Delphi Bankruptcy May Signal Deeper Problems for US Auto Industry

Barry Wood
Washington, D.C.
October 11, 2005

Experts say the recent bankruptcy of Michigan-based Delphi, the former General Motors affiliate that is the world's biggest auto parts manufacturer, may signal deeper competitive problems for the high-cost U.S.-based auto industry.

Delphi is a huge company, employing 180,000 workers, most of them in the United States. Delphi's decision to seek protection from its creditors under the bankruptcy laws sent shudders through Wall Street, even though normal company operations continue.

Delphi Chief Executive Steve Miller told Bloomberg News his company was unable to make a profit given its high-wage union cost structure, including very generous health-care benefits to employees and retirees.

"I believe this is an inflection point for basic unskilled manufacturing labor in America," said Mr. Miller. "We are in a global economy. We pay people well for knowledge. We do not pay that well in the global economy for unskilled labor."

Peter Morici, a business professor at the University of Maryland, sees the Delphi bankruptcy as a wake up call for U.S. manufacturers, particularly for the auto industry, saddled with expensive union contract provisions, including not only wages, but the high cost of health care and pensions for tens of thousands of retirees.

"The largest threat to the survival of the automobile industry in the United States are the UAW [Union Auto Workers Union] contract and the legacy costs [of retired employees] on the one hand, and the management team that grew up in a rather cushy era in which they enjoyed market dominance," said Mr. Morici.

That market dominance has steadily eroded during the past two decades as consumers have increasingly turned to products made by Japanese and European producers.

"The judgment of the market place is that Ford and General Motors do not produce cars that people want to buy at a price that will permit them to cover their costs," he added. "They are unable to cover not only their legacy [retiree pensions and health] costs, but their basic costs of production and designing the vehicles."

Mr. Morici believes the high-cost auto industry is facing the same competitive challenge that earlier afflicted the U.S. steel industry and, more recently, the airlines.

In his interview with Bloomberg News, Mr. Miller was asked if General Motors, until recently the world's biggest industrial company, could find itself facing the prospect of bankruptcy.

"If nothing changes, General Motors might find itself having to use Chapter 11," he explained. "But I think they and the UAW are more responsible than that. And that as they head towards 2007, I am optimistic that they will find a resolution."

In the case of Delphi, the union (the UAW) was unwilling to accept pay-cuts in order to forestall bankruptcy. General Motors has been seeking reductions in its generous company-financed employee health care program, but the union has been unwilling to accept cuts.