GM Rides to Delphi's RescueDavid Welch
In the months leading up to last year's bankruptcy filing by parts maker Delphi, General Motors said it wasn't interested in bailing out its troubled suppliers. GM executives probably knew that was wishful thinking.
After a weekend of round-the-clock talks, sources say that GM (GM) has just about completed a deal with the United Auto Workers union to give early buyouts to its own workers and some at Delphi, GM's former parts unit. The deal is a big step toward avoiding a strike at Delphi that would quickly shut down GM.
Delphi and the UAW would still have to work out a deal to handle wages and benefits for its existing workers and retirees before Mar. 31, when Delphi could file a motion in bankruptcy court to change the union contract. But if the early retirement deal can get enough Delphi workers to retire or go back to GM, Delphi could reduce wages by hiring new workers at a previously agreed upon lower wage. It all depends on how quickly GM and Delphi can get workers to retire, says Sean McAlinden, chief economist at the Center for Automotive Research in Ann Arbor, Mich.
THE PRICE OF PEACE.
The move could cost GM $4 billion to $5 billion in buyout costs and add about $5 billion in retiree liabilities to its balance sheet, says Sean McAlinden, chief economist at the Center for Automotive Research in Ann Arbor, Mich. But the deal could help avert a strike that would also shut down GM, and could save the auto maker money in parts costs in the long run.
Details have not been released, but sources close to the discussions say GM has identified 70,000 workers among its workforce of 110,000 and Delphi's 24,000 employees that can retire in the next two years. GM could offer early buyouts, starting at $35,000, to many of those workers to get them off its payroll and that of Delphi. Officials from GM and Delphi could not be reached. A union spokesman says the UAW had no agreement to announce yet.
The potential deal would add to GM's costs for retirees, however. More that half of Delphi's workers would be eligible to retire under GM's pension plan, putting the auto giant on the hook for their benefits.
IN A BIND.
What does GM get? It's basically goodwill money that keeps the union happy and makes it certain that GM plants and production lines stay open. Analysts have worried that a long strike at Delphi would shut GM down, possibly forcing it into bankruptcy (see BW Online, 03/16/06, "GM's Dwindling Options").
The UAW has had GM in a bind. When GM spun out Delphi in 1999, the auto maker guaranteed the UAW that it would cover some of the employees' pensions, and GM granted workers the rights to take jobs at GM if the auto maker had openings.
In turn, Delphi's strategy was to let GM take workers who earn $24 an hour back to its plants, and then cut its own wage costs by replacing them with new hires making $14-to-$18 an hour and with fewer benefits. But GM's market share kept falling, and the company wasn't able to rehire Delphi workers.
So when Delphi Chairman and CEO Robert "Steve" Miller took the company into bankruptcy last year, he threatened to use bankruptcy court to cut wages to as low as $10 an hour. Since Delphi workers figured they could make $10 an hour almost anywhere, they refused to take the pay cut and threatened a strike.
That's when GM stepped in. The auto maker first hoped to avoid being part of the bailout. But UAW leaders had other ideas, and used the threat of a strike to bring GM to the table.
The potential deal wouldn't be a slam-dunk for GM, however. The only way it will work, McAlinden says, is if in addition to a buyout offer, there are some measures in place to force workers to retire (see BW Online, 3/14/06, "GM and Ford: Roadmaps for Recovery").
For some factory hands, sticking around for another couple of years until they would can retire is more lucrative than even a $100,000 buyout plan. Here's why: GM pays workers most of their salary while they are on layoff. So they could make that $100,000 in less than two years on paid furlough.
But if GM cut payouts for the JOBS bank -- that's Detroit parlance for the paid layoff program -- or forces workers to move even to out-of-state plants instead of getting laid off, there is more incentive to leave. Right now, GM can't make workers move more than 50 miles for another job. Says McAlinden: "Without some hammers in place, GM won't get the retirees they want" (see BW Online, 2/7/06, "At GM, the Kerkorian Effect Already").
Another challenge for GM and Delphi is trimming the workforce at a rate fast enough to cut costs, but not so quickly that they don't have experienced workers to build parts and assemble cars. "We make 20,000 parts a day," says Skip Dziedzic, president of UAW Local 1868, which represents employees at a Delphi catalytic-converter plant in Milwaukee. "If half the people leave, how will they make the parts?"(see BW Online, 12/12/05, "What if GM Did Go Bankrupt?").
It will take time, and it will cost money. Just like most of GM's fixes.