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Delphi CEO Sees Major Downsizing
in Bankruptcy
By Jeffrey McCracken and John D. Stoll,
the Wall Street Journal Online
October 10, 2005
Delphi Corp., the big auto-parts supplier that filed for Chapter 11 bankruptcy protection on Saturday, plans to shut down or sell off a substantial part of its U.S. operations, but is not yet sure if it will ask the federal government to take over its pension obligations, its chief executive said in an interview.
"We have not decided what we will do," with the Delphi pension plan, said Chairman and CEO Robert S. "Steve" Miller. "We want to try and create a company that accommodates our retirees without having [the pension plan] terminated and turned over" to the government's Pension Benefit Guaranty Corp., he said. The company plan is underfunded by as much as $4.3 billion.
The filing in bankruptcy court in New York by Delphi, the largest U.S. auto supplier, is the clearest sign yet that the U.S. auto industry -- and its unionized workers -- are moving toward the sort of slash-and-burn restructuring that was forced on airline and steel workers by major bankruptcies in those industries.
Besides potential disruptions in auto supplies to manufacturers, the filing could force major concessions on Detroit's largest union, the United Auto Workers, while loading additional costs onto already-strapped auto makers. Especially vulnerable is General Motors Corp., the former parent of Delphi, which guaranteed the pensions and benefits of some Delphi hourly workers when it spun the company off in 1999.
Mr. Miller, a 63-year-old turnaround specialist, led Bethlehem Steel Corp. through bankruptcy and handed that company's pension plan to the PBGC. The filing Saturday came after Mr. Miller failed to negotiate a multibillion-dollar bailout plan with GM, Delphi's largest customer, and major wage-and-benefit concessions from the UAW.
In the interview, Mr. Miller said Delphi's troubles will require the company to divest, consolidate or close "a substantial segment" of its 45 manufacturing sites in the U.S. and Canada, which employ 49,000 workers. He said he also plans to renegotiate the contracts and retirement plans of Delphi's 33,000 union workers and 12,000 retirees.
The filing left plenty of questions unanswered. Delphi, of Troy, Mich., did not detail which or how many U.S. plants it hopes to get rid of. The company previously identified 11 U.S. plants that were unprofitable and could be closed or sold.
In addition, Delphi said it would seek in court to terminate health and life-insurance benefits for its retirees in mid-December. But one question to be answered in court is how much of that GM could be forced to pick back up.
Analysts estimated GM's obligation for retiree benefits at somewhere between $1.6 billion and $6.6 billion. The company's tab for pensions for those retirees could run an additional $3 billion to $4.5 billion if Delphi terminates its plan, analysts estimated.
GM said in a statement that Delphi's filing did not automatically trigger any of its pension or benefit guarantees, and that its ultimate exposure could run anywhere from "no material financial impact" to about $11 billion. The company said an amount close to the midpoint of that range is considered more likely than either end of the range, but that it is "not presently able to estimate the amount" it may be obligated to pay.
Mr. Miller said "it is not inevitable" that Delphi's filing will spur others in the beleaguered auto sector. A half-dozen suppliers have preceded his company into Chapter 11 protection.
But if the Big Three auto makers -- GM, Ford Motor Co. and DaimlerChrysler AG's Chrysler Group -- can't win concessions from the UAW on labor costs, then it is a "very realistic" possibility that they too "will have to use the Chapter 11 process," Mr. Miller said.
UAW officials said they were willing to make concessions to keep Delphi out of bankruptcy, but found the company's demands too high, calling for wage cuts under which UAW members "would not be able to afford a vehicle that our products are assembled into."
In a statement, UAW President Ron Gettelfinger called the filing a "bitter pill." He also criticized Delphi for sweetening the severance packages of 21 top executives the day before seeking bankruptcy protection, a move he called a "disgusting spectacle" at a time when the company is seeking "extraordinary sacrifices" from UAW members.
GM said the Delphi filing provided an opportunity for cost cuts. The auto maker said it now pays about a $2 billion price premium on the parts it gets from Delphi. "A restructuring of Delphi through the Chapter 11 process provides GM with an opportunity to reduce or eliminate that purchase-price premium," GM said.
Mr. Miller said GM and other customers could count on Delphi to continue to operate smoothly as the company moves through the bankruptcy process. And GM said it expects the bankruptcy to have no immediate effect on its global operations.
But some analysts said they expect stutters for the auto maker nonetheless. "There is a very significant supply-chain risk to Delphi and then in turn to GM," said Craig Fitzgerald, a partner at Plante & Moran, a Southfield, Mich., financial advisory firm with about 400 supplier clients. "This is a very fragile supply chain and I just don't see how there can't be production shutdowns after this."
