FRANKFURT – Robert “Steve” Miller, president and CEO ofCorp., spoke with Ward's and other journalists after his speech at the Frankfurt auto show Sept. 13.
In his speech, Miller called Collins & Aikman Corp., a Troy, MI, interior trim producer, a “total wreck” when it filed for Chapter 11 bankruptcy protection in May and called C&A a corporate “embarrassment.”
Miller says he took the unusual public stance to reassure customers that a (See related story: Delphi's Miller Assures Customers; Rips C&A)bankruptcy filing – if it should occur in the next month – will follow the letter of the law and will not be disruptive for auto makers or other customers.
Here are excerpts of Miller's comments to journalists.
Q: Why go after Collins & Aikman?
Steve Miller at Frankfurt show.
A: Collins & Aikman has created a fear that any supplier with financial issues will end up impacting the customers' issues like Collins & Aikman did. C&A went in with no money and no plans, created a huge problem for all the customers because they had to scramble to pour in money and resources in order to keep the production running. Without that assembly lines go down.
And I'm not only upset that this (C&A bankruptcy) is an embarrassment for our industry, it has caused people to worry, 'Well, could that happen to Delphi.' So I felt I needed to make it absolutely clear that is not a precedent for us.
Q: And what are your customers saying?
A: What we're hearing is they're worried any supplier with financial issues may turn out to be a disaster like Collins & Aikman. So I wanted to make very clear – and I'm doing this individually with each one of our customers – that whatever happens as we address our U.S. labor costs, it is not going to be done at the expense of the customer. We will ship on time and honor our agreements despite any restructuring that we do, whether in or out of court.
Q: What are the chances of Delphi filing Chapter 11? Is it as high as 50-50?
A: I can't quote odds. The good news is we don't have a whole lot of people we have to deal with. It is our principle unions and GM.
Q: What is the timeframe?
A: There is no deadline. We make a decision every day as to whether we think there is a good chance of finding an out-of-court solution or whether we would have to go into a filing. One important reminder is on Oct. 17, the bankruptcy laws change in the U.S. It's the biggest change in 30 years in American bankruptcy laws, and the change makes it much more problematic and difficult for companies to go through the process.
Q: Are you saying something has to be done before Oct. 17?
A: Not absolutely. We will at least need a pretty firm view of what the solution is by that time, or we would have to strongly consider a filing.
Q: Can you comment on the potential sale of assets?
A: As you know, we sold our battery business to(Johnson Controls Inc.) in June, but there will not be a massive sale of all our activities. We intend to continue to support most of the businesses we have. There may be the possibility of some non-core products that might be considered. But that's premature to talk about at this time. The largest part of Delphi will be the core around which we would build the restructured company. You will see what continues to be one of the world's leading automotive suppliers when we are done here.
Q: What about the assets in the holding company Delphi created? You have had a lot of troubled operations in that holding company for more than two years – that's a long time. Aren't you going to do something with those sooner or later?
A: Yes, it won't take two years to make the next decision. Now that we've set a pattern how to do it, any actions we might take in the future could be done more expeditiously.
Q: Do you think it is more likely we would see closures rather than sales of those operations?
A: The answer to that is really product by product, plant by plant. Very specific. Different products have different needs as to whether labor cost is so overwhelming that it needs to go to a low-cost country. Other components need to be close to their customer and can be efficiently made in the U.S. as long as you have supplier-competitive wages.
Q: Could you comment on the dangers of any kind of a labor stoppage associated with these negotiations with the UAW and how that might affect shipment of parts to GM?
A: Even though what we will have to do will impact our high-cost U.S. workforce, we will try and find a way to do it consensually with the union and get the support of the union leadership. And I think as the union would look at it, they have a significant interest in not further harming GM because that would impact changes to health-care costs and other things that are under discussion between GM and the union.
So I'm quite optimistic we will get through this without labor disruption; we will get through this with full and good discussions. I have high regard for the leadership of our largest union, the United Auto Workers. They are dealing with this responsibly, and I think we will find our way through it, even though it will impact individual members of the union.
Q: Will existing members of the union have to accept wage and benefit cuts?
A: We're not going to have these discussions in the press. We are having them behind closed doors. What we need to do most basically is to have competitive cost structures at our plants. How we get there between wages, benefits, work rules and everything else is on the table for discussion.
Q: But this has been part of Delphi's problem before it was Delphi, when it was still GM's Automotive Components Group. They used red light, yellow light, green light ratings for operations. The reds have been red since they have existed.
A: You've been following it a lot longer than I have, and that is true. When GM created Delphi, they gave us two things: magnificent technology, people, products and so on.
