Discussion:
Dinosaur dreams and other myths (Delphi, legacy firms, govt health care)
(too old to reply)
Dave Simpson
2005-10-13 00:14:12 UTC
Permalink
Granholm, of course, was a typical Dim Dinosaur representing other
dinosaurs.

"Let them move to Texas."

...

[Detroit News]

Delphi reflects bankruptcy of industrial welfare state

by Thomas Bray


Around Detroit, the bankruptcy of giant auto parts maker Delphi Corp.
is seen as a precursor of what's in store for the entire American auto
industry. More fundamentally, it confirms the bankruptcy of the
industrial welfare state.

The powers of denial ensure it may be some time before our politicians,
unions and even corporate leaders catch up to that fact. Exhibit A was
the knee-jerk rant by Gov. Jennifer Granholm, who pronounced herself
"angry" at Delphi. She then went on to blame the usual catalog of
left-wing villains: "globalization," "outsourcing," "upper management,"
"lack of support from Washington for the industries that made our
country great" and "so-called free trade."

Oh yes, and not enough government spending on health care.

But no amount of foot-stamping is likely to change facts. Among them:
Delphi's 33,000 unionized workers in the United States, like those of
General Motors, Ford and Chrysler, still earn far above the national
average in wages and benefits long after it was clear that this was no
longer sustainable.

Yes, management must share some of the blame. And yes, America's image
of itself, indeed its fabric of life, is so tightly bound to the
automobile that the industry's coming reorganization is likely to be
even more painful than the traumas already suffered by such "legacy"
industries as steel and airlines.

Henry Ford's famous $5-a-day pay brought cars within reach of his
workers. Delphi's proposal for a $10-an-hour wage -- an $80 day --
suggests the end of the American dream for auto workers.

But it's only the end of the dream if you think there isn't anything
better out there, including a thoroughly modernized American auto
industry. That's one reason a savvy investor like Kirk Kerkorian bought
into GM recently. He is betting a way will be found to unlock the value
that still exists in Detroit.

Besides, Detroit long lived in a bit of a dream world. In the 1950s and
1960s, when the rest of the industrial world was still emerging from
the rubble of World War II, Detroit could sell practically every car it
turned out -- and congratulate itself for passing along premium wage
and benefit costs to the buyer.

Pretty soon, though, competitive shadows began to appear -- first the
Volkswagen Beetle, then the Datsun and so on.

Detroit laughed at the upstarts, but now GM's market share has shrunk
to 26 percent of the U.S. market from well over 50 percent. The ranks
of the United Auto Workers have plunged from 1.5 million in the late
1970s to 654,000 last year. Staggering losses have replaced profits,
even amid a robust national economic recovery.

National health care isn't an answer. If it were, Europe would be No.
1. But so costly have Europe's welfare states become that unemployment
is far higher than in the United States.

Nor is pulling up the drawbridge against foreign autos an option, as
Granholm seems to imply. The foreign "transplants" are already well
established (with nonunionized American workers), and American auto
companies are heavily invested abroad (most of Delphi's total work
force of 185,000 is in other countries). A fit of protectionism would
crater the economy on which Detroit depends.

Globalization isn't the enemy. It's simply the messenger, exposing the
rotten structure of the industrial welfare state for what it is, a
lumbering dinosaur that can't see 20 feet ahead of itself. Like the
broader welfare state, to which it is so closely tied through labor,
tax and other laws, the industrial welfare state of the 20th century is
badly overdue for a rethinking.


...

[Houston Chronicle]

"If GM comes out of 2007 with a labor agreement that looks like what
today's agreement is, they are inevitably headed toward Chapter 11,"
Miller said.

Three days after filing the biggest manufacturing bankruptcy in U.S.
history, Miller outlined what he described as a pivotal point for U.S.
industrial society. Delphi's dilemma is "simply a flash point and a
test case" for this crisis, said Miller, who has steered auto
companies, steelmakers and airlines through bankruptcies over the past
two decades.

