Delphi spinoff was a spiral of disaster
Costly Chapter 11 mess continues to haunt frustrated former parent GM
Photo credit: REUTERS
But it didn't take long for the enthusiasm to fade, says Don Runkle, Delphi's former vice chairman. He joined Delphi from GM as part of the spinoff.
The spinoff had two fatal flaws, Runkle says:
1. Delphi inherited GM's package of wages and benefits for unionized workers. So Delphi's labor costs were more than $70 an hour, compared with about $20 an hour at rival suppliers.
2. GM immediately began undercutting Delphi contracts by sourcing the work to other suppliers.
"At the time, Delphi thought it would be a lot better off," recalls Cal Rapson, vice president of the UAW's GM department. "But as it turned out, early on, it was an ugly divorce."
GM is still dealing with its problem child. In 2005, Delphi's U.S. operations entered Chapter 11 reorganization, where they remain. Creditors assume GM will have to provide more assistance to Delphi, and that continues to weigh on GM's stock price.
Goal: More sales
Runkle says Delphi was born of a noble purpose. He says he, J.T. Battenberg III (Delphi's first CEO) and four other high-level GM executives pushed hard for the spinoff starting around 1995.
They believed GM's ownership was limiting growth because competing automakers would not buy parts from GM. At the time of the spinoff, Delphi was almost wholly reliant on GM for sales.
In 1999, the UAW signed its first contract with Delphi. Then-UAW President Steve Yokich insisted on a benefit guarantee from GM. In the event of a Delphi bankruptcy, it required GM to pick up pension and retiree health care for Delphi UAW members. It was binding for eight years after the spinoff.
Ultimately, those guarantees would cost GM billions of dollars.
Delphi's success as an independent company would depend on how quickly it could diversify its customer base and improve productivity, Runkle says. Delphi did both.
In fact, the company was saving $600 million to $800 million a year through manufacturing improvements and better purchasing, he says. Delphi raised sales to non-GM customers from almost nothing at the time of the spinoff to about 47 percent by the time of the Chapter 11 filing in 2005.
But GM was taking business from Delphi and giving it to lower-cost suppliers, Runkle says. That created a huge problem. Delphi had to put the displaced UAW workers in a Jobs Bank, where they collected almost full wages and benefits for not working. Ultimately, the Jobs Bank cost Delphi about $500 million a year, erasing the cost savings.
GM purchasing chief Bo Andersson says the automaker paid Delphi more than the supplier's rivals for similar parts. And Delphi enjoyed a "right of last refusal" on GM business that allowed the parts maker to match competing bids.
"Having that option gave Delphi an opportunity to sustain its business model as long as it did," Andersson says.
|Delphi at a glance|
|Global sales||$22.28 billion (2007)||$26.40 billion|
|U.S. hourly employees||15,000||33,000|
|U.S. factories and locations||9||29|
Runkle says that as Delphi's losses mounted and it became clear that GM's own shrinking market share would prevent the automaker from taking back Delphi workers, he urged Battenberg to convene a summit with the UAW and GM to try to avoid bankruptcy. That meeting never took place.
Runkle, now 63, left Delphi the summer before the Chapter 11 filing.
Delphi spiraled down. Today the Securities and Exchange Commission is suing Battenberg for accounting irregularities at Delphi leading up to the bankruptcy. Battenberg declined through his lawyer to comment for this article.
Steve Miller, 66, a former Chrysler executive, came aboard as CEO just before the Chapter 11 filing.
The supplier has never missed a shipment during the orderly restructuring. But Miller made himself the target of UAW criticism by talking bluntly about the need to eliminate from the contract lawn cutters who were getting $65 an hour in wages and benefits.
Ultimately, Delphi eliminated more than 25,000 UAW jobs, and it plans to shut or sell all but nine of its 29 U.S. factories and technical centers. The new Delphi is a much smaller, largely overseas supplier focused on electronics components. Its 2007 sales to automakers totaled $22.28 billion, about half of that to GM.
Meanwhile, GM's tab rose. Under the pension guarantee, the automaker paid for most of Delphi's UAW buyouts and related restructuring items. That has cost GM more than $7.5 billion to date.
GM also has promised to pay a big chunk of Delphi's nearly $6 billion exit financing package. But any possible exit from Chapter 11 will have to wait until at least 2009 as Miller tries to keep a group of private equity firms together to buy Delphi for about $2.55 billion. Some of those firms are thought to be hoping that GM will pay even more of the cost, sweetening the pot for them.
The subprime lending mess and a collapsing housing market also hurt, closing credit markets before Delphi could line up funds to leave bankruptcy.
Miller, who stepped down as CEO in 2007 and now is Delphi's chairman, declined to be interviewed. Spokesman Lindsey Williams says Delphi cannot arrange exit financing until creditors and the U.S. Bankruptcy Court approve the company's plan of reorganization.
GM is pulling for Delphi to succeed, says Andersson, 52. "All of us here in GM are interested in having a healthy Delphi," he says. "They are, after all, our largest supplier by far."
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