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Delphi Bankrupt
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Delphi Corporation, head quartered at Troy, Michigan is the worlds second largest auto supplier. It manufactures hundreds of auto parts from satellite radios to air bag sensors. It is Michigans fourth largest corporation and stands at number 63 in the list of countrys largest corporations on 2005 Fortune 500. This global giant has 185,000 employees worldwide with its annual sales in 2004 of $28 billion. While it employees 15,000 workers in the state itself, its global presence is felt from Brazil to China, with 65,000 workers employed in Mexico. It has plants in states, including Michigan, Ohio, Alabama and California.
At its most unexpected move, Delphi Bankrupt Corporation filed to reorganize its U.S. operations on the eighth of October in the United State federal Bankruptcy Court in New York, which sent shockwaves throughout the industry. Delphis non- U.S. subsidiaries were not included in the Chapter 11 filing and its international operations would remain untouched and unaffected. Delphi's foreign entities, not included in the bankruptcy filing, have more than 134,000 workers who support 120 manufacturing sites and 20 technical centers in nearly 40 countries. All the remaining Delphis U.S. parent corporation and its 38 domestic subsidiaries would be subject to the supervision of the U.S. bankruptcy court and the initial hearing next week, before Judge Arthur Gonzales, who has been assigned the first phase of the case. However, the companys management claimed that operations would not be affected as the court had allowed Delphi to operate while more hearings were being scheduled. A wide range of auto parts which are critical to the assembly plants will continue to be built and shipped as per its scheduled time.
Delphi Bankrupt came into existence in 1999 when it was spun off from General Motors Corporation as an independent unit. This big giant collapsed under the weight of pension and health care costs of its workers. It lost billions because its average of $65 an hour labor cost is at least three times as high as its domestic rivals. To add-on the flood of cheap offshore car parts have added to the anticipation of closure of several factories making commodity parts.
Delphi plans to sell off or phase out a substantial segment of its U.S. manufacturing base over the next two years. It will finance its operations with $4.5 billion in loans, including up to $2 billion in debtor-in-possession financing from a group of lenders led by investment-banking powers JPMorgan Chase Bank and Citigroup Global Markets Inc.
The company proposed to slash union wages up to 60 percent which makes it as little as $10 an hour for productions workers, drastically cut down on health care benefits and free itself of pension obligations to tens of thousands of workers those who were inherited when Delhi was spun off from the General Motors Corporation in 1999. General Motors had employed thousands of Delphi union workers before it spun off Delphi. There are presently 24,000 United Auto Workers and 12,000 union retirees at Delphi. General Motors bought more than $15 billion in parts from Delphi last year and remains its largest creditor. As the Spin-off agreement with General Motors, Delphi is required to pay wage of $27 an hour to most of its 24,000 united auto represented workers (U.A.W.). This amount it double the existing level of competing suppliers. Delphi is also required to pay full wages and benefits to 4,000 laid- off workers in jobs banks, which nearly costs to $400 million each year.
General Motors Corporation purchases the major chunk of Delphi manufacturing which accounts to almost $14 billion worth each year. Last year, General Motors accounted for $15.4 billion, which is 54 percent of Delphi's total sales of $28.6 billion.
Other major buyers for Delphi Bankrupt parts include giants like Ford Motor Corporation and DaimlerChrysler AG. The initial challenge is to persuade the powerful United Auto Workers to accept the two
third compensation slash. If this doesnt happen, the next in line would be to modify labor contracts with General Motors. Under Chapter 11, companies and union are given a period of time to settle their contractual issues. In the situation of, failure in getting to a common consensus, the court steps in and the contract is rejected accordingly. Thus, the company will certainly make attempts to renegotiate both its union contracts and its deals with its customers like General Motors and Ford. The labor contacts however, will be void if it would not reach a restructuring agreement with its union by mid December as decided by Delphi and the court.
Among the most complicated issues is who is responsible for the pension and health care coverage for Delphi workers who were formerly employed by General Motors. The amount is as huge as $6 billion. This has resulted in high unrest amongst the workers. The United Auto Workers (UAW) with Delphi members have planned and prepared themselves to go on a strike in case the court approves a cancellation. The strike could force General Motors, Delphis biggest customer, to temporarily shut plants, thereby incurring heavy losses. The workers believe that the whole gamut of bankruptcy has been planned to enforce pay cuts on them. The trend started with the United States steel industry, followed by the airlines, who landed themselves into bankruptcy court in order to cut down of labor costs. Delphis bankruptcy is also on the same footsteps. The United States auto industry also wants its workforce to either agree out of court concessions or face the prospect of court- ordered drastic slash in wages, pensions and other benefits. If Delphi comes out successful, other multinationals like General Motors will also follow the suit. Bankruptcy will indeed become a growth industry in United Sates of America
The Delphi Bankrupt sent shock waves through its own supply chain and threatened to wipe out shareholders. It has affected the whole of the auto industry food chain. The part makers suppliers now face the challenge of new terms at prices which will further lead to closure of many, thus triggering bankruptcies of suppliers in Michigan and elsewhere that rely on Delphi for business. Infact disruption in its own supply base will impact Delphi's own quality levels. Delphis customers, General Motors being the largest will be the worst effected. Delphi would cancel all contracts, which were negotiated at unprofitable prices, forcing manufactures like General Motors to give in to higher parts costs. The shares for General Motors fell sharply, immediately after the Delphi filed for bankruptcy. Another outcome could also be the risk of General Motors itself taking the same step in the near future.
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