Saving Delphi

In ancient times, Delphi was a sacred shrine that held enormous power over the Greeks. Visitors came to it from all corners to seek wisdom from the god Apollo, who foretold the future by speaking through a prophetess. The answers would dictate everything from declarations of war to the planting of crops.

Today, the U.S. auto industry can only hope Delphi is not the oracle of its future. The nation's largest auto supplier, which no longer can lay undisputed claim to that title worldwide, has lapsed into bankruptcy under crushing legacy and operating costs and potentially could drag some of its smaller Tier 2 and Tier 3 suppliers with it.

Some industry watchers suggest Delphi Corp.'s bankruptcy model could be followed by one or more struggling Detroit auto maker. At the very least, it could severely impact the standing of the United Auto Workers union and establish the roadmap for what could be the most contentious labor negotiations in decades in 2007.

Only a few short years ago, the gods were smiling on Delphi. How did things go wrong so quickly?

In 1995, General Motors Corp. executives, eager to exit the parts business, opened their history books and borrowed the Greek name Delphi for what would become the largest, most knowledgeable auto supplier the world had ever seen.

“Today, as auto makers are faced with intensifying market pressures, Delphi is becoming known as the place for OEMs to come for insight on the state of leadership in the field of automotive supply and technology,” the company declared in the 1999 Fact Book following Delphi's New York Stock Exchange debut on Feb. 5, 1999.

The swagger was palpable. Competitors took notice of this $28 billion juggernaut that had a lock on business with its former parent, GM, and threatened to conquest sales as it pounded the pavement to land new customers not only in the U.S. but in every major market in the world.

The patrician J.T. Battenberg III, a GM veteran who led Delphi's precursor, the Automotive Components Group, since 1992 and became chairman, president and CEO of Delphi, embodied the spirit of the enterprise.

He knew Delphi had to set its sights well beyond low-tech, commodity auto parts, and he pushed technology at every front: electric power steering, common-rail diesel fuel injection, advanced cockpit modules, electronics, satellite radio and vehicle stability control, to name a few.

And, recognizing limited growth prospects for auto suppliers during a time of massive consolidation, Battenberg pushed the company to look beyond the auto industry — to consumer electronics, commercial vehicles, medical supplies, motorcycles, computers and aerospace.

For a while, it all seemed to make sense. Delphi's stock opened at $17 in 1999 and for three years remained relatively stable. The strategy was sound, with one colossal flaw. Battenberg was incapable of confronting or even publicly acknowledging Delphi's biggest problem: labor costs.

When Delphi split from GM, it agreed to continue paying its 42,500 U.S. hourly employees represented by the UAW at the same rate as union brethren at Big Three vehicle assembly plants, based on the master agreement.

Immunity from union pay cuts was the ransom Delphi paid the UAW for labor peace during the signing of the 1999 collective-bargaining agreement. The union had gone on strike for 54 days in 1998 in Flint, MI, at a GM Metal Fabricating plant and a separate Delphi component facility. The strike was a backbreaker and cost GM some $2 billion.

The union clearly was sending a message of disapproval for GM's plan to spin off Delphi or, worse, to outsource components to other lower-cost suppliers, which would cost the UAW thousands of jobs. That anxiety also contributed to earlier strikes in 1995 in Flint and 1996 in Dayton, OH.

If Battenberg ever thought Delphi's U.S. labor issues eventually would overcome the company, he rarely said so publicly. Throughout his tenure, Battenberg was eager to talk about the breadth of Delphi engineering, the tremendous strides in product quality and the mission to make the supplier lean and much more efficient.

Delphi shed about 18,000 U.S. manufacturing jobs after the 1999 spin-off and soldiered on, never asking too much from the union for fear of another labor strike.

“The assumption that we're an expensive-wage UAW company is absolutely wrong — 180 degrees wrong,” Battenberg told Ward's in July 2001. “I think it's one of the most competitive in the world actually,” he said of Delphi's labor model.

During contract talks in 2003, when industry observers assumed Delphi would seek a less-expensive pact separate from the Big Three, the supplier ultimately accepted the terms of the UAW master agreement.

Meanwhile, Delphi's key competitors were well positioned to take business away. None of them (except Ford Motor Co. spin-off Visteon Corp.) paid master-agreement wages, and many had non-union plants with a fraction of the labor cost.

Even those competitors with UAW facilities in the U.S. were paying the prevailing “supplier” wage scale, which in some cases was less than half Delphi's rate. The level of wages and benefits at Delphi (and Visteon) reached $65 per hour in some cases.

After four years, the Delphi swagger was giving way to anxious pacing.

On a cold day last December, Battenberg gave an uncharacteristically icy forecast in a speech to the Detroit Economic Club. “Next year will be tough,” the CEO said, referring to the economy, raw-material prices, overcapacity, health care and pensions.

