Delphi-UAW Deal Paves Way for End of Bankruptcy
June 25, 2007

By Joseph Szczesny

The agreement on a new labor contract with the United Auto Workers (UAW), announced last Friday, finally puts auto parts supplier Delphi Corp. in a position to emerge from bankruptcy and begin rebuilding with the help from private equity firms.

The UAW agreement was the final piece Delphi needed to sell certain elements of the company that didn't fit into its future plan and pave the way for an investment by a group of private equity firms that have agreed to put up as much as $3.4 billion.

The negotiated settlement also eliminates the threat of a strike that could have crippled Delphi’s largest customer, General Motors. And it allows GM to buy parts from low-cost sources, including China and India.

Next: Plant Closings

In addition to allowing Delphi to emerge from bankruptcy, the contract also is intended to clear the way for the sale or final shutdown of a number Delphi operations that don’t fit the company’s future plan.

That plan, as outlined by Delphi executives, focuses on six broad areas, including control and security features, electrical and electronic systems, entertainment systems, power-train management systems as well as safety and occupant protection systems and thermal and climate control systems.

When Delphi exits from bankruptcy, it plans to keep only four manufacturing sites in the U.S. –- ones in Grand Rapids, Michigan; Kokomo, Indiana; as well as Lockport and Rochester, New York. The balance of the company's products will be made overseas.

The rest of the Delphi's U.S. manufacturing base -- including plants in Flint, Michigan, and Dayton, Ohio, that had been at the center of the fierce battles between GM and the UAW just prior to the Delphi spinoff in 1999 -- will be sold or closed.

The Needmore road plant in Dayton, Ohio, the Flint East manufacturing complex in Flint, Michigan, and a third plant in Saginaw, Michigan, will move into a new holding group. The holding group could be operated by GM or by a third party. Four other plants, including the steering gear plant in Saginaw, Michigan, along with plants in Adrian, Michigan; Sandusky, Ohio; and Cottondale, Alabama, have been targeted for sale.

Before making its successful bid on Chrysler, private equity firm Cerberus Capital Management was considered a leading contender to take on Delphi's Saginaw Steering Gear business, which has a healthy backlog of business. Other Delphi plants will close permanently unless a buyer can be located.

Contract Provisions

UAW spokesman Roger Kerson declined to comment on the specific details of the settlement. However, a copy of the official agreement's highlights is available at www.soldiersofsolidarity.com.

The new UAW contract will reduce Delphi's top wage to between $14 and $18.50 per hour. In addition, health-care benefits are being scaled back and the traditional cost-of-living clause was eliminated.  Pensions of older workers will be protected.  But new employees will have a 401K rather than a defined-benefit pension once standard in the automobile industry.

The agreement also incorporates generous buyouts and early retirement provisions similar to those of GM and Ford negotiated with the UAW. In addition, younger workers with little seniority also are eligible for severance packages if their jobs are eliminated as Delphi continues to restructure.

The most generous packages appear aimed at some 4,000 workers once employed by GM who will have to accept a pay cut. The workers would collect $105,000 buy-downs in return for accepting the lower-wage package. The package was clearly designed to help insure ratification. 

Delphi officials described the settlement as historic.  "If ratified, we believe this agreement will be a significant milestone in our transformation and a major step toward emergence," said John Sheehan, Delphi's chief restructuring officer in statement announcing the settlement.

Challenges Remain

John Hoffecker, managing director of the Alix Partners Consulting in Southfield, Michigan, cautioned Delphi still faces some serious challenges despite the settlement and the interest of private equity investors.

For starters, automaker customers are much more reluctant to award contracts to troubled suppliers now than they were at the start of the decade, he said.

Delphi, created by the spin-off of GM's parts operations and once the world's largest automotive supplier, according to trade journal Automotive News, isn’t what it was. Since filing for bankruptcy nearly two years ago, Delphi has cut its workforce to fewer than 18,000 workers as it curtailed operations, following cuts in GM's production runs. Hundreds of employees accepted early retirement or transferred back to GM under provisions in the 2003 contract. Delphi had more 33,000 blue-collar workers on the day it filed for bankruptcy.

Competition in the areas targeted by Delphi is sharp right now. Several of Delphi's key competitors -- such as Bosch, Nippondenso, Continental, Siemens/VDO and Valeo -- have made inroads while Delphi struggled. Further, though Delphi has continued to file for patents throughout the bankruptcy, new competitors, such as Apple Computer, are also moving into the territory staked out by its management.

In addition, the bankruptcy has tarnished Delphi's senior management. Delphi has come under fire from the federal Securities Exchange Commission, the UAW and outside commentators for failing to react fast enough to the changes in the industry.

GM’s Perspective

Fritz Henderson, GM's chief financial officer, has said the settlement will allow the automaker to purchase more components at less cost on the global market, including from suppliers in China and India.

GM's purchases from Delphi fell 13 percent in the first quarter. GM also has said it will take a $1 billion write-off on its second quarter financial report to pay for the Delphi settlement. GM has set aside $7 billion to cover pension and health-care liabilities linked to the settlement.

GM said the tentative agreement was key step in make Delphi a stronger partner. "GM is encouraged by the continued progress, and remains committed to working with the UAW, Delphi and other parties to reach a final resolution that will allow Delphi to emerge as a more competitive strategic supplier," GM spokeswoman Renee Rashid-Merem said.

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