The Auto Parts Business

Steve Miller--after a long and stellar career helping to take companies that few thought could survive to sustainable profitability--talks about what he tried to do with Delphi: Full text of remarks by Steve Miller, chief executive of Delphi, to the Financial Times, Monday, October 10:

Delphi, and its predecessor companies that became part of General Motors, have over a century of tradition as the world's leading source of advancing automotive technology.

At its birth at the spin-off in 1999, General Motors had created the world's largest auto supplier, with the incredible blessing of most of the sophisticated technologies that make up an automobile, but with the curse of uncompetitive labour contracts. By agreement , Delphi was saddled with OEM wages and benefits, yet expected to compete with other suppliers, often organised by the same unions, paying less than half the OEM levels for their workforces.

Even today, Delphi represents perhaps the finest amalgamation of automotive technologies and component manufacturing capabilities in the world. Fully half the revenue base is in profitable, growing, and technically sophisticated products on a global footprint.

The spin-off of Delphi was the right concept for GM. No automaker can compete long-term paying punitive wage and benefit costs for the labour involved in the parts content of the finished automobile. And the growing sophistication of today's motor vehicles is simply beyond the scope of a single organisation to manage.

The basic idea was for Delphi to outrun the problem of its inherited labour cost burden by diversifying its customer base and global footprint. Overall, it did an excellent job. In the most recent quarter, GM was down to 49 per cent of total revenue, compared to over 80 per cent at inception.

So what went wrong? Three things:

One: The spread between OEM labour costs and competitive supplier labour costs has widened sharply over the past decade, driven by globalisation and by rising health care costs.

Two: The sharp decline in GM market share has reduced GM North American production volumes by a million units per year, from 5.5 million to 4.5 million units, in the last three years. The impact on Delphi has been to reduce revenues by several billion dollars a year worth of parts. Given our high fixed costs and inflexible labour costs, the result has been devastating.

Three: The game plan for Delphi included 'flow-backs' to GM of excess workers at Delphi freed up by improved productivity, The theory assumed that GM would have plentiful openings due to retirements of its ageing workforce. But GM's severe production declines have offset its own workforce attrition, and it has had no room to accept excess Delphi workers. Delphi has therefore had to pay 4,000 idled workers in its 'jobs bank' full pay and benefits amounting to about $100 million per quarter.

The resulting financial pressures have forced Delphi to seek Chapter 11 protection while we reorganise. We had hoped to work things out with our unions and with GM, but despite good and constructive discussions, time ran out. Nonetheless, those discussions will continue. The unions are involved, because our labour contracts are simply unaffordable and must be changed. GM is involved, because it is contingently liable, through contractual arrangements dating back to the spin-off, to make up for any denied retirement benefits of the Delphi workforce in the event of our financial distress. The amount of liability is hard to quantify, but even GM admits it could exceed $10bn.

So what happens now?

Actually, very little changes immediately.

I had over the past month been saying that if we ended up going into Chapter 11, we would be well financed, well organised and well planned. I meant it. And we are. This stands in stark contrast to some other bankruptcies, most notably David Stockman's Collins and Aikman, which tumbled into a chaotic bankruptcy that left customers on the hook for over $100 million in penalties to resuscitate production to keep their assembly lines running. That was a disgrace and an embarrassment to the entire supplier community.

Our Chapter 11 process is limited to our US corporate entities, so half our business, which is overseas, is completely unaffected by the filing.

Our Chapter 11 process will not adversely affect our customers, period. We will continue shipments on time, under contractual terms, throughout our restructuring. I pledged that during my previous Chapter 11 experiences as a CEO of automotive suppliers Bethlehem Steel and Federal Mogul, and I delivered. I intend the same outcome at Delphi.

Our suppliers have the assurances that we have the liquidity to pay them on time, in full, for continuing shipments. Payables for goods delivered this past month to US operations will be delayed pending resolution of our Chapter 11 case, but we will have the ability to assist particular suppliers for whom this imposes an undue hardship that might threaten our production schedules.

Our people will continue to receive their current pay and benefits until we are well into the Chapter 11 case. Under the bankruptcy law, we are required to bargain with our unions in good faith, and to provide sufficient information to establish our case for reduced labour costs. This will take a number of months. In most cases, managements and companies arrive at an equitable settlement. If we should fail, however, then we can appeal to the court to allow a rejection of the current labour contract. If granted, the results is a free-for-all, wherein management can impose whatever terms it chooses, but the union is free to strike. Nobody wants to end up there, which is why a settlement is reached in almost all cases.