The very existence of GM, Ford Motor Co. and many Detroit-area auto
suppliers is threatened by the steady increase in wages, health care
costs and pensions that the United Auto Workers union has won for its
members since 1947, he said. Retirement costs were manageable when
workers retired at age 65 and died five years later; they're
debilitating to companies when workers retire at 50 and live 40 more
years, Miller said.

http://www.chron.com/cs/CDA/ssistory.mpl/business/3392399
Dave Simpson
2005-10-13 01:05:05 UTC
Permalink
"I believe this is an inflection point for basic unskilled
manufacturing labor in America," said Mr. Miller. "We are in a global
economy. We pay people well for knowledge. We do not pay that well in
the global economy for unskilled labor."


"The largest threat to the survival of the automobile industry in the
United States are the UAW [Union Auto Workers Union] contract and the
legacy costs [of retired employees] on the one hand, and the management
team that grew up in a rather cushy era in which they enjoyed market
dominance," said Mr. Morici.


"The judgment of the market place is that Ford and General Motors do
not produce cars that people want to buy at a price that will permit
them to cover their costs," he added. "They are unable to cover not
only their legacy [retiree pensions and health] costs, but their basic
costs of production and designing the vehicles."


[The Economist]

Which side are you on?

Delphi's bankruptcy highlights the danger of ballooning legacy
costs-namely pensions and health care-and is further bad news for
its main customer, General Motors. The quicker management and the
unions stop singing and start talking, the better


These are trying times for the Family Buttonwood. Younger Daughter has
been down with mumps. Elder Daughter is down with flu. Buttonwood
herself would probably be down with both except that Delphi has beaten
her to the sickbay.

It's not the fact that America's biggest car-parts maker has
finally taken its long-trailed trip into Chapter 11 bankruptcy
proceedings that demands attention, though it is the largest
manufacturer yet to do so. Those who hoped that Delphi could somehow
squeeze a deathbed concession out of its unions (mainly the United Auto
Workers)-or indeed its main customer and erstwhile parent, General
Motors (GM)-were disappointed but cannot have been surprised. For
years, Delphi has been fighting an unequal struggle against rising
raw-material costs and high inherited labour costs, including generous
pension benefits and open-ended medical coverage. In that, it reflects
in microcosm the problems not only of America's traditional carmakers
and metal-bashers but also of a whole swathe of heavily unionised
corporations.

Delphi hopes that under court protection it will be able to re-engineer
its business, ditching unproductive plants and people (in the United
States but not, significantly, elsewhere) that a restrictive
collective-bargaining agreement now protects. It wants GM to guarantee
monthly purchases of parts worth at least $1 billion, and to persuade
workers to accept $16-18 per hour in wages and benefits instead of the
current $65. One goal is to emerge with a smaller but still vital
business. Another is to avoid throwing up to $5 billion-worth of
unfunded pension liabilities into the lap of the Pension Benefit
Guaranty Corporation (PBGC), says Steve Miller, Delphi's chief
executive, who landed the PBGC with $3.6 billion-worth in 2002 when he
was head of Bethlehem Steel.

At the end of the day, Delphi's move into Chapter 11 seems to have
less to do with its imminent demise otherwise than it does with forcing
the hand of the United Auto Workers and GM. And here the stakes get
bigger, for GM itself is in dangerous territory. In the first half of
this year, the carmaker lost $2.5 billion in North America, where its
market share is fast vanishing. It wants to cut 25,000 workers and hack
back health-care costs from an estimated $6 billion this year, and is
getting nowhere with its unions. It hoped it had got rid of a large
chunk of problems when it spun off Delphi in 1999 and was less
responsive to its main supplier's pleas for help than was Ford (which
agreed to take over some less attractive plants from Visteon). Those
problems have come right back.

Reckoning that GM will not be able to escape a) supply disruptions if
Delphi plunges into open warfare with its workforce and b) some
contribution, perhaps as high as $11 billion, in pensions and benefits
to Delphi's past and present employees, both Standard & Poor's and
Fitch have cut the carmaker's bond ratings to a deeper level of junk.
Interestingly, S&P did not downgrade GM's cash-cow credit arm,
General Motors Acceptance Corporation, sparking rumours that GMAC may
be up for sale. But analysts at Bank of America now rate GM's own
chances of going into bankruptcy at 30%, up from 10% pre-Delphi.

