In a small airless room hidden within Delphi Corp’s high-tech booth at the Frankfurt motor show last week, newly-appointed chairman and CEO Robert ‘Steve’ Miller talked openly about the financial difficulties the auto parts supplier now faces and the importance of finding a solution by 17th October. Matthew Beecham reports
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What’s the big deal?
Since its spin-off from GM in 1999, Delphi has managed to reduce its dependence on the carmaker. In the second quarter of 2005, GM accounted for less than 50% of its global business. While some of that has come from growing its non-GM auto business and diversifying into other fields such as medical, recent cutbacks in GM vehicle production contributed.
On the flipside, the parts supplier has struggled under the high wage, retirement and healthcare costs in the US. Escalating medical costs, lower interest rates, a collapse in the stock market combined with retired workers living longer has meant that Delphi must account for higher future retirement obligations. Delphi reported a net loss of $US338 million for the second quarter of 2005 compared to net income of $143 million a year ago. The result includes $49 million in restructuring-related charges. In a bid to stem the losses, the company’s restructuring plans include shedding 8,500 jobs this year, most of whom are UAW (United Auto Workers) union members.
In addressing these problems, Delphi’s management are discussing with union leaders about how to implement a restructuring plan and secure GM’s financial support. Miller said: “If these discussions do not lead to the implementation of a plan that addresses our existing legacy liabilities and the resulting high cost of US operations, we will consider other strategic alternatives, including Chapter 11 reorganisation for our US businesses, to preserve the value of the company and complete our transformation plan.”
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By GlobalDataEnough is enough
“We can no longer continue to support the losses that are caused by those high labour costs in the US,” said Miller. “We are in constructive discussions with our principal unions. They understand the issue and are dealing with it in a responsible way. We are also in discussions with General Motors to support any financial requirements we would have to facilitate the transition of the workforce from high cost to competitive cost structure.”
Miller declined to quantify the kind of labour cost reduction required, saying it varies plant by plant. “In each component we make, we need to have a competitive wage structure. We are paying between $65 and $70 per hour for our workers. That includes all the benefits. But there are other US-based suppliers who compete with us who are paying $15 – $25 per hour. So that is a big explanation of our problem.”
Yet Miller is confident he can nip things in the bud. “We are going to fix the labour cost problem,” he said thumping the desk. “That is true whether we are able to achieve an agreement with the unions and with GM or alternatively we would consider using the Chapter 11 process to achieve that result.”
What’s on the table?
Although Miller declined to go into the finer details of Delphi’s discussions with the UAW union, he emphasized the importance of his workforce to either accept a much lower wage and benefit contract or take retirement if eligible. “In order to encourage our workforce to make that change, we might have to give them one time payments,” he said. “Those one time payments could amount to several million dollars.”
He added that he was asking GM for financial assistance to help fund it.
“There is a second way that GM can help,” he added. “Under the agreements which have existed since the time of the spin-off, the plan was that GM would take excess workers back from Delphi. But General Motors has been reducing production and therefore not had the space nor need to take back those workers. We have ended up as part of our financial problem, paying workers full wage and benefits even though there is no work for them to do. It is costing us about $100 million per quarter to pay for 4,000 workers we don’t need. So another solution to our problem – besides getting financial assistance from General Motors — would be if they found a way to take back workers that we don’t need.”
So why would GM be so nice Mr Miller?
“The reason is that if we fail – and we have a financial problem and are unable to take care of the retirement pensions and healthcare for our workers – then by agreement between GM and the unions, General Motors will have to make it up. Therefore General Motors wants to help us find a solution and is willing to contribute to the solution so as to avoid the big penalty that they would otherwise incur if we fail.”
Chapter 11: the Delphi way
One of Miller’s main aims while at the Frankfurt show was to spend time reassuring Delphi’s customers that whatever the future holds, it will be business as usual. Raising his voice over the ritualistic wall-to-wall thumpin’ pumpin’ music of neighbouring motor show booths, Miller boomed: “Chapter 11 is nothing more than a process. It does not change any underlying economics. It does not require any change in your business strategies. It will simply be a tool to deal with our labour cost issues in the US if we choose to utilize the Chapter 11 process.”
He noted Collins & Aikman’s recent experience of Chapter 11 proceedings both in the US and Europe, suggesting that the interior parts supplier had caused problems for automakers, requiring significant financial assistance from them to keep production going.
But if Delphi did file for Chapter 11, Miller would take a different approach. “What I have pledged to our customers is that if we were to utilize the Chapter 11 process to resolve our US labour issues, there will be no disruption in our production. There will be no change to our commercial contracts with our customers and no request for changed pricing terms. In other words, they can [expect] to continue to deal with us in confidence. The Chapter 11 process would be limited to the US entities. Therefore our profitable European operations would not be involved in the Chapter 11 process at all.”
Miller also stressed that there would be no adverse impact on its financial or human resources that it applies to its European businesses. In fact, quite the opposite could occur. “As a result of utilizing the Chapter 11 process, we would expect to be able to invest more aggressively than we have in the past when we have had to use capital to support the losses in the US,” he added.
Over the past five years, Delphi’s European sales revenues have grown by more than 50%. Last year, this business received new contracts totaling over $7 billion.
If the company does file for Chapter 11, the rules state that the current board and management team may remain the managers of the company while it works its way through Chapter 11. In the event, Miller confirmed his intention to see it through and continue to make investments to support the carmakers.
Why is 17th October so important?
On 17th October, a new bankruptcy law that controls Chapter 11 proceedings swings into force in the US, marking the first radical shake-up for 30 years. The new law means that for any company that files for Chapter 11 after 17th October will be duly governed under the new rules. If they file on any day before then, they can conduct their entire Chapter 11 case under the existing rules.
The point is that the current rules have all been tested in the courts. Everyone knows what they mean. Miller is concerned that if Delphi files for Chapter 11 after 17th October, they could be propelled into a period of uncertainty, potentially involving millions of dollars in litigation to resolve unprecedented situations
But there are other reasons why that date is so important.
The new regulations also introduce a change to the way in which federal law treats a company’s trade creditors. It has the impact of greatly reducing the liquidity of a company that goes through Chapter 11 under the new rules, giving those companies less flexibility to work their way through a Chapter 11.
Another point relates to limiting the time a company may be immersed in Chapter 11. The new law stipulates that the ‘debtor in procession’ (i.e. the company that files) will have 18 months to get approval for its plan of reorganization. If it fails to do so then any creditor can submit to the court a different plan of reorganization. The theory is that it will shorten up the bankruptcy process.
But Miller is also fearful that if nothing were to happen for 18 months, chaos would ensue with all kinds of competing plans.
So that is why Oct 17 is a red letter day for Delphi executives and other big companies such as Delta Airlines and North West Airlines currently considering Chapter 11.
Time will tell
Miller wrapped up saying that 17th October is not an absolute deadline but very important consideration. “We will have a judgment to make in the middle of October as to whether we have enough confidence that we will get a satisfactory agreement with the unions and with General Motors or whether we should utilize the Chapter 11 process instead.”