Our pension plans have been the object of much speculation. We have about a $5bn shortfall in our plan assets to our plan liabilities. Some have suggested that Chapter 11 means termination of the plans. That is simply not true, at least at this point in time.

As background, I have been involved in a leadership position in about 10 corporate restructurings, starting with Chrysler in 1980, and now at Delphi. In about half the cases, we have had to use a Chapter 11 process. In most of those cases, however, the pension plans survived intact. In only one case did the PBGC take over the pension plan, and that was Bethlehem Steel. There, we had 12,000 active workers, in six steel mills, all bleeding red ink, trying to support 130,000 dependents. The math could not work. The PBGC took action to terminate the plans, and I had no way to stop it.

At Delphi, we have made no decision to terminate our pension plans. The big question will be whether we can formulate a plan of reorganisation over the next few months that can generate sufficient capital to support continued efforts to restore funding of the plans. To do so will require the participation of many parties.

First, our unions will have to agree to modifications of our wages and benefits at our continuing operations, such that we have profit margins sufficient to repay the pension plan shortfall out of future years' profits. This will put the unions in the difficult position of perhaps having to make trade-offs between maximising the pay and benefits for active workers versus maximising the chances for saving the pension plans. It is a calculus made infinitely more complex by the GM contingent benefit guarantees.

Second, we will need to reach an understanding with GM as to our future business prospects as a continuing supplier to them. Without GM's business, Delphi would lack a healthy revenue base to support our accumulated pension obligations.

Third, we will probably require some forbearance from the PBGC as to our funding schedule. It is too soon to quantify what our needs might be, and it is a hot topic in Washington these days so we don't even know for sure what the legal requirements are going to be.

Fourth, we would have to convince the other creditors in our bankruptcy case that we should reorganise in a way that holds the PBGC harmless, even though they are an unsecured creditor.

Behind all this financial drama are the lives and livelihoods of thousands of our loyal and dedicated workers. These are honest, hard working human beings who played by the rules and cannot be blamed for pursuing the American dream by taking a job at GM or Delphi. They expected us to live up to our promises, but have been caught by fast changing global economics. They are being severely impacted and disappointed. I don't blame them for being angry. But neither do I fear production disruptions. They are adults, and they understand that industrial action can only hasten plant closures and further jeopardise their pensions.

It is a very difficult job to be the CEO of a company going through this transformation, knowing that my decisions will affect so many. But we are at the mercy of forces beyond our control, and so we must face up to the hard choices ahead of us. I expect continuing heavy criticism for my role here, but I will not shy away from pointing out the harsh, simple realities of our situation.

What will happen to Delphi?

If we do this right, Delphi will remain one of the world's leading global automotive suppliers. Yes, with a smaller US manufacturing footprint. And with a more focused approach to selected product lines where we can be the technology leaders and the category killer. But it will be a jewel of a company, and a technological powerhouse for years to come.

If we do it badly, Delphi may be broken up into small pieces, and America will have lost some of its precious industrial treasures. The impact of a collapse could potentially injure most of the world's automakers, and perhaps fatally wound General Motors. I am absolutely determined not to let that happen.

Broader Context

Let me turn to what I think is the broader context in which the Delphi drama is being played out.

The two overarching themes here are globalisation, and our ageing population.

Globalisation is a fact of life these days. We no longer exist in a national economy, but a global economy. This is a good thing, in that it brings rising standards of living not only to Americans, but to all the world's citizens

But what has been brought into sharp relief is the different value the global market places on knowledge workers versus basic manufacturing workers. I was struck by what I saw when I visited our Delphi operations in Mexico last week. Our average hourly worker makes about $7,000 a year, while the average salaried worker makes about $35,000 a year. A spread of five times! The same spread, or wider, exists in all low-cost countries. The implications for Americans are enormous, and it boils down to this. If you want your kids to enjoy the great American dream, get them a good education. The days when manual unskilled labour can deliver $65 per hour are disappearing.

My recent experiences have been with three industries that are undergoing profound change - as CEO at Bethlehem Steel, as a board member at United Airlines, and as CEO at Delphi. Steel, airlines and autos.

