Column: Delphi goes bust

Here’s a column I posted at about Delphi filing for bankruptcy:

“To the ancient Greeks, Delphi was the place where the high priestess of Apollo would foretell the future in return for the right number of gold pieces. General Motors just got a glimpse of its future from something called Delphi too, but this one isn’t an oracle — it’s a bankrupt auto-parts company that GM spun off a few years ago, one that has continued to be a millstone around the neck of the giant company. And this particular Delphi is going to cost General Motors a lot more than a few gold pieces and some incense. In the worst-case scenario laid out by some industry analysts, Delphi’s woes could force the car-maker to file for bankruptcy protection.

Those concerns pushed shares of GM down by almost 11 per cent on Monday, on huge volume, to a new 52-week low. Although the stock rebounded somewhat on Tuesday, it is still down almost 40 per cent from the peak of $42.22 (U.S.) it hit in late July, and is more than 50 per cent lower than it was in January of last year. The car-maker has lost about $15-billion in market value in less than two years, and — in a striking illustration of the market’s perception of this giant company — GM’s market capitalization of a little over $14-billion is now less than 10 per cent of the company’s annual revenue of $190-billion, and also less than the amount of cash GM has on hand, which amounts to about $16-billion.

So why is everyone so down on the world’s largest car-maker? Aren’t lots of people buying cars? They sure are. But GM and its fellow U.S. auto companies are making less and less on each one, thanks to the ever-increasing sales incentives they provide to new buyers (the latest being “employee pricing”). And meanwhile, their costs — primarily health-care and pension related — are rising. General Motors may have sales of $190-billion, but its total debt outstanding is $300-billion, and that doesn’t include its future health-care costs, which amount to about $57-billion, or four times its market value.

Labour costs, related primarily to health-care and pension liabilities as well as to wages, was one of the main reasons GM got rid of Delphi in the first place, by spinning it off as a public company in 1999. Unfortunately for the newly independent auto-parts maker, it was hobbled by that legacy even as it had to compete with other suppliers whose labour costs were a fraction of those at Delphi. And GM’s slipping market share over the past few years has left Delphi twisting in the wind, since about 50 per cent of its business still comes from the U.S. car manufacturer. Unfortunately for General Motors, meanwhile, the auto-maker remained on the hook for a large chunk of Delphi’s liabilities related to health care and pensions, and that is what helped take GM’s stock price down so quickly on Monday.

Despite the damage that a Delphi bankruptcy filing will cause to GM, some analysts applauded the company for resisting attempts by its former division to pressure General Motors into agreeing to a $6-billion bail-out package. “In the past GM had often taken the path of least resistance in such cases: opting to pay out billions rather than facing the uncertainty associated with a hard-line stance. This history led many industry observers to conclude that GM would most likely take the same tack with Delphi,” said a report from Deutsche Bank. The brokerage firm said that the auto-maker might actually make out fairly well in the longer term, if it gained a bigger stake in a restructured Delphi.

Others are more pessimistic, however. GM itself has said that the benefit guarantees it made to Delphi could cost as much as $11-billion. While the parts company has said that it doesn’t foresee any disruption to its business during the restructuring, there is no way of telling whether that optimistic scenario is realistic or not, and if not how such a disruption would impact GM. At the very least, the auto-maker would likely wind up paying more for the $13-billion in parts it buys from Delphi every year. What’s worse, GM’s failure to help bail out Delphi isn’t likely to go down well with the company’s own unions, and that could derail GM’s attempts to get a break on its own crippling health-care and pension costs.

Banc of America Securities — which downgraded GM to a “sell” — said Delphi’s filing boosts the chances that GM will also have to file for Chapter 11 to 30 per cent from 10 per cent. Standard and Poor’s cut its rating on the car-maker’s debt, which was already lowered to “junk” status earlier this year. And an analyst with the debt-rating agency said GM might have to sell off a stake in its financial arm, General Motors Acceptance Corp., in order to pay its obligations. GMAC is the auto-maker’s crown jewel, since it is the only part of GM’s business that actually makes money. S&P said that GMAC would have a market value of about $35-billion as a standalone company, or more than twice what GM is worth including GMAC. That effectively means the car-maker has a negative net worth of about $20-billion.

If the smile on your local GM dealer’s face seems more than a little forced, now you know why.”

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