Late last month (26th Sept.), I read a piece in the WSJ which started like this:
ROBERT S. "STEVE" MILLER, the chairman and
chief executive of auto supplier Delphi Corp., says he wakes up every
morning and wonders if he can stave off bankruptcy for another day.
After 12 weeks in the job, he is still finding reasons not to seek
court protection from creditors.
"I make a new judgment every
morning. Do we have enough time left? Are the parties ending up in a
way that might result reasonably in substantial transaction?" said Mr.
Miller, a veteran of bankruptcies at Bethlehem Steel Corp. and auto
supplier Federal-Mogul Corp., in an interview last week. "So far, I
think we might get this done, so I decide let's keep on trucking for
But now he is coming down to the wire. If the Troy,
Mich., company is going to file, Mr. Miller wants to do it before a new
U.S. bankruptcy law takes effect Oct. 17. The new law limits the
control that companies can exercise over their restructuring plans and
comes with untested regulations that could prompt lengthy court
battles. Mr. Miller says he doesn't want to be a "guinea pig" for the
When you read something like this, you know that it was just a matter of when the chapter 11 filing would take place. I don't think that most people realize that this is a BIG deal, and it just portends the shape of things to come for the US auto parts industry and OEMs.
Brad DeLong has reproduced the text of message sent by Steve Miller to the FT. Excerpts:
So what went wrong? Three things:
One: The spread between OEM labour costs and competitive supplier labour
costs has widened sharply over the past decade, driven by globalisation
and by rising health care costs.
Two: The sharp decline in GM market share has reduced GM North American
production volumes by a million units per year, from 5.5 million to 4.5
million units, in the last three years. The impact on Delphi has been to
reduce revenues by several billion dollars a year worth of parts. Given
our high fixed costs and inflexible labour costs, the result has been
Three: The game plan for Delphi included 'flow-backs' to GM of excess
workers at Delphi freed up by improved productivity, The theory assumed
that GM would have plentiful openings due to retirements of its ageing
workforce. But GM's severe production declines have offset its own
workforce attrition, and it has had no room to accept excess Delphi
workers. Delphi has therefore had to pay 4,000 idled workers in its
'jobs bank' full pay and benefits amounting to about $100 million per
A big part of restructuring that takes place in the Chapter 11 process for Delphi will involve negotiations with UAW and other unions. The problems, however, don't end there. Steve Miller did not mess up his words:
Beyond Delphi, things are going to get messy for the Big-3 in coping
with all this. The current labour agreements expire in 2007, and it will
be a historical collision point for all these social and economic forces
that are at work. GM has already declared it can't wait til then to trim
its $80bn of accrued retiree health care obligations. Clearly, they are
headed down the same Chapter 11 path as Delphi, unless there is dramatic
change in their staggering legacy labour burden.
Everybody knows that both GM and Ford are in deep trouble. My personal opinion is that we are all going to have to get used to a lot smaller sized Ford and GM. Big-3 term will soon become a misnomer, if it has not already.
Delphi’s bankruptcy underscores the heavy lifting that still lies ahead for Corporate America and the US workforce. That, in turn, draws into question the relative restructuring premium that has benefited dollar-denominated assets over this period.
Moreover, there is good reason to believe that the US model will now
have to face some new and important challenges of its own -- not just
the pension time bomb symbolized by Delphi but also the downside of
another asset bubble, shifting political winds, new leadership at the
Fed, and the inevitable current account adjustment. This spells unrelenting pressure on US-centric global growth and asset allocation.
I guess, we can't worry about everything that might go wrong in the world, but the next couple of years are going to be rough. Hold tight.