Tuesday, October 11, 2005

Will Delphi drag down GM, too?

Wall Street fears grow that supplier's problems could put automaker's turnaround in jeopardy.

By Brett Clanton and Bill Vlasic / The Detroit News

What's next A judge is scheduled to be assigned to the bankruptcy case today in New York at a hearing where preliminary motions will be made. Delphi plans a news conference Wednesday afternoon in Troy with the news media and security analysts to discuss its restructuring plans during the bankruptcy. Latest developments • Delphi has not made a decision to terminate its pension plans. But it says it needs to reorganize over the next few months to generate sufficient capital to restore funding for the plans. It says its unionized workers will have to agree to modifications in wages and benefits to generate profit margins sufficient to repay the pension plan shortfall -- about $4.7 billion -- out of future years' profits. GM must also remain a major customer. Without GM's business, Delphi says it would lack a healthy revenue base to support its pension obligations. • Wall Street analysts and credit rating agencies downgraded their outlooks for GM and Delphi on Monday, citing the bankruptcy and its potential to disrupt part supplies and hold GM liable for retiree obligations at Delphi. • GM and the UAW continue to discuss ways to lower the automaker's health care costs. But GM's failure to participate in three-way bailout talks with the UAW and prevent a Delphi bankruptcy has complicated the negotiations. Error processing SSI file Comment on this story Send this story to a friend Get Home Delivery

Delphi Corp.'s bankruptcy wreaked havoc on General Motors Corp. Monday as investors abandoned the automaker's shares, a Wall Street credit rating agency downgraded its debt and at least one prominent analyst raised the specter of a Chapter 11 filing for the world's largest automaker.

Also Monday, Delphi Chairman and CEO Robert S. "Steve" Miller said GM was in jeopardy of eventually falling into bankruptcy if it cannot lower its huge labor costs.

Analysts worry that GM could inherit billions of dollars in liabilities from the auto parts supplier, spun off from GM in 1999, and experience a kink in its supply chain at a time when it is struggling to rebound from losses in North America.

The moves signal that investors are growing increasingly doubtful about the prospects of a GM turnaround, and they put more pressure on GM Chairman and CEO Rick Wagoner to give investors some good news ahead of a third-quarter earnings report next week.

Wagoner is pushing the United Auto Workers for a deal that would lower GM's annual tab for employee heath care by at least $1 billion but the Delphi bankruptcy could make the negotiations more difficult.

On a wider scale, the pessimism over GM underscores the huge challenges facing U.S. automakers as they race to restructure, lower costs and compete with the rest of the world.

While GM and Delphi have downplayed the impact of Delphi's bankruptcy filing, investors were jittery on the first business day after the announcement.

In New York Stock Exchange trading, GM shares plummeted nearly 10 percent, ending the day at $25.48 per share -- just shy of a 52-week low.

Ford Motor Co. and DaimlerChrysler AG shares also slid Monday, amid concerns about how the problems facing suppliers could affect automakers. Shares in Ford dropped 30 cents, or 3.3 percent, to $8.93, while DaimlerChrysler fell $1.83, or 3.5 percent, to $50.76.

Standard & Poor's Corp. lowered GM's debt further into "junk" status territory, and Moody's Investors Service, another ratings firm, placed GM under review for a possible downgrade.

The agencies cited GM's vulnerability to any disruptions in parts shipments from Delphi, as well as financial liabilities.

The biggest alarm was sounded by Bank of America analyst Ronald Tadross, who said GM could be at risk for bankruptcy because it has many of the same high labor costs and pension obligations that drove Delphi into Chapter 11.

"It is our view that bankruptcy protection for GM is increasingly looking like a reasonable way to address the company's retirement liabilities and job security benefits," Tadross said in a report, pegging the risk of a GM filing at 30 percent.

The assessment comes as GM is trying to battle back from $2.5 billion in North American losses this year.

"Our focus right now is on improving North America and returning it to profitability as soon as possible," GM spokesman Jerry Dubrowski said.

Earlier this year, Wagoner took control of the company's North American auto business in hopes of restoring profits at its biggest business unit.

As part of a broad cost-cutting effort, GM has been pressing the UAW to accept higher health care costs. The two sides appeared close to a deal last week that could shave $1 billion from GM's near $6 billion-a-year health care tab.

But the talks could be complicated by GM's failure to give a multibillion-dollar bailout package to Delphi, which the supplier claimed it needed to avoid bankruptcy. The union, said analysts, is likely to read the move as a betrayal that puts thousands of former GM workers at Delphi at risk.

"We continue to believe that GM and the UAW will collide at some point as the company's results worsen, but the Delphi filing suggests that it will happen sooner rather than later," Merrill Lynch analyst John Casesa said in a Monday report.

GM expects to benefit from the Delphi bankruptcy, especially if the supplier reduces costs and passes on the savings in the form of less expensive parts. GM estimates it could cut its purchasing bill by $2 billion a year by doing business with a leaner Delphi.

Yet the immediate risks of a parts interruption or a strike by Delphi workers are overshadowing the potential benefits of the supplier's Chapter 11 filing. The risk of an eventual work stoppage could be high as Delphi moves in bankruptcy court to slash wages of hourly workers by 60 percent, eliminate retiree benefits and close or consolidate the majority of its U.S. factories.

Delphi has assured its suppliers that they will be paid on time, though payments for goods delivered over the past month to U.S. operations will be delayed pending resolution of the Chapter 11 case. The company said Monday it plans to assist any suppliers that face a hardship because of any late payments.

That's why it's important that the bankruptcy process goes smoothly, Delphi CEO Miller said in prepared comments to New York-based media outlets on Monday and provided to The Detroit News.

"If we do it badly, Delphi may be broken up into small pieces, and America will have lost some of its precious industrial treasures," Miller said.

"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."

Miller said GM faces many of the same issues that drove Delphi into bankruptcy, including high labor costs for union workers.

"Clearly, they are headed down the same Chapter 11 path as Delphi unless there is dramatic change in their staggering legacy labor burden," he said.

GM's troubles could be amplified if it inherits massive benefit obligations for former workers who were transferred to Delphi under the 1999 separation agreement that created the supplier. The pact holds GM responsible for at least a portion of the pension, post-retirement and life insurance benefits owed to Delphi retirees, but there is some disagreement over the scope.

GM said it could be liable for as little as nothing or up to $11 billion.

The UAW has retained Cohen, Weiss and Simon LLP to represent it in Delphi's bankruptcy proceedings.

On Monday, workers at Delphi plants were still trying to digest the news that the nation's largest auto supplier was in bankruptcy.

"It's basically business as usual," said David Heizer, an hourly worker at a Delphi plant in Kettering, Ohio. "The water cooler talk is quite different, though. It ranges from nervousness to outright rage."