What those three industries have in common is a social contract, worked out over the past half century with strong centralised labour unions, to elevate their workforces with elaborate defined benefit retirement programmes. Back in the days when you worked for one employer till age 65 and then died at age 70, and when health care was unsophisticated and inexpensive, the social contract inherent in defined benefit programmes perhaps made economic sense.

Today, defined benefit programmes are an anachronism, and we are witnessing the slow agonising death of defined benefits as industrial compensation policy. First off, they force people to stay with one employer, and even though we have a much more mobile and flexible population these days. The lack of portability of defined benefits is a real issue. Second, the notion of having all your retirement eggs in one basket - your employer - is a concentration of risk that is simply inadvisable for anyone in today's fast moving economy. Finally, these programmes have a way of threatening the existence of traditional large employers. GM is a junk bond credit these days as it staggers under a burden of $150 billion of combined pension and health care retirement obligations.

People are living longer these days. And medical science is rapidly expanding the capability to spend vast amounts of money keeping you alive for decades. Of course, that is a good thing. But the question is, how can we afford it? As a society, we must we must generate enough wealth in our working years to support our income aspirations and health care needs in our sunset years. It is getting more difficult every year.

In the midst of these trends, the unions in the traditional steel companies and the traditional auto companies bargained for thirty-and-out. The theory was, create more jobs by retiring people sooner. And aren't 30 years in a grimy factory enough? But this means people can start work at age 20, retire at age 50, and expect full pensions and health care til age 90 or so. In other words, enjoy the fruits of your labour for more years than you were at labour. As a society, somebody has to pay. And to the shock of the Big-3 automakers, they've found that customers won't pay when they have choices.

Beyond Delphi, things are going to get messy for the Big-3 in coping with all this. The current labour agreements expire in 2007, and it will be a historical collision point for all these social and economic forces that are at work. GM has already declared it can't wait til then to trim its $80bn of accrued retiree health care obligations. Clearly, they are headed down the same Chapter 11 path as Delphi, unless there is dramatic change in their staggering legacy labour burden.

My worries go beyond the auto industry. What I am describing is also embedded in our debates over Social Security and Medicare. The overwhelming voltage in the political third rail of touching these entitlements will forestall corrective action for years, but the problem will only grow. I fear something like inter-generational warfare, as young people increasingly resent having their wages reduced and taxed away to support social programmes for their grandparents' income and health care concerns.

I didn't come here to suggest answers for all this. I don't have answers. But I just wanted you to view what is happening at Delphi as simply a flash point, a test case, for all the economic and social trends that are on a collision course in our country and around the globe.

I cannot avoid the adverse impact this will have on the many fine people who work at Delphi. But hopefully, I can help soften the blow, and help preserve the magnificent industrial assets that a century of innovation and hard work have brought us.

Comments

[Nicholas Weaver]

Two much bleaker viewpoints:

Robert Farrago: http://www.thetruthaboutcars.com/content/1128962357158877558/index.php

He believes a crippling strike is inevitable because the union can't (and won't) accept significant pay cuts and an end to guarenteed employment.

Peter Moricci: http://www.thewashingtonnote.com/archives/001009.html

He believes the whole US industry is fundimentaly in deep trouble as well.

Frankly, I vote for the latter viewpoint. Any company who's immediate pre-bankrupcy action is to significantly increase executives salaries when there MUST be huge cuts to labor is not a good sign.

[Derelict]

He doesn't have answers, but the answers are strongly implied:

1. American workers must be willing to work for third-world wages, or else there will be no jobs for them.

2. American workers must give up the idea that they be allowed to retire with dignity and economic security. Workers no longer able to work must accept that they will be reduced to penury.

3. Just because your employer spent the last 40 years of your career promising you a pension and health benefits, don't think that your employer really meant it. All your pension belong to us!

4. Management should never be held accountable for its mismanagement, no matter how blatant that mismanagement is. Rather, workers must be made to suffer for management's stupidity.

[sd]

Derelict:

Please point to the mis-management on the part of Delphi executives. Go ahead. Fire away. Share all of the fact-based, well-thought-out examples you have of where the Delphi management team has failed. Still waiting. Don't be shy now. I'm sure you have an extensive body-of-knowledge detailing exactly which decisions the Delphi management team has made over the past several years/decades that have led to the current situation. Given your expertise as a automotive supply-chain industry thought leader, I'm sure you'll be posting some evidenciary support for your claim that Delphi's executives have mis-managed the company and are stupid. Specific instances where Delphi has parted from your own previously-publicized recommendations on the best way to run an auto parts supply business with an aging unionized workforce and a customer base with declining overall sales in such a way as to avoid financial distress. I know you have the material to back your claim up. I believe in you Derelict!

