General Motors Death Watch 63: GM RIP

31 March 2006
By Robert Farago

[As read by Robert Farago]




At 9:30am this morning, a group of lawyers representing bankrupt auto supplier Delphi will appear in front of a federal judge. The lawyers will file legal motions for Sections 1113 and 1114. It’s a legal request to void Delphi’s current collective bargaining agreements with the United Auto Workers (UAW). The moment the judge says the word “granted,” he will terminate the wage structure, post-retirement health care and life insurance plans for the company’s 33k US hourly workers. The UAW will respond with a strike against Delphi. Starved of its former subsidiary’s parts, GM’s assembly lines will fall silent. The General will begin its final slide into Chapter 11.

There will be a gap between Delphi’s filing, the judge’s final ruling (May 9th) and industrial action. During this highly fraught interregnum, Delphi President Steve "Quotation Marks" Miller may make a fourth wage and benefits offer to the UAW. The proposal would fall somewhere between the workers’ current compensation ($27 per hour) and Miller’s last last stand ($16.50 per hour). As we’ve said before, the UAW will accept nothing less than the status quo, and that’s somewhere where Miller won’t go-- at least not without GM footing the bill. Common sense says if GM CEO Rick Wagoner was going to ride to Delphi’s rescue, he would have done so already. Chances are he can’t.

Analysts estimate that the General’s got about $20b lying around. Take away the $10b GM needs to run its business, add in its line of credit, discount its line of credit (the company just got locked-out of $5.6b worth of previously available funds), add in recent and upcoming sales of overseas assets (including Isuzu), discount the cost of recently announced worker buyouts and plant closures, add back the cost of worker buyouts (it’s unlikely that many workers outside the infamous jobs bank will take-up GM’s offer), discount ongoing losses from its automotive operations, ponder the possibility of more “accounting adjustments,” throw your hands in the air regarding the possibility of GM selling majority interest in its GMAC finance unit (The General's only remaining lifeline), and you’d be forgiven for wanting to check Rabid Rick’s wallet.

GM's inability/reluctance to pay off Delphi’s UAW work force may be the clearest indication of The General's true financial situation. In fact, despite a stock price still hovering around $20 a share, the world's largest automaker could very well be worthless. I write that with some trepidation. I’m aware that any large institution in extreme financial crisis is susceptible to the fatal effects of negative perception. So much so, it’s entirely possible that GM’s fate will be sealed somewhere well away from federal bankruptcy court, by someone who simply loses faith in The General’s future.

For example, the automaker relies heavily on sales to rental fleets. As much as 15% of GM's US production heads off to these discount buyers (roughly 600k vehicles). All of the purchases are financed by large banks, who lend money to the fleets based on the strength of GM’s buyback guarantee. All of these banks have industry analysts who now admit (if not actually forecast) the possibility of a GM bankruptcy. Should the banks suddenly decide that GM's buyback guarantees are meaningless, financing for GM products would dry up quicker than the Mojave Desert after a light drizzle. Without rental sales, well, as TTAC’s Deep Throat eloquently puts it, GM would soon be Tango Uniform.

Alternatively, GM’s suppliers could be its ultimate downfall-- a poignant reversal given how harshly The General has treated its parts-providing “partners.” While GM’s biggest suppliers aren’t anywhere near as short-sighted as the UAW (i.e. they know better than to kill the golden goose, no matter how pitted and pathetic it may seem), a smaller, mission critical, non-GM dependent supplier could look at the lay of the land, get up its gumption, and refuse to give GM credit on terms. GM would have to put cash up front for its parts. Once news of the deal got out, all of GM’s suppliers would seek similar protection. GM couldn't survive this “run on the bank” scenario.

And so it goes. As anyone who’s been following this story knows, we’re at the point where if it's not one damn thing, it’s another. Critics who call for Wagoner’s head are missing the point. GM has expended all its capital: political, creative, financial, moral and, now, psychological. When I started this GM Death Watch, TTAC was one of the few places where the words “GM” and “bankruptcy” appeared in the same sentence. Those days are gone, and it’s not our fault. Time and time again, GM had their chance to do the right thing. To stand up, admit their failures and change their business. Now, it’s too late.

General Motors chief executive Rick Wagoner says his company disagrees with Delphi Corp.'s request today to void union contracts as part of Delphi's bankruptcy reorganization.


GM said it "expects Delphi to honor its public commitments to avoid any disruption in GM operations." General Motors accounted for about half of the autoparts maker's $29 billion in revenue in 2004. Delphi's plan is to close or sell 21 of its 29 U.S. plants.
Delphi’s moves carry huge risks: It may lead to a strike by unionized workers at Delphi that could cripple the U.S. auto industry and push GM, closer to Chapter 11 bankruptcy.

In Indiana, the 5,500-employee Kokomo operation would be among the plants salvaged. Delphi didn't name the plants it wants to close, but the future of the 1,000-employee Anderson facility is in doubt. The United Auto Workers said this morning that a strike against Delphi was virtually impossible to avoid if Delphi's plan is approved by a federal bankruptcy court.

Anderson mayor’s office spokeswoman Connie Smith clung to some hope on Friday, saying the plant does work for the Kokomo plant, which might enhance its chances of keeping some jobs.

“That could mean Kokomo and its associated facilities, which Anderson is, will remain viable,” she said.

The head of Anderson’s United Auto Workers local, however, said the deal Delphi was seeking to negotiate with the union made that unlikely.

“It is probably the end of a Delphi presence in Anderson,” Rick Zachary, president of UAW Local 662, told The Herald Bulletin for a story today before Delphi released the list.

