The Order Grows...
MaxSpeaks About Delphi Auto Parts

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.