[Derelict]

sd--See Max Sawicky's treatment that Brad linked to above. Note that executive salaries at Delphi have been rising dramatically even while the company lurched toward bankruptcy. Note the failure to adequately fund the pension program even while the expected costs of that program were well known (and, indeed, legally required to be reported to the government). Note the very nature of spin-off contract that created Delphi.

Explain to me how any of these things indicate anything other than gross mismanagement.

[save_the_rustbelt]

I think Delphi was born to fail. GM used the Delphi spin-off to dump billions in liabiities and thousands of workers.

By creating a business model that cannot possibly work GM set this up for failure (aided and abetted by the UAW unintentionally), which by the way now gives GM a perfect excuse to buy parts overseas.

One-half of all auto parts jobs in Ohio and Michigan will be gone by 2015. The blood bath continues.

Not to worry though, Bill Clinton promised that "high value service jobs" would replace all of our lost manufacturing jobs. We are waiting Bill.

(The Economist thinks "rich countries" are selfish for wanting to keep manufacturing jobs, and we should be happy because Mcdonalds is air conditioned and a steel mill is not.)

[pragmatic_realist]

The newest plan: Save the last bullet for your retirement.

[wkwillis]

You can't cut pay for management. If you think they are screwing things up now, wait till you cut the wage of the parts buyer to match the wage acceptable to a unemployed parts buyer!
If a line worker screws up it's obvious. We don't have mechanisms to monitor when a salaried worker screws up on purpose.
Sure, we could easily replace all the managers at Delphi in a week by going to Monster and screening resumes. Lots of younger managers out there that would be cheerfully willing to accept a raise to half the present salaries of the Delphi managers. No problem. Except that the managers at Delphi would scream "age discrimination" and sue for their jobs back.

[BC]

Toyota just broke ground for a new RAV4 production plant in Canada. They own the hybrid market. Nissan is having records sales. Korean automakers are grabbing huge market share.

GM, Ford, and Daimler-Chrysler gambled big on selling massive SUVs so they could make money off of the financing. It's backfiring on them bigtime now.

[Kimmitt]

"Please point to the mis-management on the part of Delphi executives."

My understanding is that Delphi relied on GM's success; it's GM's management failures (overinvestment in SUVs, underinvestment in hybrids, and consistently poor quality control) which have ramified down to Delphi. I suppose one could say that Delphi's management failure was relying on GM to keep their promises, but that seems a bit harsh.

[ricardo]

Hey sd and derelict:

Here's an article from the NYTimes:
"Delphi Used Sham Sales to Lift Profits, Lawsuit Says"

http://www.nytimes.com/2005/10/06/business/06delphi.html
(Get it before it goes into the archive.)

[Derelict]

"GM, Ford, and Daimler-Chrysler gambled big on selling massive SUVs so they could make money off of the financing. It's backfiring on them bigtime now."

And let us not forget the chairman of GM making public statement as recently as early August of this year to the effect that "nobody wants to buy hybrid vehicles--there's just no market for them." This, even while there was a six-month waiting list for Toyota and Honda hybrids.

But, I suppose this is just a continuum from the late '70s when Detroit was absolutely baffled that Americans did not want to buy gas-guzzling cars that had terrible reliability. I recall reading in the WSJ of a dealer who found a four-year-old Chevette sitting on his lot that he had accepted and then forgot about. As he told the WSJ reporter, "There's something vaguely disconcerting about a car that rusts in the showroom."

[Michael Cain]

"Back in the days when you worked for one employer till age 65 and then died at age 70, and when health care was unsophisticated and inexpensive, the social contract inherent in defined benefit programmes perhaps made economic sense."

The days when one retired at 65 and died at age 70 have been gone for a long, long time. As nicely summarized at this site
http://www.infoplease.com/ipa/A0005140.html

in 1940, the life expectancy at age 65 was already 12 years, not five. Increasing life expectancy patterns were also already known. Social Security studies from that time period estimated the age 65 life expectancy for the 1990s quite closely.

I find it interesting that the CEO-class seems to be unable to take the last step and make clear statements about the choices regarding health care. The options are illustrated by our international neighbors to the north and south. We can have a third-world arrangement like Mexico's, where the wealthy get care and the poor (and increasingly, the middle class) do not. Or we can have a modern industrialized arrangement, with some sort of unified universal care system like Canada's (I would prefer something more like Japan's way of achieving it, but that's just me).

