Michigan braces for collateral damage in Delphi battle
DETROIT -- General Motors Corp., Delphi Corp. and the United Auto Workers union are engaged in a perilous, three-way game of high-stakes poker in which the financial future of hundreds of thousands of Michigan auto workers and retirees is at risk.
Industry experts say they are increasingly worried that the three will not reach agreements to cut health care costs at GM and keep Delphi, a former GM-owned parts operation, out of bankruptcy.
Such failures could result in a deepening financial crisis at GM, the loss of tens of thousands more auto jobs in the economically struggling state and a cascade of bankruptcies by struggling smaller suppliers dependent on business from Troy-based Delphi, the nation's largest auto supplier.
"It's hard to glean any good news out of this situation," said Jim Gillette, an auto supplier analyst in the Grand Rapids office of CSM Worldwide.
Analysts and economists say GM, Delphi and other companies must significantly cut their costs to compete with companies in India and China or face extinction.
"The idea that a large, well-established corporation with a household name can't go bankrupt is a casualty of the past," said Patrick Anderson, president of the Anderson Economic Group in East Lansing.
GM Chairman Rick Wagoner said at the company's annual stockholder meeting in June that the money-losing automaker would make big cuts in its annual $5.6 billion health care bill, with or without the cooperation of the UAW.
Labor law experts say unilaterally cutting UAW worker benefits would probably violate federal labor law and put GM at risk of a crippling strike. GM is the state's largest private-sector employer with 77,000 hourly and salaried workers here.
The UAW and GM are negotiating possible concessions. But UAW President Ron Gettelfinger has said repeatedly that he will not reopen the union's GM labor contract, which expires in September 2007.
GM lost $3.3 billion on its North American automaking operation in the first six months of the year. The automaker cited escalating health care costs as a major reason for the loss.
Gettelfinger has hired outside consultants to conduct a financial review of GM and has said he feels "no pressure" to come to a decision on health care givebacks anytime soon.
That may be because Gettelfinger has an even more critical crisis on his hands at Delphi.
Robert S. "Steve" Miller, who was hired as Delphi's chief executive officer in July after the company revealed an accounting scandal, has said Delphi might file for Chapter 11 bankruptcy as early as Oct. 16 unless it can get billions of dollars in wage concessions from the UAW.
"Delphi cannot continue to make parts and components at a $65-an-hour labor cost," said Sean McAlinden, chief economist at the Center for Automotive Research in Ann Arbor.
That figure, which includes the hourly wage and benefits of an average worker, has also been cited by Delphi in its claim that it must cut wage-and-benefit costs by some $2.5 billion.
Miller, a corporate turnaround specialist with a history of putting troubled corporations into bankruptcy and jettisoning their expensive pension plans, has said he hopes to avoid that scenario this time.
The key is reaching a bailout agreement with GM, which spun off Delphi into an independent company in 1999. Delphi says that under the spin-off agreement, GM is obligated to assume at least a portion of Delphi's pension and benefit obligations should Delphi file for bankruptcy.
Delphi is using that agreement as a bargaining chip to get financial assistance from GM to avoid bankruptcy. Delphi has 9,200 hourly workers and 5,300 salaried workers in Michigan.
The federal Pension Benefit Guarantee Corp. said Wednesday it estimates that Delphi's pension fund is short about $5 billion in paying promised benefits. But spokesman Gary Pastorius said it's unknown how much of that gap would be covered by the federal agency in the event of a Delphi bankruptcy.
In an Aug. 8 filing with the Securities and Exchange Commission, GM said it has "limited guarantees" to pay for pensions, retiree health care and life insurance of Delphi retirees. But it also said it can't estimate its financial exposure for Delphi's current and future retirees.
Analysts have estimated that figure to be as high as $10 billion, which GM can ill afford. Delphi has 12,000 retirees.
A Delphi bankruptcy could even interrupt the flow of parts from the supplier to virtually every car and truck model made by GM.
And a bankruptcy filing will likely happen, analysts say, unless GM provides aid to Delphi, which lost $338 million in the second quarter of this year.
"The only way Delphi avoids bankruptcy is if GM comes to the table," said Erich Merkle, senior auto analyst at IRN Inc., a a Grand Rapids-based automotive consulting firm.
But GM has been mostly mum on that prospect.
"At this point there is not much we can say or speculate on," GM spokesman Jerry Dubrowski said.
Merkle and others say it appears GM, the UAW and Delphi are working on a plan that would save Delphi by GM agreeing to take back some money-losing Delphi plants and roughly 7,000 Delphi workers.
Those plants could include the Delphi East parts plant in Flint, Delphi's steering gear operations in Saginaw and its fuel injector plant in Coopersville, near Grand Rapids, Merkle said.
Eventually, those plants could be sold to other suppliers. Ford Motor Co. and its former Visteon Corp. parts operation recently agreed to a similar restructuring of Visteon.
But Gillette, the CSM Worldwide analyst, said he thinks there's a 40 percent chance that Delphi will file for bankruptcy. That's because the UAW has been sending signals that it can't agree to Delphi's stiff demands.
Delphi's stock slumped earlier this week on rumors that Delphi was lining up financing to operate in bankruptcy.
The company wouldn't comment on the rumors. But spokeswoman Claudia Baucus said if Delphi files for bankruptcy, "we're going to be very well-prepared for it."