GM still has cash and credit aplenty, but the uncertain outlook for the
firm that once symbolised American capitalism, and for the car sector
as a whole, is once again roiling markets which have plenty of other
things to worry about. Shares fell in the first trading day after
Delphi's announcement, pushed partly by a gloomy announcement from
another parts maker. The cost of buying insurance against default by GM
increased by 10% in the credit-default swaps market. And two rating
agencies said they were likely to downgrade a chunk of collateralised
debt obligations-bundles of notional debt whose risks are sliced up
to suit different sorts of investors-which refer to Delphi credits.

What this all comes down to is how to handle the promises made to their
workers by important companies that now find them awkward-and hugely
expensive-to honour. The combined unfunded liabilities of pension
schemes insured with the PBGC is more than $450 billion, the
organisation reckons. The pension insurance fund itself had a deficit
of over $23 billion when it last looked. Congress has been considering
a bill to shore up companies' pension schemes in various sensible
ways, but it is currently on holiday.

If pension schemes look bad, health-care liabilities are far worse, for
they are not funded at all. Defined-benefit pension funds are anyway
being consigned to the dustbin, in favour of defined-contribution
schemes. Medical liabilities, on the other hand, are spiralling out of
sight. GM is now reckoned to be the largest provider of health care in
the private sector. How is all this to be resolved?

Delphi has thrown into harsh relief some of the basic conflicts in
society today, inescapable trade-offs that we normally turn a blind eye
to in the expectation that endless economic growth will somehow bail us
all out.

Delphi's Mr Miller would have us focus on one: the clash between the
interests of young workers and those of their predecessors. As he put
it stirringly in an interview with the Financial Times,
inter-generational warfare looms "as young people increasingly resent
having their wages reduced and taxed away to support social programmes
for their grandparents' income and health-care concerns". Short of
flinging the oldsters to the sharks, there is no escaping the
demographic trend that has fewer workers supporting more baby-boom
retirees in most of the developed world (and part of the developing
world). The question is whether the burden should fall on workers in
specific firms, on all workers, or on taxpayers in general.

Here's another conflict, though Mr Miller didn't bring it up: the
one between shareholders' and workers' interests. Perhaps GM's
employees, and Delphi's, do not need our sympathy: for decades they
have had the luxury of secure employment and benefits that many in the
workforce would kill for. Perhaps their unions were too greedy-and
too unrealistic-in the deals they negotiated in happier times. Nor
are shareholders in thrilling shape at the moment, with GM's share
price at $26, down from over $40 earlier this year.

But GM was making good money in the 1990s. Like many companies, it
stopped contributing to its pension scheme for a while when the
stockmarket boom was producing what was reckoned to be sustainable
pension surpluses. And at a time when many big corporations were
rewarding shareholders (and, no doubt, executives with stock options)
by buying back company shares, GM was particularly famous for it. If
that money had been put instead into pensions-and indeed into funding
health-care obligations-the problem would be less acute now.

But it is acute, and no amount of finger-pointing will change the
equally unappealing options. A debt's a debt, but a dead company
cannot pay it. Delphi must cut and run, or go under-unless the United
Auto Workers will do a huge deal, losing face but saving jobs. Which
side are you on, brother?


[Business Week -- one month ago]

Spin-Offs That Won't Go Away

Why Delphi and Visteon continue to haunt General Motors and Ford


Like grown children badgering their parents for handouts, auto-parts
companies Delphi and Visteon keep turning up on the doorsteps of GM and
Ford. Spun off from General Motors Corp. in 1999, Delphi Corp. is now
threatening to file for bankruptcy court protection by Oct. 17 if it
doesn't get a truckload of GM's money and union concessions. And
Visteon Corp., spun off by Ford Motor Co. the year after, is dumping 24
mostly money-losing plants on Ford this month as part of its second
bailout in two years.

