Sunday, October 09, 2005

Yet Another Corporate Bankruptcy - (Un)Intended Consequences of Changing the Bankruptcy Law

So Delphi filed for bankruptcy on Saturday. More here, here, here, here, here, here, here, here, and here.

This filing (like the NorthWest filing three weeks ago) is being done because of the rule changes coming October 17th to the Bankruptcy Law. IANAL, but it is common knowledge that after the rules change, corporate bankruptcies must be completed inside a year and a half. The duration of current corporate bankruptcies are only limited by the receiver. How many years has United been operating under the advice of a receiver appointed by the bankruptcy court? It used to be said that you could tell which railroad or steamship line was under receivership by looking at their equipment. The business with the newer/better equipment was usually in bankruptcy.

The problem with Delphi is structural. Delphi assumed a series of GM-UAW contracts under the assumption that the union employees would be recalled to their normal positions by GM so that Delphi could hire employees under a new contract with a lower cost of labor. But GM didn't recall the employees. So Delphi is left with people that it has to pay full wages regardless of whether they are employed or whatever.

This would be fine if Delphi were operating as a normal part of GM where the cost of labor is carried by all GM production, but Delphi isn't part of GM, it just has the GM-UAW contract that extends to 2007.

Delphi is a GM supplier and GM expects its suppliers to cut their costs by 30% per year forever. This is hard to do when the production costs for Delphi are fixed by that GM-UAW contract. Regardless of how many widgets Delphi produces for GM (using automation or whatever) the base cost of the widgets still has to carry the labor costs regardless of whether that labor is employed in making the widgets or on layoff.

Delphi is seeking to have the bankruptcy court terminate the GM-UAW contract now so that (a) they are only paying the people who are working, (b) to cut the labor rate to around $14 per hour, and (c) unburden Delphi from paying GM pensions. The item (b) corresponds to the projected labor rate for newly hired workers replacing workers rehired by GM.

It would not surprise me if the receiver transferred the obligation for (a) and (c) back to GM in the process of un-doing inappropriate transactions. This would leave Delphi to soldier on with the rest of the GM-UAW contract until it expires in 2007 at which time they would get (b).

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