Buffalo News (New York), November 25, 2005, Friday

Copyright 2005 The Buffalo News
Buffalo News (New York)

November 25, 2005 Friday
FINAL EDITION

SECTION: NEWS; Focus: The Auto Industry; Pg. A1

HEADLINE: GM's future awaits Delphi's fate;
If Delphi can extract itself from bankruptcy, General Motors might have a chance to recover from years of bad decisions

BYLINE: By Jerry Zremski - NEWS WASHINGTON BUREAU

BODY:
The future of General Motors Corp. -- which announced the elimination of 30,000 jobs this week -- hangs in the balance at Delphi Corp.
If Delphi can extract itself from bankruptcy with a workable labor agreement -- and billions in help from GM -- the longtime auto industry leader might have a chance to bounce back from years of bad decisions, auto industry analysts said. In fact, GM probably would look at Delphi as the model for its own new deal with its workers.
But if talks between Delphi and the United Auto Workers end in a prolonged strike, Delphi and its workers could drag General Motors into bankruptcy, too.
In other words, it wasn't a divorce that occurred when GM spun off its major parts operations in 1999, the experts say. It was the beginning of a codependent relationship.
General Motors and Delphi "are inextricably linked," said Gerald C. Meyers, a Buffalo native who once headed American Motors. "Delphi is essential to General Motors. You can't run the company without it."
That's because Delphi, which employs 3,800 at a plant in Lockport, makes key parts for every vehicle made by GM, which employs 3,000 at its Tonawanda Engine Plant.
And the same structural financial problems plague the parent company, which lost $4.8 billion in North America in the first nine months of this year, and its bankrupt offspring.
"GM sold Delphi because auto parts manufacturing didn't make economic sense anymore," said Peter Morici, a professor of business at the University of Maryland. "The trouble is, General Motors doesn't make economic sense anymore, either."
Experts said the two companies are both being dragged down by huge "legacy costs," the billions they owe to retirees and longtime workers for pensions and health care. Those expenses stem from the days when GM was bigger and more successful.
GM guaranteed pensions and health care for many Delphi workers and retirees as part of the spin-off agreement. The automaker has said that responsibility alone could cost it $11 billion.
>$60 billion in retiree health costs
Meanwhile, GM faces more than $60 billion in health care obligations to its own retirees.
Japanese competitors like Toyota and Honda, with younger work forces and less expensive labor, don't face anything like GM's burden, experts said.
"Clearly [GM's] competitive position relative to the Japanese manufacturers is affected by the legacy costs," said Howard G. Foster, associate dean of the University at Buffalo's School of Management.
The only way to quickly deal with such cost pressure is to cut expenses elsewhere, which is why GM plans to eliminate 30,000 manufacturing jobs, which is expected to save $7 billion annually.
But experts said that's just one step in GM's effort to heal itself.
The biggest step is likely to come later -- if GM weathers the coming crisis at Delphi.
For now, Delphi and the United Auto Workers appear to be at loggerheads. The company wants to cut wages for its U.S. hourly employees to as little as $10 an hour, down from $27, while trimming 20,000 of its 34,000 production jobs over three years. The union says that is "an insult."
Experts see that exchange as the beginning round of a titanic labor battle.
Meyers, the former American Motors executive, foresees an optimistic scenario where Delphi and the UAW move to the brink of a strike, which is averted by last-minute concessions by the union.
"They're mad," Meyers said, "but they're not stupid."
A deal between Delphi and the UAW, trimming wages and benefits, could become the model for a new agreement at GM when its contract with the union expires in 2007, several experts said.
Then again, if there's a strike at Delphi, all bets are off.
"Within one day, a strike at Delphi would start shutting down GM's plants," said Arthur Wheaton, an industry education specialist at Cornell University's School of Industrial and Labor Relations. "It would be good for GM if Delphi can reduce costs, but if they do that by disrupting the supply of parts, they can absolutely cripple GM."
And the longer a strike goes, the more GM would suffer. Several experts said that GM would burn through its supply of $19 billion in cash in a matter of months and have to declare bankruptcy.
"If that happens, it's like nuclear war," said Eric Merkle, director of forecasting at IRN of Grand Rapids, Mich., a consulting firm that follows the auto industry. "There's nothing left for anybody: [Delphi and its union] would have both just killed each other off."
And they might do irreparable damage to GM, too.
While few experts foresee the company going out of business, some think bankruptcy would destroy the company's reputation at a time when it has other huge problems to overcome.
>GM needs better management
Beyond its huge cost burdens, GM needs better management, analysts said. It can't afford any more big mistakes like the acquisition of Fiat, the troubled Italian automaker that has cost GM upwards of $5 billion, Morici said.
Moreover, while the quality of its vehicles has improved over the years, GM can no longer be so far behind the competition in vehicle design, several analysts said.
"There is no good solution for GM until GM designs cars that everyone must have," Wheaton said.
Bob Kurilko, vice president of corporate strategy at Edmunds.com, noted that leading Japanese manufacturers are 11/2 times faster at bringing fresh models to the market. That's because GM designers, caught in a lumbering bureaucracy, are busy putting together "me too" clones of the same model for the company's various divisions.
"The Japanese manufacturers are always a step ahead," Kurilko said.
Analysts also worry that GM is far too heavily invested in sport utility vehicles when Americans are losing their passion for gas-guzzlers. For that reason and others, GM soon could lose its status as the world's largest automaker to Toyota.
In other words, the automaker's troubles go far beyond those of its main parts supplier.
And where will those troubles end?
"It's hard for me to envision a world without GM," said Foster, of UB. "But I can foresee GM as nothing but another player [in the auto industry] and not a dominant force."
e-mail: jzremski@buffnews.com.

GRAPHIC: GRAPHIC: Uncertain future: Automaker General Motors and its former subsidary Delphi Corp. face major decesions related to the costs of curent and former employees. (see microfilm)