The two parts makers remain GM's and Ford's largest suppliers, but
there's a bigger reason why the auto makers are still on the hook for
these offspring: Except for their stock, they never completely cut all
ties to make them independent companies. Visteon began life without
full-fledged administrative systems such as payroll, information
technology, and accounting -- it paid Ford to do that work. Next month,
Ford will assume responsibility for the retirement benefits of
Visteon's union workers and GM would pay benefits to Delphi retirees if
the parts maker fails. One industry watcher and consultant, Maryann N.
Keller, says that because so many Delphi executives were GM lifers, the
company was reluctant to drop unprofitable business from GM.

Indeed, Delphi and Visteon -- which together employ more than 250,000
people and book nearly $50 billion in annual revenue -- may have been
destined to fail. GM and Ford lumbered them with huge labor costs while
extracting promises from them to cut their prices. "These companies
were not spun out as viable businesses," asserts Keller. Ford argues
that Visteon did have a fighting chance to succeed, but, like other
suppliers, it was hit by many problems, such as falling Big Three sales
and rising costs for commodities. "A lot has changed in the intervening
years," says Ford spokesman Oscar Suris. GM declined to comment.

Now some of the costs that the auto makers tried to move off their
books are coming right back to them, making the whole spin-off exercise
something of a charade. GM may well have to cough up $2 billion to $3
billion for Delphi over the next couple of years, says Brian A.
Johnson, an auto analyst at Sanford C. Bernstein & Co.. And in agreeing
to take back 24 Visteon factories and their 17,000 workers, Ford said
in May that it will book about $1 billion in restructuring charges.
Ford already took a $1.6 billion Visteon-related charge in 2003. Plus,
the company may have to continue paying part of the wages of union
workers in order to sell the plants to other suppliers. As matters
stand, it expects to lose up to $450 million on the facilities this
year and next. These are burdens that the companies can ill afford: In
the North American market for the first half of the year, GM lost $2.5
billion and Ford $244 million.

"ECONOMIC SUICIDE"

Back at the height of the 1990s bull market, the spin-off stories
sounded swell for both GM and Ford and for shareholders in the new
parts outfits. The auto giants said they would shed highly paid
workers, inefficient plants, and some retirees -- and be free to buy
parts from other companies with lower costs. "There was no logic to
paying those kind of wages for parts [manufacturing]," says one former
Ford executive. "It was economic suicide. Once GM did it, we had to."

And at Delphi and Visteon, profits were rolling in and balance sheets
were healthy, thanks to strong sales of SUV parts and pension plans
that were largely funded by the soaring stock market. Also, both
companies boasted hot new technologies that they said would attract
orders from the likes of Toyota Motor Corp., Honda Motor Co., and other
auto makers once they were independent. And both pledged to boost
business overseas, where they weren't tied down by United Auto Workers
contracts. Visteon Chairman Peter J. Pestillo, a former Ford
vice-chairman and labor relations chief, declared at Visteon's launch:
"This opens the door wide to new business." Visteon's shares jumped at
first, from $13 to $21 in 13 months, before plummeting, while Delphi's
shares fell along with GM's and are now off 75%.

Delphi tried to play down the labor costs in presentations to
institutional investors and analysts during a roadshow. Two analysts
who attended recall that J.T. Battenberg III, a longtime GM official
who recently retired as Delphi's chairman and CEO, argued that Delphi's
average wage was competitive with other suppliers'. Trouble was, the
average included the low rates in Mexican and Asian plants. His point,
says Joseph S. Phillippi, president of consulting firm AutoTrends Inc.
and a former Lehman Bros. analyst, was that Delphi could lower costs by
moving more factories overseas. But Keller adds: "It didn't show that
the bulk of the business was in noncompetitive factories." Battenberg
declined to comment. Delphi said it could not comment without checking
its records first.