On the other hand, they gave us the curse of what we call OE labor contracts. What has happened over the last half-dozen years since we were spun off is that the differential between OEM labor costs and globally competitive supplier costs has gotten wider and wider, to where it is now unsupportable.
In addition, the GM decline in market share resulting in a million units' reduction in volume over the last several years significantly affects us because we have so much fixed costs on operations that we can't recover them on these lower volumes.
Finally, a big part of the plan was that as the GM workforce matured and retired, we would flow back excess workers from Delphi to GM. Instead, there is no space for them at GM. We have ended up putting them in what is called Jobs Bank, and we are now paying about $100 million per quarter for full pay and benefits to workers who have nothing to do.
Q: How many people do you have in the Jobs Bank right now?
A: Four thousand. So all of these things have combined to put us in the position we're in. We've blown the whistle and said, 'Stop, we cannot continue to support these labor cost penalties, and we need to deal with it now.' I've got the attention of the union; I've got the attention of GM, and we are going to deal with it.
Q: You could argue that at the time of the spin-off in 1999, GM should have recognized that Delphi could not sustain this high labor rate long-term. Do you feel GM shares some of the blame for the state of Delphi today?
A: Everyone understood at the time of the spin-off that we inherited a great asset and a great liability. The great asset was the people and the technology and the products that came with the spin-off. The liability is the labor costs, contracts that were designed to run until 2007.
The game plan was to outrun the labor cost problem by growing geographically to Asia, Europe, South America, and growing new business with customers beyond GM. The company did a very good job. It went from being almost exclusively a GM supplier to, in the second quarter of '05, for the first time GM was less than 50% of the total business of this company. That's a real milestone. So give them good marks for that.
What happened? Three things: The differential between the GM wage and benefit package and the global supplier competitive wage package got wider. Who would have known that? Driven by health-care costs, other economic factors and rapid globalization, the cost penalty got wider.
Plus, GM has lost market share and a lot of volume. The production volumes in the U.S. have declined by about a million units a year – 5.5 million to 4.5 million units. And since we still have such a big business with GM, it hurt us in our inability with our high fixed costs and high fixed labor costs to absorb those reductions in volume.
Third, the relief valve. As we would become more productive and free up excess workers, they were supposed to flow back to GM to replace retiring GM workers. When GM cut their production schedules, even with the retirements, they didn't need any more workers.
The combination of all these things has brought us to the financial issues we now are facing. I don't think the idea was wrong at the time of the spin-off. But for all these reasons I just said, we ran out of time to work our way beyond the problem.
Q: Can you comment on the Securities and Exchange Commission's investigation into Delphi's accounting? Your accounting work internally was done as of July?
A: I officially started this job July 1, and we finished off the investigation on June 30, which included the restatement of (earnings for) all the prior years. We turned everything over to the SEC and to the other governmental agencies involved. And we have no way of predicting what they might choose to do about it. We would say we've cleaned up our act, it's old history. The people principally responsibly no longer work at Delphi, and so we don't think there is any reason for any further action. We said we made a mistake, we're sorry, we fixed it.
Q: Is there some statute of limitations by which time they have to take action or they can't?
A: If they start a proceeding, then the proceeding itself can last for years.
Q: So you are basically sitting and waiting, and they could or couldn't do anything, and it may be years before you know?
A: It could be, but I think the main point is doing the restatement was no doubt a significant distraction to management in the first half of this year. It's over, it's done. We've completed all our work. To the extent the SEC has issues, there will be a very small group of finance and legal people who would deal with it. But the company could focus on how do we fix our business issues.
Q: Will any union agreement have to be put to the rank-and-file for a vote?
A: Yes. If we were to do this on an out-of-court basis, then no doubt the union leadership would seek ratification by the membership based on the significance of what we are talking about.
Q: Do you feel they are preparing their membership for any kind of an agreement?
A: I have read of the meeting they (UAW) had where they brought in all the GM and the Delphi local presidents to talk about where they were on the GM health-care situation and where they were on the Delphi situation. They presented the facts – mind you I wasn't there – in a very frank and stark way: 'These are the issues, Delphi indeed may well have to file Chapter 11 if nothing is done. We believe the case.' You didn't see what I would call defiance and denial. Instead, what I think occurred was very sober recognition that something has to be done.
Q: So will Delphi's top management have to take pay cuts then?
A: We'll see. That's a balancing act. Top management has gone without bonuses for three of the last four years, and the prospect of any bonus in '05, I'd have to say, is remote. We're very far off the path that we intended to be on this year. So bonuses shouldn't be an issue because there haven't been any for so long.
