Delphi's Bankruptcy Cast Ripples

January 6, 2006
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Economic analysts are not known for their use of colorful, figurative language. So when an economic analyst uses the word “doomsday” to describe the potential fallout from a company’s bankruptcy, it’s safe to say he’s pretty concerned.

That is one of the colorful turns of phrase East Lansing-based Anderson Economic Group used in its report on the potential effects to Michigan’s economy caused by the bankruptcy of the nation’s largest auto parts supplier, Delphi Corp.

The Troy-based parts supplier filed for Chapter 11 bankruptcy protection Oct. 8 after lengthy struggles to control costs and regain profitability. Ultimately, it was the company’s “legacy costs” that did it in. When Delphi split off from parent General Motors Corp. in 1999, it took with it massive health care and pension obligations. According to Delphi CEO Robert S. “Steve” Miller, these costs, along with high, union-negotiated wages, were simply too burdensome to sustain. Miller, who had previously taken Bethlehem Steel Corp. through the largest bankruptcy in U.S. history, was brought in to turn the company around.

Delphi had been in a slow decline since its birth as a stand-alone corporation. Prior to the bankruptcy filing, the company had received negative attention because of a Securities and Exchange Commission investigation into alleged accounting fraud, a subsequent criminal investigation, and several executives’ choice to take “early retirement.” Days before the bankruptcy filing — in the midst of asking 34,000 hourly employees to take drastic pay cuts — Delphi executives finalized a $90 million executive compensation and severance package improvement deal.

All of this was bad news for the company’s employees — including those at plants in Coopersville and Wyoming in West Michigan. However, the real effect of Delphi’s bankruptcy may be yet to come. Many have suggested that the Delphi bankruptcy could be the falling of the first domino in what may become a statewide chain reaction of economic peril. If Delphi were to close its Michigan plants and move its headquarters elsewhere, the AEG report suggests that it could leave a $945 million hole in the state coffers and bring about “depression-magnitude losses in the private sector.”

Even without such a severe outcome, the state’s car business is not in good shape. Ford Motor Co. and GM have both seen poor financial performance and declining sales this year. Second- and third-tier auto suppliers have begun to feel the pinch as orders dry up from the top down.

On the bright side, some analysts have suggested that the state’s economy is diversified enough to handle a major hit to the auto industry.

But the problems that have plagued companies like Delphi don’t apply solely to auto suppliers. Earlier in the year, Chicago-based United Airlines filed for Chapter 11 protection and subsequently defaulted on its obligation to pay $6.6 billion in pensions. Other industries that employ unionized labor have been grumbling about unsustainable wage levels and the increasing costs of health care and retirement benefits. And those problems don’t apply only to unionized work forces. The price of health insurance and health care continue to rise as the number of companies offering insurance benefits falls.

As 2005 drew to a close, the repercussions of the Delphi bankruptcy began to echo around the globe. In Washington, D.C., company officials were scheduled to defend a $500 million bonus plan designed to reward executives who stick with the company through its bankruptcy. While union members were protesting outside the offices of their elected officials, Delphi spokesmen were reassuring employees in the company’s Chinese facilities that “China operations have an even more significant position to Delphi now that the North American operations are in difficulties,” according to a report in British trade publication Automotive World.

In a possible sign of things to come, an Indian company is considering a buyout of some of Delphi’s holdings.    

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