After six years of lurching downhill at increasing velocity, Delphi has finally fallen over. The rest of the US auto industry now confronts its overdue reform.
The company that was worth $10bn on flotation had collapsed to a few hundred million on Friday and is now worth whatever the Chapter 11 administrator says it is worth. The reducing share price has been progressive since flotation.
The event brings to an end the extraordinary attempt by General Motors to dump its internal problems on equity investors rather than fixing them. Now GM will confront its worst nightmares all over again as the administrator, 45-year-old Robert Dellinger, calls on everyone who owes money to Delphi.
According to the debt market GM probably holds some Delphi debt, there is inter-company debt of at least $1.2bn, and the legacy costs – the responsibility to ex-GM employees who remained on the GM payroll when Delphi floated as a separate entity – could be up to $10bn. Some of these liabilities now crystallize.
Interestingly €10bn was exactly the value that Delphi was first ascribed by the stock market when GM came to sell. In other words, the whole cunning plan has been a complete waste of time. In the meanwhile, initial buyers of the equity have lost everything.
It would be naive to imagine that there has not been some discussion with Rick Wagoner at GM in allowing Delphi to fail. As GM takes half of Delphi’s output, the alternative would have been for GM to bail out its supplier by paying more for its purchases, and then recouping the excess by confronting the leaders of the UAW with its own employment and benefits costs.
We must therefore imagine that though the situation is hideous it is agreed to have been the least bad solution.
The US is late in dealing with its demons in the auto industry. GM and Delphi are said to be incurring $1,500 a car on legacy costs and paying as much as three times over the odds for semi-skilled labour. All-in costs for senior employees can be as much as €64 an hour. There are 160,000 employees worldwide – a third in the US.
For the industry as a whole, there will be anger that Delphi is now competing unfairly. Chapter 11 is a construction peculiar to the US which allows companies that are broke to go on trading while a fix is sought by the administrator. As with the airline industry, the US allows its dead to go on walking for years.
Just as the problem at Delphi embroils GM, the problems for the two companies together will be fully reflected at Ford and its listed, ex-captive supplier, Visteon.
One thing that both groups have struggled with since flotation has been closing loss-making subsidiaries. So often there was no other source of supply. And writing off assets would just have further weakened already weak balance sheets.
There have been achievements over the last six years of trading as a public company. Delphi has opened substantial facilities in low-wage cost countries and has spread risk by dealing with far more customers than just the ex-parent. But trusting shareholders who were promised cost saving from renegotiated wage and benefit packages, and from closure of loss-making subsidiaries in the US, have been disappointed. All the time that Delphi’s management was working on these strategic imperatives, car assemblers – including GM – were turning the screws on prices paid for components.
All employees in Delphi were offered “founder” shares in the new public company and between them own 8% of the stock. This was one of the measures which advisors believed would allow Delphi to disengage from the tyranny of the UAW.
It never worked. And now the vision of a shareholder democracy flips into employee disaffection.