Auto parts maker Delphi’s bid to have a judge throw out its labor contracts raises the stakes in a three-way poker game with its former parent, General Motors, and the United Auto Workers.
Like most bets, the outcome of this one is impossible to predict. The risks include the potential for a crippling strike, a possible bankruptcy filing by GM itself and the economic devastation of regions where auto jobs are heavily concentrated. But unlike most poker hands, there will almost certainly be a smaller pot — and no winners — when all the cards have fallen.
“If the judge goes along and rips up the contracts with the unions or with General Motors, you will have a strike on your hands,” Michael Ward, an analyst at Ward Transportation, told CNBC. “And that could shut down virtually the entire industry, certainly General Motors.”
Such a shutdown is still months away — if it happens at all. The decision on whether the court will cancel Delphi’s labor contracts won’t happen before a hearing May 12, after which the judge could delay a decision and keep pressure on both sides to keep working on a new contract.
Unlike the potentially fatal shutdown of an ailing airline, GM could weather a possible strike, say some analysts, provided it was not prolonged. The auto giant is sitting on a cash hoard of $30 billion, and is selling off stakes in its GMAC finance unit and an 8 percent stake in Isuzu Motors to raise more.
And though a Delphi strike could cripple auto manufacturing, it would not bring about a lasting economic slowdown, according to Richard J. DeKaser, chief economist at Cleveland-based National City Bank.
“After such time as the workers returned to the factories, there would presumably be lean inventories as a consequence of selling out of inventory in the interim,” he said. “And that would require increase. You’d see a lot of monthly volatility (in economic indicators), but over time you’d essentially see a lot of wiggles around getting to the same place.”
In the past, companies have successfully used the bankruptcy process to break labor contracts, and the judge presiding over Delphi’s bankruptcy reorganization may well decide in favor of management this time around. But as the threat of such a move has become more common in ongoing battles between labor and management, some judges have preferred to lean on both sides to work out an agreement on their own. That’s what happened recently in a similar case involving auto parts supplier Tower Automotive, according to Ward.
“The judge basically said to them, ‘I'm not going to tear up this contract, I want the two sides to continue to talk,” he said. “So this thing could drag on for several months.”
The threat of a shutdown by its main supplier comes as GM struggles to steer itself back to profitability after losing nearly $11 billion in 2005. Delphi, meanwhile, posted combined losses of more than $6 billion in the latest 4 quarters of reported results.
The financial fates of the two companies are more tightly bound than manufacturer and supplier: GM retained huge financial liabilities for Delphi workers when it spun off the parts maker in 1999. Delphi’s bankruptcy could cost GM as much as $11 billion.
The causes of the industry’ problems range from high-cost labor contracts, including full salary and benefits for thousands of idled workers, to management’s prolonged reliance on high-margin, low-mileage light trucks and SUVs — even as soaring gasoline prices have clobbered sales of those vehicles. Meanwhile, U.S.-based foreign manufacturers like Toyota have gained market share with lower labor costs and a wider offering of more fuel-efficient cars, including more advanced gas-electric hybrids.
The declining fortunes of the U.S. auto industry have already been widely felt — especially in Midwest states where auto manufacturing is heavily concentrated. GM has already announced plans to cut 30,000 jobs and close 12 plants through 2008, and the indirect impact on related industries will hit even harder.
Because automakers and their suppliers have tended to concentrate around each other, the ripple effect in some regions would be more like a shockwave. Dekaser estimated that the so-called “multiplier” effect of GM job losses in the seven Midwest states served by his bank.
“We found that the the number was very large — like eight times,” he said. “So for each job you lose in motor vehicles, you tend to lose another seven in parts and elsewhere. That is very higher as multipliers go. Those number usually range around two.”