Who Lost Delphi - Road to the Middle Class

Dell Who? Of course. Delphi Corporation, the former parts division of General Motors, isn’t exactly a household word. But Delphi filed for Chapter 11 bankruptcy on October 8, 2005. And that means that its workers could be facing wage cuts, and its retirees pension and health care benefit cuts.

The cuts could be substantial. “We pay hourly workers three times the market rate; salaried staff are paid a market rate and execs are paid below market,” said Delphi CEO Steve Miller. He proposes to cut hourly wages by 63 percent. United Auto Workers President Ron Gettelfinger (http://www.detnews.com/2005/autosinsider/0510/16/D01-349665.htm) responded by accusing Miller of using “scare tactics.”

How could Delphi have got into a position where it can’t pay the pensions it promised? Who is to blame? Is it greedy management? Is it greedy unions? Is it the FASB? Is it Congress? Or is it all due to the inattention of President Bush? It’s important to get out in front in the blame game because the Delphi bankruptcy could set a precedent for bigger bankruptcies coming down the road. Like General Motors.

When we get to the bankruptcy of General Motors even the sluggish minds of the mainstream media will sit up and take notice. It took an agonizing two days for them to decide that the mess of hurricane Katrina was all President Bush’s fault. It is unlikely that they will take as long to come to a decision when GM goes broke. It is important to establish a narrative now so that when the great minds at the MSM grab for their ledes on Detroit’s Black Monday, the American people won’t find themselves on the hook for the mother of all bailouts.

Who is to blame? London’s (http://www.economist.com/displaystory.cfm?story_id=5017138) Economist blames the managements of “older manufacturing firms with (at least until recently) large workforces and unions strong enough to negotiate generous retirement benefits.” The United Auto Workers demanded “More” and management gave it to them. Well, not quite. What management actually gave the workers was something rather less; they gave them a promise. They offered to pay them their benefits out of future earnings. Now it turns out that there aren’t going to be any earnings. Delphi lost $741 million on revenue of $13.9 billion in the first half of 2005.

What an outrage! How dare they renege on their promises! That is what the politician and the activist in each of us say. How could Detroit have made extravagant promises and then passed the bills off for the next generation to pay?

When a corporation creates a successful new product or innovates a business process and creates a new “global best practice,” it gets to enjoy extraordinary profits for a while until the rest of the world catches up. It gets to charge “rent.” Investors and speculators clamber aboard for the ride, and other rent seekersÃ¢â‚¬â€employees organized into labor unionsÃ¢â‚¬â€also demand their piece of the action.

The auto manufacturers of Detroit were the most productive in the world from the introduction of the Model T until the heyday of the magnificent land yachts of the 1960s. They spewed out cash in every direction: to investors, to managers, to government, and to organized labor. Then God created Toyota and the rent dried up.

In response, the automakers improved their products, eventually. But they did not reduce the promises and the rent payments first established when the Rocket V-8 and the Turbo-Hydromatic were the wonders of the world. For one thing, the United Auto Workers refused to let them.

Twenty-five years later, everyone is complaining about the mess. It seems that corporations everywhere are going into Chapter 11 bankruptcy, tanking their labor agreements, shuffling their pension obligations off onto the Pension Benefit Guaranty Corporation (PBGC), and, freed from their obligations, obtaining an unfair advantage over their competitors.

But there’s another angle to the story. In the airline bankruptcies, the workers and shareholders have submitted to the Chapter 11 process rather meekly. The shareholders get wiped out; the pension beneficiaries get a haircut from the PBGC, the unions get their above-market wages thrown in the toilet, and we hardly hear a peep. Will the Delphi stakeholders agree to go under the knife so quietly? We’ll soon find out.

Imagine a nice smooth Delphi bankruptcy, with management blamed, shareholders wiped out, and the workers and retirees given a really close shave without bloody nicks and cuts. It could set the rules for the upcoming General Motors bankruptcy.

Meanwhile it’s time for Congress to get to work. It could stop corporations from making reckless promises to current employees about future benefits. Neither today’s “global best practice” corporation nor its employees should assume that the rent will go on forever.

Who Lost Delphi?

To comment on this article at American Thinker click here.

To email the author, click here.