[Slocum]

"By creating a business model that cannot possibly work GM set this up for failure (aided and abetted by the UAW unintentionally), which by the way now gives GM a perfect excuse to buy parts overseas."

First of all, when Delphi was spun off in 1998, the auto industry was booming and Dephi shares were selling for something like $17. Obviously not everybody thought Delphi was born to go bankrupt.

"GM, Ford, and Daimler-Chrysler gambled big on selling massive SUVs so they could make money off of the financing. It's backfiring on them bigtime now."

GM, Ford, and Chrysler emphasized SUVs not because they were stupid, but because they had no real alternative. They still had an advantage in trucks over the transplants and HAD to try to exploit it because, with the significant cost disadvantages they have, the Big 3 simply CANNOT compete head-to-head with the transplants and succeed in vehicle categories where the transplants are strong.

Put it this way, GM could build a car as good as a Toyota Camry. But it simply cannot sell that car at the price of a Camry and make money. So they try to skimp and get by with cheaper, older technology and skin-deep redesigns. They're not stupid, they're boxed in.

Why did Toyota totally redesign the Sienna minivan with a completely new platform, engine, transmission, etc, while GM took its decade old design, put a SUV style front end, and called them 'new'? Is GM run by morons? No, GM realized that if they did what Toyota did, there would have been NO WAY to make the R&D investment pay off, and no way to produce the vehicle inexpensively enough to sell. You're not looking at companies run by idiots, you're looking at companies trying to survive in spite of huge structural disadvantages.

Why doesn't GM build hybrids as good as a Prius and sell them for less? Hell, why don't they do all that and include a free pony, too?

[save_the_rustbelt]

slocum:

We were having the same conversations in the early 80s.

How long do we wait for the Big 3 and the UAW to get with the 21st century?

Answer: They will never get with the 21sr century - they will die a long slow death.

[a different chris]

>We were having the same conversations in the early 80s.

Yup.

Note: Us card-carrying Republican haters must stay aware of the fact that our nice crop of Democratic congresspersons from Michigan were/are some of the worst offenders when it comes to both CAFE and any sort of consumption-punishing gas tax, as the UAW yanks their chokechains pretty hard when the subject comes up.

I often try to be fair and say "the UAW didn't think GM etc. could make competitive cars and they had a pretty good reason to think that" but I'm just sick about the whole thing at this point. Everybody involved should be slapped silly.

PS: Slocum, stop just making shit up and presenting it as fact. There were plenty of opportunities to change course for the Big 3. And GM does build as good a car, check out the Malibu's reliablity ratings and price lately?

[Derelict]

Saying they're "boxed in" tells us everything we need to know about the overall cluelessness of management. As a different chris asks, how many decades do we have to wait before management at the Big 3 gets a handle on their own business? We're coming up on the 30th anniversary of the '70s gas crunch and the explosion of popularity of Japanese cars. Yet, three decades on, Detroit STILL can't figure it out.

Delphi's troubles stem from a number of factors, and poor management is a big part of it. Too bad management will not suffer one jot while current and former workers take it in the teeth. And so it will go when GM finally rolls over and sinks. Top management will wander off to Nantucket with enormous golden parachutes; Joe Assemblyline winds up living under a bridge and roasting sparrows on curtain rods.

[still working it out]

Wages in Japan are HIGHER than in the US. Japanese companies also have generous pension schemes and an employee for life mentality. The population of Japan is aging faster than that of the United States and has a higher life expectancy. They operate in the same globalised marketplace. Yet they produce better cars more cheaply than the big 3 US manufacturers. Why have Japanese car makers been able to thrive while facing the same problems that are supposedly killing the big 3 US car makers?

I submit the answer is that the senior management of the US car makers have focused on results in the short term at the expense of the long term. This is driven by the fact that the shareholders most active in the share market oversight of these companies have only a transactional relationship with the company and have more interest in short term returns at the cost of the long term health of the company.

[still working it out]

As an example consider the problem of health care.

