Daily Archives: October 14, 2005

Is the Delphi bankruptcy genuine?

Restructuring artist and Delphi CEO Steve Miller says Delphi is broke and is demanding unprecedented wage cuts from its union workforce. To get his way, Miller is attempting to use the bankruptcy laws as a sword to attack his workforce. As John Gapper of the Financial Times wrote yesterday, “organized labour meet organized capital.”

But there is a deeper story here. Delphi was created as a spinoff of the disparate parts (so to speak) of GM’s internal parts supply divisions. A central purpose of the spinoff by GM of its ownership of the entity was to enable the new company to put greater pressure on its unions to cut wages and benefits. The transaction is actually quite similar to the privatizations of state owned companies as a result of various forms of “shock therapy” in countries like Russia, Poland, and China. Privatization allows the capital markets to carry out the attacks on labor that politically sensitive governments are unwilling to do. Delphi made this clear to anyone willing to listen and said it explicitly in the prospectus it prepared for investors in its 1999 IPO. But it also noted that it was losing money at its birth and that it faced liabilities associated with an underfunded pension plan. And it remained overwhelmingly dependent on its biological parent, GM.

In a sense, then, Delphi was never really an independent company. It was, from the beginning, a political ploy to divide and conquer the GM workforce – a scheme hatched by GM officers and directors and carried out by GM representatives who controlled the Delphi subsidiary. The key was sending Delphi off on its own but on a very tight string – those losses and pension obligations hung over the newly born company like a dark cloud on warm humid Detroit afternoon. Everyone knew, as Bob Dylan might have put it, that a “hard rain was gonna fall.”

And now it has.

But there is a way out. GM remains not just solvent but positively flush with cash – more than 50 billion dollars at last count, and, as Mr. Gapper notes, Delphi has a two year supply of cash as well. Delphi belongs back inside GM not in bankruptcy court. Instead of rewarding its executives, the court should toss the case out and together GM and Delphi should find another way to solve their problems than taking them out on the backs of American workers.