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Delphi files for bankruptcy

Delphi Corp., the largest U.S. auto supplier, filed for bankruptcy Saturday, sending shock waves through the nation's auto industry, already is weakened by high labor costs, falling market share.
The Delphi Corp. headquarters in Troy, Mich.Carlos Osorio / AP File
/ Source: The Associated Press

Delphi Corp., the nation’s largest auto supplier, filed for bankruptcy Saturday, sending shock waves through a U.S. auto industry already weakened by high labor costs and falling market share.

Delphi’s bankruptcy, which is expected to result in plant closures and layoffs, is one of the largest in U.S. history. The company has 50,000 U.S. employees.

The company filed to reorganize its U.S. operations in federal bankruptcy court in New York, where a judge Saturday allowed Delphi to continue operating while more hearings were scheduled. Delphi’s non-U.S. operations were not included in the filing.

Delphi Chairman and CEO Robert S. Miller said the company hopes to emerge from Chapter 11 in early to mid-2007.

“We will make every effort to make this as quick as possible,” Miller told The Associated Press on Saturday.

Miller said Delphi will continue to pay its employees and suppliers and will ship its products on schedule, although the company’s former parent, General Motors Corp., said the filing could cause supply problems.

“We are not going to adversely affect our customers,” Miller said. “Our people will get their paychecks and will still have their health benefits. Retirees will continue to get their checks. Any changes to that will be dealt with in an orderly way.”

Miller, a restructuring expert who was hired in July, had threatened to take the company into bankruptcy if he failed to reach a restructuring agreement with GM and its largest union, the United Auto Workers. Miller set a deadline of Oct. 17, when U.S. bankruptcy laws are scheduled to change.

Miller said Delphi will continue negotiating with GM and the UAW to lower its labor costs; wages for many Delphi workers are set by the company’s spinoff agreement with GM. Miller said the three parties agreed to continue their discussions after a bankruptcy filing.

“We mutually concluded there was still too much of the complex work yet to be done,” Miller said. “It was not going to be efficient to work right up to the midnight deadline to the change in the law.”

UAW officials blasted Delphi’s decision to file for bankruptcy one day after sweetening the severance packages of 21 top executives to help persuade them to stay at the company.

“Once again, we see the disgusting spectacle of the people at the top taking care of themselves at the same time they are demanding extraordinary sacrifices from their hourly workers, engineers, administrative and support staff, midlevel managers and others,” union leaders said in a statement.

Delphi said it made the change after determining its severance package for top executives was not competitive.

John Butler Jr., a bankruptcy attorney for the company, said Delphi would attempt “some restructuring of its collective bargaining agreements” during the reorganization. Delphi’s contract with the UAW expires in October 2007.

Delphi also intends to try to scale back pension benefits, Butler said during Saturday’s hearing. “The current level of retirement benefits is unsustainable and will eventually sink the company,” he said.

Delphi has 31 plants in 13 states, including Michigan, Ohio, Alabama and California. The company has 185,000 employees worldwide.

Jim Gillette, supplier analyst for CSM Worldwide in Grand Rapids, said he expects a number of underperforming plants to be shuttered or sold. He also said the bankruptcy could prompt other companies to file.

“This is not going to be an isolated incident,” he said. “It’s really going to be a rough few weeks and a rough few months for the industry.”

Delphi will finance its operations with $4.5 billion in loans, including up to $2 billion in debtor-in-possession financing from a group of lenders led by JPMorgan Chase Bank and Citigroup Global Markets Inc.

Based in the Detroit suburb of Troy, Delphi has struggled to make a profit since GM spun it off in 1999. It lost $4.8 billion in 2004 and nearly $750 million in the first half of this year.

Delphi, No. 63 on the 2005 Fortune 500 list of the country’s largest corporations, had listed $17.1 billion in assets and $22.2 billion in debt in Saturday’s bankruptcy petition.

While Delphi reported $4.3 billion in unfunded pension liabilities at the end of 2004, GM said in a statement released after the bankruptcy court hearing that it could have to assume $10 billion to $11 billion in retirement benefits for union-covered employees who transferred to Delphi as part of the 1999 spinoff.

The largest corporate bankruptcy in the U.S. was WorldCom Inc., which had $103.9 billion in pre-bankruptcy assets.

Like Tower Automotive Inc. and other auto suppliers that have recently declared bankruptcy, Delphi has struggled with the high cost of steel and other raw materials as well as U.S. production cuts.

But Delphi also blamed its spinoff agreement with GM for saddling it with high labor costs. Under the agreement, Delphi is required to pay GM wages of $27 an hour to most of its 24,000 UAW-represented workers. That’s double the level of competing suppliers, according to Standard & Poor’s Ratings Services. Delphi also had to pay full wages and benefits to 4,000 laid-off workers in jobs banks, which cost it $400 million each year.

A letter sent from UAW leaders to union members in Kokomo, Ind., earlier this week said Delphi asked the UAW to accept wage cuts of more than 50 percent, to $10-$12 an hour, and eliminate the jobs banks. Delphi also called for a reduction in health care benefits and vacation time.

Delphi also has been plagued by an accounting scandal that the FBI and the SEC are now investigating. Six people have resigned because of the investigation, including Delphi’s former Chief Financial Officer Alan Dawes.