SEPTEMBER 19, 2005 · Editions: N. America | Europe | Asia |
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FINANCE

Spin-Offs That Won't Go Away
Why Delphi and Visteon continue to haunt General Motors and Ford

Like grown children badgering their parents for handouts, auto-parts
companies Delphi and Visteon keep turning up on the doorsteps of GM and
Ford. Spun off from General Motors Corp. (GM ) in 1999, Delphi Corp.
(DPH ) is now threatening to file for bankruptcy court protection by
Oct. 17 if it doesn't get a truckload of GM's money and union
concessions. And Visteon Corp. (VC ), spun off by Ford Motor Co. (F )
the year after, is dumping 24 mostly money-losing plants on Ford this
month as part of its second bailout in two years. Advertisement

The two parts makers remain GM's and Ford's largest suppliers, but
there's a bigger reason why the auto makers are still on the hook for
these offspring: Except for their stock, they never completely cut all
ties to make them independent companies. Visteon began life without
full-fledged administrative systems such as payroll, information
technology, and accounting -- it paid Ford to do that work. Next month,
Ford will assume responsibility for the retirement benefits of
Visteon's union workers and GM would pay benefits to Delphi retirees if
the parts maker fails. One industry watcher and consultant, Maryann N.
Keller, says that because so many Delphi executives were GM lifers, the
company was reluctant to drop unprofitable business from GM.

Indeed, Delphi and Visteon -- which together employ more than 250,000
people and book nearly $50 billion in annual revenue -- may have been
destined to fail. GM and Ford lumbered them with huge labor costs while
extracting promises from them to cut their prices. "These companies
were not spun out as viable businesses," asserts Keller. Ford argues
that Visteon did have a fighting chance to succeed, but, like other
suppliers, it was hit by many problems, such as falling Big Three sales
and rising costs for commodities. "A lot has changed in the intervening
years," says Ford spokesman Oscar Suris. GM declined to comment.

Now some of the costs that the auto makers tried to move off their
books are coming right back to them, making the whole spin-off exercise
something of a charade. GM may well have to cough up $2 billion to $3
billion for Delphi over the next couple of years, says Brian A.
Johnson, an auto analyst at Sanford C. Bernstein & Co. (AC ). And in
agreeing to take back 24 Visteon factories and their 17,000 workers,
Ford said in May that it will book about $1 billion in restructuring
charges. Ford already took a $1.6 billion Visteon-related charge in
2003. Plus, the company may have to continue paying part of the wages
of union workers in order to sell the plants to other suppliers. As
matters stand, it expects to lose up to $450 million on the facilities
this year and next. These are burdens that the companies can ill
afford: In the North American market for the first half of the year, GM
lost $2.5 billion and Ford $244 million.

"ECONOMIC SUICIDE"
Back at the height of the 1990s bull market, the spin-off stories
sounded swell for both GM and Ford and for shareholders in the new
parts outfits. The auto giants said they would shed highly paid
workers, inefficient plants, and some retirees -- and be free to buy
parts from other companies with lower costs. "There was no logic to
paying those kind of wages for parts [manufacturing]," says one former
Ford executive. "It was economic suicide. Once GM did it, we had to."

And at Delphi and Visteon, profits were rolling in and balance sheets
were healthy, thanks to strong sales of SUV parts and pension plans
that were largely funded by the soaring stock market. Also, both
companies boasted hot new technologies that they said would attract
orders from the likes of Toyota Motor Corp. (TM ), Honda Motor Co. (HMC
), and other auto makers once they were independent. And both pledged
to boost business overseas, where they weren't tied down by United Auto
Workers contracts. Visteon Chairman Peter J. Pestillo, a former Ford
vice-chairman and labor relations chief, declared at Visteon's launch:
"This opens the door wide to new business." Visteon's shares jumped at
first, from $13 to $21 in 13 months, before plummeting, while Delphi's
shares fell along with GM's and are now off 75%.

Delphi tried to play down the labor costs in presentations to
institutional investors and analysts during a roadshow. Two analysts
who attended recall that J.T. Battenberg III, a longtime GM official
who recently retired as Delphi's chairman and CEO, argued that Delphi's
average wage was competitive with other suppliers'. Trouble was, the
average included the low rates in Mexican and Asian plants. His point,
says Joseph S. Phillippi, president of consulting firm AutoTrends Inc.
and a former Lehman Bros. analyst, was that Delphi could lower costs by
moving more factories overseas. But Keller adds: "It didn't show that
the bulk of the business was in noncompetitive factories." Battenberg
declined to comment. Delphi said it could not comment without checking
its records first.

