi plants that could shut down GM's factories. "We get our direction from [UAW headquarters]," says Skip Dziedzic, president of UAW Local 1868 in Milwaukee. "But the sentiment is, as long as GM feels no obligation towards us, maybe some workers will feel no obligation toward them."
READY TO RUMBLE.
The lack of a deal also casts a cloud over GM's ability to get health-care concessions from the union. GM pays $1,500 per vehicle in health-care costs that competing Japanese carmakers don't have to shoulder. GM wants the union to accept a cheaper health-care plan to cut that burden.
But without a deal to aid Delphi, the UAW may be less inclined to help GM, analysts say. GM has hinted that it could challenge in court the validity of its health-care obligations to UAW retirees if the union does not cut a deal. Says Sanford C. Bernstein analyst Brian Johnson: "Getting concessions outside of a court fight may be impossible."
Miller says Delphi, GM, and the union will continue negotiating in an effort to strike a peaceable deal. If they can't come up with one, all three parties could be in for a nasty brawl. The worst may be yet to come.
Welch is BusinessWeek's Detroit bureau chief
Edited by Phil Mintz