But not a word about hourly wages.

Six months later, with its battered stock at $5 per share, Battenberg would leave Delphi, retiring at 61 as the company reeled from a far-reaching accounting scandal that cost Chief Financial Officer Alan Dawes and five others their jobs and forced Delphi to restate earnings from 2000 to 2004.

In July, Battenberg's replacement, Robert “Steve” Miller, assumed control of the company and delivered a starkly different message to the media and investors.

For the first time, Delphi management would not only acknowledge its onerous labor costs but would use them as a primary weapon in attempting to restructure the company before it lapsed into insolvency.

Shortly after arriving, Miller spoke of bankruptcy, saying Delphi would end up in Chapter 11 if it could not win meaningful concessions from its U.S. labor unions or if GM did not agree to a financial bailout.

Discussions continued through September, and Miller vowed the bankruptcy filing would occur before Oct. 17, when new bankruptcy laws would kick in and only complicate Delphi's predicament.

In early October, UAW union halls were buzzing as fliers foretold of Delphi's request for hourly pay cuts as high as 63%.

Blue-collar anger turned to moral outrage when it was learned, at the same time, Delphi had sweetened severance packages (from 12 months' pay to 18) for top executives in the event any of them were downsized out of a job.

Virtually overnight, Delphi's problems exploded beyond the insular ranks of the auto industry and onto the national stage.

When the bankruptcy filing came on Oct. 8 — a Saturday afternoon — 38 U.S. cities with Delphi plants had more to worry about than whether their high-school football teams would win a game that day.

The sudden prospect of thousands of lost jobs forced America to confront the reality of a global supply chain that can ship just about any component from faraway lands such as China and Thailand for a fraction of the price of those produced locally.

“These are good, hard-working people,” Miller says of Delphi workers. “They were pursuing the great American dream and thought if they just did their job for 30 years, they could retire and know exactly what they were going to get and be taken care of the rest of their life.”

That dream, however, appears to be coming to an end. “Globalization has swept over them,” Miller says. “They are extremely angry, and they need to lash out at someone. They lashed out at me. I understand it. I forgive them.”

Delphi is not alone in Chapter 11, joining the swelling ranks of suppliers already there. Miller says he believes GM's overwhelming cost pressures ultimately could push it into bankruptcy as well.

“Clearly, they are headed down the same Chapter 11 path as Delphi, unless there is dramatic change in their staggering legacy labor burden,” Miller says. However, he does not consider a GM bankruptcy filing to be imminent, or even likely.

Miller has been here before, seemingly drawn to companies in distress.

He helped craft the federal bailout that saved Chrysler Corp. in 1980. Miller was chairman and CEO of supplier Federal-Mogul Corp., which has spent four years in bankruptcy, from 1999 to 2000 and again from 2004 to 2005.

While chairman and CEO of Bethlehem Steel from 2001 to 2003, Miller presided over the demise of one of America's great steel enterprises. He started at Bethlehem in September 2001, and the company was in bankruptcy a month later.

The Bethlehem case did not end well, with its remaining plants purchased in 2003 by Wilbur Ross's International Steel Group. Employees and retirees lost their pensions. “I had no way to stop it,” he says.

At Delphi, concerns about a similar fate for the pension plan have caused extreme anxiety. Miller makes no assurances the plan will survive the bankruptcy process. Creditors could press for termination of the pension plan. Further clouding the issue is whether GM will shoulder some of the pension burden for Delphi retirees. That matter will be sorted out by the courts.

Meanwhile, Delphi must focus on its U.S. operating expenses, or risk becoming an ancient ruin. Miller insists Delphi's operations overseas are solid, generally profitable and will not be affected by the bankruptcy case.

As of late October, Delphi had submitted written proposals for wage and benefit concessions to its U.S. labor unions. Details have not been disclosed, but Delphi has said it cannot afford to continue paying hourly wages of $30 or more.

Instead, it wants to pay what other suppliers pay at union and non-union shops: between $10 and $20 per hour. UAW locals report Delphi wants to pay hourly wages below $10 an hour.

The UAW and other unions received Delphi's contract proposal Oct. 21. The U.S. Bankruptcy Court in New York has given the two sides until Dec. 16 to reach new contract terms. Without an agreement, Delphi says it will file a motion to nullify the current contract and to eliminate retiree medical and life-insurance benefits.

“Delphi's proposal is designed to hasten the dismantling of America's middle class by importing Third World wages to the U.S.,” the union says. “The proposal faithfully reflects a vision of an America in which an elite few live in luxury while everyone else struggles to make ends meet.”

UAW President Ron Gettelfinger says the union is getting too much blame in the crisis. “From the outset of talks about a possible bankruptcy filing, Delphi made it clear that the UAW, alone, could not solve the company's problems,” Gettelfinger says.