The only major disadvantage that the US companies face is having to fund health care. With the amount of political clout they have and, oh, about 25 YEARS to realise there was a problem they could have pushed for some sort of National Health Care to solve this. Instead they use that political clout to reduce CAFE standards to produce cars that have no future. Maybe pushing for health care would have worked, maybe not, but they have still not even tried this obvious solution. Yet they spend all day reminding people is their biggest problem. Failure to come up with a solution to your biggest potential problem despite literally a generation of warning is simply managerial incompetence.

[Slocum]

"Why have Japanese car makers been able to thrive while facing the same problems that are supposedly killing the big 3 US car makers?"

Because, to a great extent, the 'Japanese' cars they sell here are built here using non-union workers. Their workforces are younger and, therefore, have lower medical costs, and they don't have the huge legacy expenses for pensions and retiree health benefits. Some of their cars are also built in Canada where they also don't have the medical costs (and, because their presence is recent, don't have the legacy costs either).

And the high price of labor in Japan has also been leading Japanese companies to outsource production to lower-wage countries.

"I submit the answer is that the senior management of the US car makers have focused on results in the short term at the expense of the long term."

So do you believe the idea that the Big 3 have a significant disadvantage in higher wage, medical, and pension costs relative to the Japanese and Korean transplants is just a myth?

[Kimmitt]

Isn't that what "still working it out" said?

[still working it out]

"Because, to a great extent, the 'Japanese' cars they sell here are built here using non-union workers."

I was not talking about Japanese cars built at US plants. The life expectancy in Japan is obviously irrelevant to that. Japanese companies successfully export cars built in Japan to America and yet remain financially healthy despite having higher wages in Japan than in the US.

"So do you believe the idea that the Big 3 have a significant disadvantage in higher wage, medical, and pension costs relative to the Japanese and Korean transplants is just a myth?"

Yes. The wage and pension costs are a problem for Japanese domestic production as well. And Germany has the same problem, yet successfully exports to the US. Korea does have lower wages, but the Japanese are able to compete or co-operate with them successfully. Why can't the US? The medical cost disadvantage is real but was possibly avoidable. Why did they ignore it for 25 years?

"And the high price of labor in Japan has also been leading Japanese companies to outsource production to lower-wage countries."

Why are Japanese car makers doing this successfully while US car makers are doing it so poorly they face bankruptcy?

[Slocum]

"PS: Slocum, stop just making shit up and presenting it as fact. There were plenty of opportunities to change course for the Big 3."

Shrug. My theory is that the Big 3 are where they are because of cost disadvantages due to labor, medical, and pensions costs, yours is that they are where they are because the management is just plain stupid.

Remember Oldsmobile? Olds was going to be GM's import fighter. Olds tried to go head-to-head. The cars featured overhead cam V6s instead of the usual GM pushrods and 'european inspired' styling. What happened? Sales tanked so bad, GM had to put Olds out of its misery. And this was *before* GM's current crisis.

I'm not saying that none of GMs wounds are self-inflicted. My first car was a '71 Malibu -- beautiful car. My brother still has a '72 Cutlass convertible that turns heads whenever he drives it. GM's current lineup? Not many head turners, there, to say the least. Chrysler has done a much better job of turning style into sales. It's a hit-and-miss proposition and right now Chrysler is riding the hit of the 300, but they still have the same underlying cost problems, and they're one big styling miss away from finding themselves in the same boat as GM.

"And GM does build as good a car, check out the Malibu's reliablity ratings and price lately?"

The Malibu is a decent car and a clear improvement over the previous model, but bland and unrefined. It is relatively cheap, but it certainly isn't coming out on top of any comparisons with the Camry, Accord, Altima, Passat, etc. The same is true of the new Cobalt -- decent car, big improvement over the ridiculously long-in-the-tooth predecessor, but still clearly a cut below the competition (Civic, Corolla, Mazda3):

http://autos.msn.com/research/vip/ConsumerReportsSnapshot.aspx?year=2005&make=Chevrolet&model=Cobalt

I will say that the Pontiac Solstice looks like a clear winner in its segment, but unfortunately that's a low-production niche vehicle that can't make much of a difference to the bottom line.

[me]

""Please point to the mis-management on the part of Delphi executives.""

How about they bankrupted the fuck**g company?

Why does Bankruptcy Bob "Steve" Miller need retention bonuses for the management that hosed the company? Do a little research and you will find that all the execs at Delta Airlines that got the retention bonuses are gone with the money and the airline is still bankrupt. If the workers can be replaced, so can the execs. I am sure a manager from KIA can run the company for a lot less money than the Delphi management.