GM already is struggling with declining U.S. market share and spiraling costs and is in the midst of its own restructuring. But a strike would hurt other companies and smaller suppliers as well, since Delphi supplies every major automaker, including Ford Motor Co. and Nissan Motor Co.

GM said it will continue negotiating with Delphi and its unions. But the United Auto Workers blasted the move and said it could stall talks.

“Indeed, today it appears there is no basis for continuing discussions,” the UAW said in a statement.

GM shares fell 42 cents, or 2 percent, to $20.64 in morning trading on the New York Stock Exchange, while Ford lost 12 cents to $8.04. Nissan’s U.S. shares lost 31 cents to $23.74 on the Nasdaq Stock Market.

Delphi, the largest U.S. auto supplier, said it is filing a separate motion asking the court to reject some unprofitable contracts with GM. Delphi also said it will freeze its hourly and salaried pension programs later this year and move employees into a defined-contribution plan.

“We are clearly focused on Delphi’s future,” Delphi Chairman and CEO Robert S. “Steve” Miller said in a statement. “Emergence from the Chapter 11 process in the U.S. requires that we make difficult, yet necessary, decisions.

Troy-based Delphi filed for bankruptcy in October and intends to emerge from court protection during the first half of 2007. Delphi said it wants to exit certain product lines and sell or close noncore plants by 2008.

Delphi’s motion to void its labor contracts was widely expected; the company had delayed similar motions three times before. The company says it was saddled with uncompetitive labor agreements when it was spun off from GM in 1999 and wants to cut the wages of its 34,000 U.S. hourly workers as part of its restructuring.

Delphi, GM and its unions spent months negotiating but were unable to reach a wage agreement. Under its most recent proposal, which was rejected by the UAW and other unions, Delphi proposed dropping pay for current hourly workers to $22 per hour from $27 per hour through September 2007, then to $16.50 an hour, but that would include a one-time payment of $50,000.

“Delphi’s misuse of the bankruptcy procedure to circumvent the collective bargaining process and slash jobs and wages and drastically reduce health care, retirement and other hard-won benefits or eliminate them altogether is a travesty and a concern for every American,” the UAW said in a statement. It represents 24,000 Delphi workers.

The International Union of Electronics Workers-Communications Workers of America, which represents around 8,000 Delphi workers, also said it was disappointed in the filing.

“It further hinders a very difficult process in reaching an acceptable agreement,” said Henry Reichard, chairman of a union board that represents plants in Ohio and other states. “We will not be threatened or intimidated into accepting an agreement that dismantles our plants and devastates our membership.”

Delphi said it plans to keep negotiating with GM and its unions, and some analysts have said the added urgency could help the parties reach a deal.

Judge Robert Drain has scheduled a hearing on Delphi’s request for May 9-10 and won’t decide whether to void Delphi’s contracts until after that hearing. If Drain allows Delphi to void its contracts and Delphi does so, the UAW and other unions have threatened to strike.

Delphi said it also plans to cut 25 percent of its salaried work force, or around 8,500 workers, including up to 40 percent of its corporate officers. Delphi said that measure should save $450 million per year.

The company has identified eight U.S. plants that are considered critical to its U.S. operations. They are located in Brookhaven, Miss; Clinton, Miss.; Grand Rapids, Mich.; Kokomo, Ind.; Lockport, N.Y.; Rochester, N.Y.; Warren, Ohio; and Vandalia, Ohio. Delphi said those plants will focus on product lines such as safety features, electronics, diesel and gas powertrains and climate control products.

Twenty-one other plants that do not make core products — including those that make brakes and chassis, instrument panels, door modules and steering components — will be sold or closed. Delphi said it will provide further details on those plants in its filing, but they include plants in Dayton, Ohio, Saginaw and Flint.

“We believe many of these product lines have the potential to compete successfully under new ownership that has the resources and capital to invest in them,” Delphi President and Chief Operating Officer Rodney O’Neal said in a statement.

Delphi said it will ask the court to reject unprofitable contracts with GM accounting for around half of Delphi’s annual volume with GM. Delphi said the judge is expected to consider the motion on May 12, which gives both companies time to continue negotiating prices.

“We simply cannot continue to sell products at a loss,” Miller said.

In addition, Delphi sent a letter to GM Friday that will begin the process of resetting terms for more than 425 commercial agreements that have expired since Delphi filed for bankruptcy. Those terms will be negotiated outside of bankruptcy court.

Delphi also said it will freeze pension benefits for hourly workers on Oct. 1 and for salaried workers on Jan. 1 and will replace them with plans that require employee contributions with company matches. Workers will still have access to any accrued benefits.

The company may ask for relief from the Pension Benefit Guaranty Corp., the Internal Revenue Service and possibly Congress so that when it emerges from bankruptcy protection it won’t immediately owe billions of dollars to its underfunded pension plan. The company expects it will take at least six years to fully fund its pension plan.

Despite unions’ fury at Delphi’s wage proposals, Delphi said it is encouraged by its progress in negotiations so far and hopes to reach an agreement outside of court. GM’s cooperation in a settlement is key, since Delphi would depend on GM, its largest customer, to supplement its wage offer or provide benefits. For example, in Delphi’s latest proposal, wages would fall to $12.50 an hour if they weren’t supplemented by GM, the UAW said. GM has said a Delphi settlement could cost it between $5.5 billion and $12 billion.

Delphi, GM and the UAW did agree last week to a buyout offer for approximately 17,000 U.S. hourly workers. Under that agreement, workers will be eligible for a lump sum payment of $35,000 to retire. Also, up to 5,000 Delphi workers will be eligible to return to GM.