PREMATURE BIRTH

Right from the start, the U.S. plants of both Delphi and Visteon had a
tough time winning new customers. Because of union contracts, the parts
companies inherited their parents' outsize labor rates -- now $22 an
hour, compared with about $15 at parts companies Johnson Controls Inc.
and Lear Corp.. Adding in benefits, Delphi's workers cost $65 an hour,
says Delphi Chairman and CEO Robert S. "Steve" Miller. That's more than
twice what rivals have to stump up. And if GM and Ford thought their
parts operations were too expensive, so would potential customers such
as Nissan Motor Co. or BMW. Since the spin-offs, additional sales to
other companies haven't offset declining revenues from the parents.
Says Joseph W. Cornell, president of Spin-Off Advisors LLC: "When GM
and Ford did this, you could see that it was more to benefit the
parents than to unleash good businesses that would blossom."

Many of Visteon's problems can be chalked up to its premature birth.
For the first 18 months, Ford wrote the paychecks for white-collar
workers. The company's offices were spread out among 26 different
buildings, forcing managers to drive all over the Detroit area just to
attend meetings. It didn't have a full-blown marketing and sales
operation and had few relationships with other auto makers because it
made 90% of its sales to Ford. Salespeople, to win new customers,
sometimes quoted prices that were too low to cover costs. In the fall
of 2000, Visteon's then-president, Michael F. Johnston, and Robert H.
Marcin, senior vice-president of corporate relations, went to Tokyo to
build ties with Nissan -- and ran into a buzzsaw of criticism from
Nissan's top purchasing executive, Marcin recalled later. The Nissan
official said two Visteon salespeople had visited him that day and
neither knew the other was coming. And he told them that he didn't
believe Ford had relinquished control of the company. He feared that
Visteon would hand over Nissan's product plans to Ford. Says Merrill
Lynch & Co. analyst John A. Casesa: "Visteon never had the tools to
start with."

Visteon still depends on Ford for 65% of its sales and has lost $3.4
billion since 2002. And Ford has been a tough customer: It once gave
Delphi a big order instead of Visteon to save 3 cents apiece on car
stereos that cost several hundred dollars each, says a Visteon
executive.

Freed of its uncompetitive plants, Visteon now expects better times.
Most of its remaining business comes from foreign markets where it
produces parts and doesn't have to deal with the UAW. In fact, Visteon
is now one of the largest makers of interior systems for cars in China.
"Tomorrow is really different for us," crows Visteon Chairman and CEO
Mike Johnston.

Now Johnston's problems are reverting to Ford. Under its plan to unload
or revamp the plants it's getting back from Visteon and to buy out
employees, Ford hopes to reap $600 million to $700 million a year in
lower supply costs by the end of the decade, says Ford Chief Financial
Officer Donat R. Leclair. That's the plan, anyway. Says Leclair: "It
assumes a whole series of things."

DELPHI'S DEMANDS

Though it was far better prepared than Visteon for its kick out the
door, Delphi today is in much worse shape than its rival. It lost $608
million from operations in the first half of the year, vs. $288 million
at Visteon. Its pension plan will eat up $1.1 billion in cash next
year, says Standard & Poor's debt analyst Martin King.

Delphi hired Miller, a turnaround specialist, in June after an
accounting scandal that, in part, involved transactions with GM. He's
calling on GM to foot at least part of the bill for rescuing Delphi,
either by taking workers back, buying them out, or paying Delphi more
for parts. He has also told UAW leaders that Delphi must have a new
labor agreement to cut wages, benefits, and jobs, close plants, and nix
the long-standing practice of paying workers 75% of their wages after
they're laid off. Its 4,000 furloughed workers are costing Delphi $400
million a year, he notes. Says one union official: "He has demanded
everything except making the workers bring their own materials to work
to make the parts." Miller responds: "Should we fail in our discussions
with GM and the UAW, we will have to consider [bankruptcy court]
reorganization."