I only have one other question. Since Greenspan says we are in BOOM times, why are all these huge industries in THIS country going under?

All we need now is for some more genius economists to get with the republicans and finish running the government like a busienss, bring in Bankruptcy Bob and ditch social security and medicare and boy will the porfits roll in then.

[Maynard Handley]

"
The Malibu is a decent car and a clear improvement over the previous model, but bland and unrefined. It is relatively cheap, but it certainly isn't coming out on top of any comparisons with the Camry, Accord, Altima, Passat, etc. The same is true of the new Cobalt -- decent car, big improvement over the ridiculously long-in-the-tooth predecessor, but still clearly a cut below the competition (Civic, Corolla, Mazda3):
"

To take some obvious examples, GM and other American companies could compete by doing a decent job with electronics. For example 10 years ago, or at worst 5 yrs ago, they could have defined a standard interface to generic car electronics based on say USB. This way we wouldn't have the current ridiculous situation where half the US driving population has iPods hooked up to their car audio systems via a variety of klunky and unsatisfactory mechanisms.

Or they could offer GPS at cost, instead of as a grossly overpriced luxury. Sure it would canabalize their high-end sales, but isn't the goal here to produce something that is actually, in at least one way, superior to what the competition is offering instead of being, in every respect, just a little bit worse?
Likewise for cellphone interaction with the car electronics (and heck, why not a cell antenna built into the body to reduce dropped calls?)

These two examples are, IMHO, just symptomatic of GM. Zero understanding that it's no longer 1970 and that there is a whole world of IT, communications and so on out there. Rather than trying to save their mass business by exploiting this technology, in the few situations where they have their act together they restrict it to the luxury models. I am not at all convinced that this makes economic sense.
It makese economic sense for say Toyota, which sell a low-end car that people want to buy. But the whole point is that GM is not Toyota.

[Michael Cain]

"I submit the answer is that the senior management of the US car makers have focused on results in the short term at the expense of the long term."

The Japanese car companies, led by Toyota and Honda, have been fanatics about reducing the number of units of a particular model that must be sold to cover the manufacturing fixed costs. Where a GM or Ford may need to sell 1.5M units of a new model in order to cover those fixed costs, Honda may need to sell only 750,000 units, and Toyota an even lower number. The techniques to accomplish this are not surprising: fewer models, more common parts, factories that are better designed for rapid change-over from one model to another.

Similarly, the Japanese have worked very hard to make their factories profitable at lower utilization rates. Where GM or Ford may need a factory to operate at >80% of capacity in order to turn a profit, the Honda or Toyota factory may be profitable when run at as low as 60% of capacity. I regard this less as a matter of long-term focus than as a simple matter of risk management. The Japanese factories and product lines are profitable across a much wider range of possible futures than those of GM and Ford.

[William]

The long term thinking of the Japanese led them to the approach of building their cars in the United States rather than in Japan. Both the Honda Accord and the Toyota Camry are built in the U.S. Those are the two biggest selling models by far.
Since none of the employees that they've hired have even retired yet and they don't have stupid Union rules like 65 job classifications such as Delphi, those factorys run very effeciently.
You could have the best management in the world at GM and Ford. Thing is, it costs them $1500 extra per car just in health care costs. If you give the Japanese an extra $1500 per car there is no way that GM and Ford can compete no matter how good the management.

[FactoryRat]

Well, its hard to know where to start, so perhaps some factoid-type thoughts.

The macro playing field is a huge disadvantage for US manufacturers - pension and health care, yen manipulation, persistant imbalances in auto trade all hurt. I'd invite comments on how the persistant imbalance fits current theory and on figuring the net cost of Japan's yen support.

Pension and retiree health care are not are a "problem" in Japan, they are for the most part "materially insignificant," as described, for example, in Toyota's annual report. Imagine GM with a balance sheet $100b lighter and pension/healthcare expenses $8b/year lighter, i.e. as if it were a Japanese firm based in Japan. The U.S. government is not competative in providing a health care financing system that doesn't put U.S. firms at a huge disadvantage.

As for electronics, GM is probably the leader here, having developed the two most popular telematics applications, satellite radio and On-Star. Toyota contracts with GM for the later in its Lexus line.

As for health care, GM is on the bandwagon for what it thinks is achieveable, a reinsurance scheme. The Detroit firms were publically warming up to Hillary care a dozen years ago, but got burned, and still face red-state politician hate for it.