He pointed out that many of Delphi's 3,500 suppliers also supply GM, and estimated that any supplier that gets more than 20% of its business from Delphi is at risk of going under -- causing further disruption in parts supply to GM. Auto analyst Glenn Reynolds, of research firm CreditSights, warned that the UAW could decide to strike Delphi plants that supply GM if the union feels Mr. Miller's contract demands are too onerous.
Delphi's need for help is only one of several serious problems facing GM. Its key North American operations are piling up massive losses, its credit rating was cut to "junk" status earlier this year and it faces a possible further downgrade by Standard & Poor's. At the same time, billionaire investor Kirk Kerkorian has bought a 9.9% stake in the auto maker and has indicated he may seek a seat on GM's board.
Delphi's Mr. Miller expressed disappointment he could not negotiate a bailout from GM and the UAW as he had hoped. He said the two are preoccupied by continuing negotiations to reduce GM's health-care tab, this year slated to hit $5.6 billion.
"GM is occupied by their own discussions with the UAW and we ran out of time," said Mr. Miller.
Delphi is expecting relief from the bankruptcy court, permitting the company to continue to pay wages, salaries and current benefits of U.S. hourly and salaried employees. But Mr. Miller said the company would like to cut hourly wages to "more competitive" levels and is hoping to get cooperation from the auto-workers union in coming months in determining a new wage.
"The unions are being realistic," said Mr. Miller. "They know life has to change and that we can't go on as usual."
GM spokeswoman Toni Simonetti said GM will continue to work with Delphi and others in the proceedings, but "needs to pursue outcomes that are in the best interest of GM and our stockholders." Ms. Simonetti said that GM engaged in serious talks with Delphi, "but we also have a company to run and we have to make money in the end."
Industry experts had estimated that a Delphi bailout could have cost GM between $1 billion and $9 billion over the next several years, which would have significantly squeezed the auto maker's liquidity -- which currently is about $20 billion.
Mr. Miller, who started at Delphi in June, has deep roots in the auto industry and a long track record of overseeing troubled companies -- his area of expertise. He was hired away from Ford in 1979 by Lee Iacocca and became one of the architects of the loan bailout at Chrysler Corp., where he spent more than a decade, rising to chief financial officer and vice chairman.
After leaving Chrysler he took a series of temporary engagements managing companies at or near bankruptcy, serving as CEO for auto supplier Federal-Mogul Corp., Waste Management Inc. and Bethlehem Steel. While at Bethlehem Steel, Mr. Miller was quoted saying that the steel industry was simply going through a process that other once-dominant American industries, such as the auto industry, would soon head down as well.
Doug Fraser, who as UAW president from 1977 to 1983 was one of the people Mr. Miller negotiated with to secure Chrysler's bailout, rejected the theory the auto industry must follow steel and airlines. "I don't accept the premise that it has to be that way," he said. "This is a key historical marker and we need to stop the bleeding, but when you see how well Chrysler is doing now, you have to hold out hope we can avoid what steel and airlines went through."
Mr. Miller, an Oregon native with a law degree from Harvard and an M.B.A. from Stanford, said he hoped Delphi's filing could be a catalyst to "show the rest of the industry," it doesn't need to head the down the same path.
Some auto suppliers have managed to navigate bankruptcy with few signs of turmoil. Tower Automotive for example, went into Chapter 11 last year and has continued shipping truck frames and other heavy steel components to Ford and other customers.
But another recent bankruptcy, at Collins & Aikman Corp., has required auto makers to provide some $330 million in emergency financing to keep the company's plants from shutting down. For a few weeks, one plant supplying convertible roof parts for the Pontiac Solstice, a key model for GM, stopped production, almost forcing GM to halt Solstice assembly.
Delphi said it has secured $4.5 billion in third-party funding to finance global operations and plans to emerge from bankruptcy in early to mid-2007.
The company, which has substantial auto-parts operations in China and Europe, said its non-U.S. businesses weren't part of the bankruptcy filing.
To help facilitate its transition into bankruptcy, Delphi is moving John D. Sheehan from chief operating officer to chief restructuring officer. In his place, Robert J. Dellinger will become chief financial officer, effective immediately. Mr. Dellinger most recently was the executive vice president and finance chief for Sprint Corp., which is now Sprint Nextel Corp.
In the first half of 2005, Delphi posted a net loss of $747 million, after losing $4.87 billion last year. The company spends about $400 million annually to cover costs on about 4,000 laid-off workers.
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