It turns out that while GM was readying Delphi for the spin-off, it was
also preparing for a quick switch of business away from Delphi. The
parts maker was getting about a quarter of its business from outside
GM; now it's 51%. "We thought we had a good long runway" to exit some
product lines, says James A. Bertrand, president of Delphi's Automotive
Holdings Group, the unit that mostly supplies GM. The group's 11
manufacturing sites are set for restructuring, sale, or closure. The
plants, some making commodity products such as air filters and spark
plugs, account for 9% of Delphi's revenue but most of its losses.
Miller is pushing GM and the UAW for concessions to make the plants
viable. One possibility: GM would give workers a one-time cash payout
of $75,000 or more, and the workers would accept lower wages.

Meanwhile, Delphi has diversified into electronics such as satellite
radio and medical devices. "Delphi is a tale of two companies," says
Miller. "Half is profitable, growing, and a technology leader. The
other half, through its legacy from GM, has costs that are not
competitive."

The ugly half may land the company in bankruptcy court before Oct. 17,
the day that tougher corporate bankruptcy rules take effect. Either
way, Miller says he will transform Delphi. GM's response: "We're in
discussions with Delphi," Vice-Chairman and CFO John M. Devine told
investors on Aug. 30. Then he added: "That said, we'll do what's best
for GM." Of course, that's what GM executives were doing from the
get-go.


[Voice of America]

Delphi Bankruptcy May Signal Deeper Problems for US Auto Industry

by Barry Wood


Experts say the recent bankruptcy of Michigan-based Delphi, the former
General Motors affiliate that is the world's biggest auto parts
manufacturer, may signal deeper competitive problems for the high-cost
U.S.-based auto industry.

Delphi is a huge company, employing 180,000 workers, most of them in
the United States. Delphi's decision to seek protection from its
creditors under the bankruptcy laws sent shudders through Wall Street,
even though normal company operations continue.

Delphi Chief Executive Steve Miller told Bloomberg News his company was
unable to make a profit given its high-wage union cost structure,
including very generous health-care benefits to employees and retirees.

"I believe this is an inflection point for basic unskilled
manufacturing labor in America," said Mr. Miller. "We are in a global
economy. We pay people well for knowledge. We do not pay that well in
the global economy for unskilled labor."

Peter Morici, a business professor at the University of Maryland, sees
the Delphi bankruptcy as a wake up call for U.S. manufacturers,
particularly for the auto industry, saddled with expensive union
contract provisions, including not only wages, but the high cost of
health care and pensions for tens of thousands of retirees.

"The largest threat to the survival of the automobile industry in the
United States are the UAW [Union Auto Workers Union] contract and the
legacy costs [of retired employees] on the one hand, and the management
team that grew up in a rather cushy era in which they enjoyed market
dominance," said Mr. Morici.

That market dominance has steadily eroded during the past two decades
as consumers have increasingly turned to products made by Japanese and
European producers.

"The judgment of the market place is that Ford and General Motors do
not produce cars that people want to buy at a price that will permit
them to cover their costs," he added. "They are unable to cover not
only their legacy [retiree pensions and health] costs, but their basic
costs of production and designing the vehicles."

Mr. Morici believes the high-cost auto industry is facing the same
competitive challenge that earlier afflicted the U.S. steel industry
and, more recently, the airlines.

In his interview with Bloomberg News, Mr. Miller was asked if General
Motors, until recently the world's biggest industrial company, could
find itself facing the prospect of bankruptcy.

"If nothing changes, General Motors might find itself having to use
Chapter 11," he explained. "But I think they and the UAW are more
responsible than that. And that as they head towards 2007, I am
optimistic that they will find a resolution."

In the case of Delphi, the union (the UAW) was unwilling to accept
pay-cuts in order to forestall bankruptcy. General Motors has been
seeking reductions in its generous company-financed employee health
care program, but the union has been unwilling to accept cuts.

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