On CAFE, isn't it true that GM sold more small cars than than Totota last year, Toyota is the company increasing sales of SUVs the fastest, and if you norm for total market sales mix, GM and Toyota have the same CAFE? Yes it is.

Delphi's biggest problem is GM's falling share. Try pro-forma financials for both firms with GM at 29%. The only thing between here and there is a bunch of great vehicles. GM spent good money to deliver losers -imagine Oddessy instead of Aztec, Camry rather than Impala, etc. Product counts for a lot here, and they have failed repeatedly.

Finally, one must account for lots of bad strategy bets by GM. Saab, why? $4.5b for two engine designs and a plant from Fiat? How many $b in buybacks? How many marketing channels for its market share, with duplicate/parallel costs all the way from body dies to advertising?

[save_the_rustbelt]

General Motors dealers give better trade-in value on Hondas and Toyotas than they do on their own cars (I've been there).

If you have a Malibu built before 2004 it is almost worthless because GM dumped 10s of thousands on the rental car and fleet market to keep factories open.

Duh.

Any more questions?

[chuck]

No automaker can compete long-term paying punitive wage and benefit costs for the labour involved in the parts content of the finished automobile.

Woa, punitive labour costs. Did not hear this one before. Freedom of contract sure is inconvenient. If only we could starve those lazy workers into accepting any conditions their betters might offer them...

[wkwillis]

The funny thing is, the managers that looted the worker's pension funds invested the money in collaterallized mortgage securities that are the mortgages on the worker's houses. And when the workers get their pay cuts the money they can pay for houses will go down and the mortgages will get defaulted on and the managers will lose their money.
I wonder who they'll blame?
Oh, Clinton, of course.

[saudi albertan]

It seems fair to blame Delphi management for the current situation. The huge pension and health care costs that are mentioned are a function of the decision on the part of management to offer deferred compensation (i.e., pension and retirement health care) instead of current compensation. Had Delphi not offered pensions and health care, it would have had to pay higher current wages. Current wages, from management's perspective, have the unplesant characteristic of being easy to account for (pensions offer lots of accounting leeway). Since Delphi management made a decision to offer deferred compensation to its employees, it should have been aware of the effects such polices and planned for them.

Given the need to declare bankruptcy, many of the profits that were posted in the past appear to have been illusory (i.e., failed to account properly for pension and health costs). Perhaps executive bonuses on those phantom profits should be clawed back.

[save_the_rustbelt]

"It seems fair to blame Delphi management for the current situation. The huge pension and health care costs that are mentioned are a function of the decision on the part of management to offer deferred compensation (i.e., pension and retirement health care) instead of current compensation. Had Delphi not offered pensions and health care, it would have had to pay higher current wages."

Delphi inherited this scenario from GM, the current management had very little flexibility.

GM did this spinoff to dump some problems, andprobably knew the ultimate outcome in advance.

[nate]

For publicly traded U.S. corprations: improved or new annual financial reporting on total salary and wage compensation (including breakout of total compensation into salary and wages, bonus, and other categories) would be nice.

The author of this needs to be careful in extrapolating the Delphi situation and his history of experience in bankrupty situations. A lot of U.S. corporations are not bankrupt and are sitting on huge piles of cash. If the U.S. could learn from the Delphi and GM situation, and make sure the cash at other corporations is used in wise ways and not squandered, it would be nice. Just because Delphi and GM are struggling in globalization does not mean all corporations are struggling.

Furthermore, the social security system is not completely analogous to Delphi. Delphi's biggest customer, GM, lost lots of business for a variety of reasons. The social security system, on the other hand, has a monopoly on all U.S. labor. If one U.S. company and its jobs struggle, another U.S. operation may experience job gains (eg, Toyota plant in U.S.). Overall net impact on social security revenues may not be diminished on a 1:1 basis. Also, people do not retire at age 50 on social security.

You might find Bogle's new book "The Battle for the Soul of Capitalism" to be of interest and applicable to GM. It is a battle. It will be interesting to see how "owner" Kerkorian fares.

[nate]

one more...

The GM story has unfolded relatively slowly compared to other "creative destruction" (Schumpter) in the U.S. ...

What has the fed govt done (or not done) about this? ARe there tax breaks for workers who will be negatively affected by this? Are there loans or grants to retrain or move? Are there other things that could be done to make transition from GM or GM-related jobs to other jobs?

Should the fed govt do anything? What do you think?