Delphi Fallout A Doozey

November 4, 2005
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EAST LANSING — No matter in what form Delphi Corp. emerges from Chapter 11 bankruptcy — whether successfully reorganized as a smaller company or as a partially liquidated and consolidated company — the news won’t be good for the state because Delphi fuels Mid-Michigan’s economy.

An economic impact study released Monday by Anderson Economic Group of East Lansing goes into shocking detail about the likely impact of Delphi’s bankruptcy on Michigan’s economy. The most “optimistic” scenario painted in the report is that the auto supplier will emerge from bankruptcy in mid-2007 about 20 percent smaller than when it filed for protection against creditors Oct. 8.

In that scenario — the least bleak of three possible outcomes — workers, retirees and suppliers would lose $10 billion in earnings in 2007 alone, and about 12,500 Delphi employees in the United States would no longer have jobs. AEG believes that is the most likely outcome of the three.

Delphi has 15,000 employees in Michigan, with manufacturing facilities in Coopersville, Flint, Saginaw, Wyoming and Troy. Delphi Chairman Robert “Steve” Miller has said that the company will likely close, sell or consolidate some of its U.S. facilities in an effort to return the company to profitability.

There has been talk of five plant closings across five states: Michigan, Indiana, Wisconsin, Ohio and Arizona. Among the top 10 plants likely to be closed in 2006, according to AEG, is Delphi’s massive Flint East factory, which employs 3,160 people. It bears noting that Michigan’s current 6.7 percent unemployment rate is already 2 percentage points higher than the national average.

The study’s authors, Patrick Anderson, principal of Anderson Economic Group (AEG), Economist Ilhan Geckil, and Senior Analyst Caroline Sallee, believe that Delphi will likely take the “optimistic” direction; if so, the state would emerge with only one major plant closure, but a lot of Delphi workers would be left with drastically reduced wages or no job at all. The Anderson team foresees Delphi’s average wage per worker dropping from its current level of $27 per hour to about $14 per hour. They estimate the loss in state taxes would be $390 million in 2007 if this scenario plays out. Other economists question that figure, however, believing it would be lower.

If Delphi fails to reorganize quickly and is forced to move into partial liquidation and curtail business operations even further — or if its reorganization plans call for the closing of three or four plants — then the fiscal impact on the state could be $596 million, according to the study.

The third scenario — doomsday for the state — would unfold if Delphi were to shutter its plants in Michigan and move headquarters somewhere else. That, the authors say, would result in a loss of $945 million in state taxes and result in “depression-magnitude losses in the private sector.”

The closure of any Delphi plant, the authors note, will likely encourage the closure of supplier plants in the same region.

“Thus, there is a real danger of a ‘domino effect’ in one or more states where Delphi chooses to close down operations,” the report states. So closures here could mean a double whammy for Michigan’s economy if other suppliers in this region don’t pick up the work.

“They correctly make the point that not all the work to Delphi will be lost,” said George Erickcek, senior regional analyst with the W.E. Upjohn Institute for Employment Research. “They estimate about two-thirds of it will be picked up other auto suppliers that get orders from GM (General Motors) and other customers of Delphi. That’s a very good point, and that’s often missed in an economic development analysis. That, of course, reduces the potential impact that our state and other states will feel.”

Erickcek thinks the “optimistic” scenario is the most realistic and most likely. He said one thing the AEG team didn’t estimate — probably because it’s so difficult — is whether Michigan auto suppliers would be better able to pick up the slack than other states.

“I think we would,” he remarked, noting that the “pick up” might not be immediate and the sector might have some “tight” months.

“If we lose the two Delphi plants in the Grand Rapids area, it’s likely much of that work will be picked up by another plant somewhere in Michigan. That’s not good news for Coopersville or Wyoming, but it’s possible that we would see, on net, not as big of a job loss that we would if the work was not picked up.”

As he sees it, if Delphi closes its Flint plant, it’s possible the Coopersville and Wyoming operations could pick up some of the work.

The only finding in the AEG analysis that Erickcek said he couldn’t duplicate was the drain Delphi’s restructuring would have on state and local tax coffers. He said Upjohn economists estimate that the loss of tax dollars will be much lower than the AEG report predicts. Instead of a loss of $390 million under the best scenario, Erickcek estimates the tax loss would be closer to $40 million.

“I don’t have access to their methodology, but can’t, using standard assumptions, come up with what they come up with. That’s my only concern. The direction is correct: Delphi currently pays good wages and that’s going to be missed in our economy. However, my first review of their methodology and their findings suggests that it’s going to be bad, but maybe not as bad as they have derived.”

The potential impact of Delphi’s bankruptcy really highlights the importance of the auto industry in this state, said Steven Szakaly, an economist with the Center for Automotive Research in Ann Arbor. He thinks the most optimistic scenario that can be expected is that two or three of Delphi’s Michigan plants will close, and the state will lose 7,000 or more jobs.

“We have diversified, and diversification of jobs is important, but we can’t forget about how important the automotive industry is to Michigan and how important those jobs are to the state economy,” he said.

Some of Delphi’s automotive components simply aren’t going to be made in Michigan or in the United States, anymore, Szakaly predicted.

“Some of it is going to go to lower wage countries; some of it will stay in the states, but might not stay in Michigan. It depends on what particular components — like fuel filters and oil filters — are not going to stay. The more high-value components, like the steering system they make in Saginaw, are more likely to stay. It’s important that the state take an active role to try to protect those kinds of component plants.”

There are still many unknowns in Delphi’s future, Erickcek said. Will Delphi workers accept $14 an hour? What is going to happen to the hundreds of workers in the company’s job bank program? How will its retirees be affected?

“All those elements really make this very difficult to estimate. No matter how you cut it, it’s not good news.”

Delphi has 180 days from its original filing date to submit a restructuring plan to the bankruptcy court detailing how it will pay its creditors and how it will conduct business as a restructured company.    

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