Q: While you are busy talking with your customers and with GM, are you making active preparations for potential bankruptcy filing such as debtor-in-possession financing?
A: I just gave a speech where I said, if we have to utilize the Chapter 11 process, we will be well financed, well planned and well organized. And if you have interpreted that to have any question as to whether we are doing the appropriate contingency planning, you're not listening.
Q: You mentioned Delphi's high labor costs in the U.S. Will you be attempting to move more production to other countries?
A: Yes. The issue with our U.S. labor contracts is there is no flexibility for any change or reductions. And so, for example, we have currently 4,000 workers in the Jobs Bank. We no longer have work for them to do. So in that case, moving the work does not solve the problem because you still have to pay the people. That is one of the things that is being addressed in our discussions with the union at this time.
When we are finished, there will be fewer workers – fewer high-cost workers – in our U.S. plants. One of the things we are talking about is changing the wages and benefits to be competitive with other suppliers. We can no longer wait to deal with the U.S. problem. It is too big, and we are no longer able to support it. We may close some plants. There are some components presently being made in the U.S. that even with reduced wages would not make sense (to keep in the U.S.). They need to go to low-cost countries.
Q: What is significant about the Oct. 17 deadline?
A: It is the date a new bankruptcy law becomes effective. Any company filing Chapter 11 prior to that date will be treated under the rules that have existed for the last 30 years and have been thoroughly tested in the courts and everyone knows what they mean.
If you file Chapter 11 after Oct. 17, then you will be under the new rules. And that's a problem for four reasons. First, it's not been tested; nobody knows what it means. The language is not very clear in the legislation. You're going into uncharted waters. Second, there is a change in the rules that affects your payments to suppliers that has the effect of reducing the liquidity that you would have while you are going through the Chapter 11 process to operate your business.
Third, the law was designed to try to shorten the period of time that people are in Chapter 11 by saying if after 18 months you do not have an agreement with your creditors, then any creditor can propose in the courthouse a plan of reorganization. What I am afraid that means for companies that will file after Oct. 17 is that nothing will happen for 18 months. And you will have chaos.
And the total results will be a worse outcome for the company and a longer period of time to realize it. Fourth, any board of directors considering a Chapter 11 process has to be concerned about retaining the senior management to help the company get through the process.
Under the current rules, you are allowed to make retention awards, which is extra payments to say, 'if you stay and work this through, even though there is no bonus, at least you can be assured you will get a good income.' Under the new bankruptcy law, that is prohibited. And, therefore, there is much higher risk that your senior management will go take jobs somewhere else.
You can still file Chapter 11 after Oct. 17, but it probably will be more difficult for the company to have a successful reorganization.
Q: How is it being an executive specializing in problem companies?
A: This wasn't in my career plan. What I found is that no one ever calls me when things are going well. I joinedCorp. in 1979 with a fellow named Lee Iacocca and others who came from to help Chrysler turn around. That was my first experience in what you would call turnaround or crisis management. And I actually found it quite satisfying – take something that's broken down and make it strong again.
I've retired about a dozen years ago, and I have about nine times gone back to work as a full-time executive to help companies that are in one kind of trouble or another. It is not the career I planned on. But the more of it I have done, the more comfortable I've become.
When I receive a cold call, totally unexpected from a stranger like this one, 'Hello Mr. Miller I represent the Delphi Corp. and we'd like you to consider becoming the CEO,' I have only two questions: Is it worth doing; does anybody care if this company gets fixed? And can I add value; is there something in my experience that can be used here?
In Delphi's case, both of those answers are absolutely yes. We are at a crucial moment for the automobile industry and particularly in North America. How Delphi deals with this will be important not only to Delphi but to the rest of the American automobile industry.
Q: Part of Lee Iacocca's plan to savewas to introduce a new product, the minivan. What will be your new product for Delphi?
A: We announced a bunch of them today (at the Frankfurt show), and we have them on display. In Chrysler's case, that was a recovery driven by some cost reduction but also renovation of product. We have a very different thing here at Delphi. Think of it as two companies – half the company is saddled with historic high labor costs and is losing money.
The other half is a $14 billion to $15 billion company that is making money, growing, high technology, everything you'd ever want. But you can't see it because it gets buried in the losses due to the high labor costs. So we will deal with the high labor costs, and when we have solved the high labor costs, then what is left is magnificent technology.
We pride ourselves on being inventors, and yes there will be a flow of new products every year you'll see here at the auto shows. But lack of product is not our problem.