Delphi's move to extend severance packages from 12 months to 18 months for the company's top executives angered the union chief, who called the move a “disgusting spectacle.”

In response, Miller says he will forfeit his $1.5 million annual salary as of Jan. 1 (while keeping his $3 million signing bonus). Plus, 20 Delphi officers are accepting 10% pay cuts. Delphi President Rodney O'Neal is taking a 20% cut in salary.

Still, Miller is not backing down from the union. Unlike Battenberg, he complains openly about the UAW Jobs Bank, which guarantees pay and benefits for union members downsized out of a job.

The program began in the 1980s as Detroit, ironically, pushed for more efficient plants. The Detroit News recently tallied up 12,000 UAW members in the Jobs Bank. Of those, 4,000 belong to Delphi, which has spent $200 million in the last two quarters to support the program.

The UAW rank-and-file resents the Delphi situation and is talking strike. Miller says any plant on strike will be that much more attractive as a closure target.

Lost in the bankruptcy shuffle is the tremendous efficiency gains made by certain Delphi plants in the U.S. over the years, says Harbour Consulting President Ron Harbour, an expert on manufacturing.

Years ago, Harbour visited Delphi's sprawling Saginaw, MI, facility, which produces steering components for several customers, including Toyota Motor Corp.

“They didn't get Toyota business from good luck but because they were competitive,” Harbour says.

Delphi could spend years in bankruptcy court, untangling a messy financial web. But being competitive — in wages and benefits — is something Miller is demanding at Delphi immediately.

Failure will spell economic catastrophe, like a Greek tragedy Delphi's creators never foresaw.

Bankruptcy Costly, Messy — But Effective

If Delphi Corp. follows the pattern set by other companies in bankruptcy, the No.1 U.S. supplier can plan on spending 18 to 24 months in Chapter 11, and the proceeding should cost the company about $10 million per month, a restructuring expert says.

Delphi has retained several law firms, financial advisors and investment bankers to escort it through court. The case has been assigned to Judge Robert Drain.

In Kmart Corp.'s bankruptcy (from 2002 to 2003), the retailer's professional expenses amounted to about $10 million per month, says Al Koch, vice chairman of Alix Partners, a Southfield, MI, firm that restructures companies in distress. Kmart is roughly the size of Delphi.

A smaller supplier, Federal-Mogul Corp., has been in bankruptcy since 2001. Its legal expenses, alone, have been running $100 million a year.

Delphi's options in bankruptcy court are relatively clear. The company can reorganize and rationalize the U.S. operations or sell some facilities to the highest bidder.

Koch refers to Tower Automotive, which filed Chapter 11 in February and has been consolidating and closing some plants. The same could happen to Delphi in the U.S.

“If Delphi could shut down certain operations or sell them, they will,” Koch says. “Delphi has an obligation to generate as much value as it can.”

The outlook for preserving jobs, however, is murky while Delphi attempts to negotiate concessions with its unions.

When LTV Steel was acquired by Wilbur Ross's International Steel Group in 2002, nearly all the employees lost their jobs.

Ross appears to have set his sights now on cash-strapped interior trim supplier Collins & Aikman Corp., which began its messy bankruptcy case May 17.

His private equity firm, WL Ross & Co. LLC, and Lear Corp. have formed a joint venture to explore combining the interior trim business of Lear and C&A.

Federal-Mogul has been in Chapter 11 due to massive asbestos liability and has carried on day-to-day business without widespread cuts in jobs and facilities.

But Federal-Mogul CEO Jose Maria Alapont offers this advice: “Do your very best to avoid bankruptcy. Even if you're a competitor, stay away from it.”

That may not be an option, however, for some of Delphi's subsuppliers. Koch says it is possible the “domino effect” will lead at least some of Delphi's Tier 2 and 3 suppliers into Chapter 11.

It is likely Delphi's subsuppliers will not get paid for work done before the Oct. 8 filing until after Delphi completes its plan of reorganization, Koch says. For claims that occur afterward, Delphi has arranged large debtor-in-possession loans to assure its suppliers will be paid.

Delphi identifies several significant claims from subsuppliers, including Flextronics Corp. ($40.7 million), Freescale Semiconductors ($22.7 million), Robert Bosch Corp. ($15 million) and Siemens VDO Automotive ($13.6 million).

Delphi CEO Robert “Steve” Miller says the company has more than 4,000 suppliers and received more than 1,000 calls from some of them after the filing.

Suppliers cannot stop shipments to Delphi “without incurring the wrath of the law,” Miller says. “Once we explain that, we find they start shipping. They grumble, and then wish us well in our restructuring.”

Koch calls bankruptcy an “ugly” process. “It's played by people who have sharp elbows who are fighting over the spoils,” he says.

“But the carnage to the economy will be less because the companies will have an opportunity to reorganize themselves or come out with new owners by selling their business. It does the best job of any country in the world at preserving as much as possible.”