Copied below is an editorial column from todays WSJ. Substitute Lucent for
Delphi and change a few numbers and you are looking at our future. Read it and
Membership in the LRO is still only $25/yr.
The Oracle of Delphi
October 12, 2005; Page A16
Delphi's bankruptcy filing is ominous enough as the largest in the history of
the American automotive industry. But it also lives up to the company's
mythological name in what it portends for the auto industry, not to mention
the pension burdens that may soon be foisted on the American taxpayer.
This is a story about globalization and the increasingly unsustainable expense
of traditional business health and pension benefits in the U.S. But it is also
about an industry -- and here management and unions share the blame -- that
allowed its cost structure to grow out of all proportion to its productivity,
making a retrenchment inevitable.
A Delphi worker who earns $25 an hour actually costs an average of $65 an hour
once retirement and health-care benefits are factored in. It is these
open-ended benefits packages that make any rationalization of the auto
industry's cost structure so difficult. Six-year-old Delphi, with 12,000 union
retirees compared with 185,000 employees world-wide, can count itself
fortunate. GM has more than one million retirees and dependents to provide
for, against a global payroll of 317,000.
Over the weekend, CEO Robert S. Miller described Delphi's business plan as
trying to "outrun" its legacy costs through growth and the attrition of the
workers (and union contracts) it inherited when it was spun off from GM in
1999. The idea was that GM would reabsorb some of Delphi's workers as GM's
payroll needs increased.
Delphi would then grow by taking on new workers at lower, more competitive
wages -- in some cases, less than half the $25 an hour that the legacy workers
were entitled to under GM's contracts with the United Auto Workers union. In
2004, Delphi secured that right under a new contract with the UAW, but it has
hired too few people under the new terms to make much of a dent in its cost
This is, in part, because Delphi itself has never grown much since the
spin-off. It has added new business, reducing its reliance on GM orders. But
GM has shrunk over the past six years, meaning Delphi was mostly running to
stand still. GM's shrinkage has also meant that it never needed those workers
who were supposed to "flow back" to the parent company; it has some 5,000
workers in its "jobs bank," laid-off unionized employees who are essentially
sitting around waiting for the phone to ring and costing GM $750 million a
year. Delphi has 4,000 employees in its own jobs bank. Mr. Miller puts the
cost of paying them to do nothing at $400 million a year even as its unfunded
pension liabilities have climbed toward $4.5 billion.
It was in this context that Mr. Miller sought 60% pay cuts from the unions in
the run-up to last weekend's bankruptcy filing. Under a court-supervised
reorganization, he will presumably get those concessions. But even so, it is
likely that a substantial number of the 33,000 unionized Delphi employees in
the U.S. will lose their jobs. Three-quarters of the 185,000 people Delphi
employs are outside the U.S., with one-third in Mexico. The reorganization
will likely result in a company even more heavily tilted toward its overseas
Whatever the ultimate outcome, Delphi's bankruptcy likely marks the death
knell for the expansive system of defined-benefit retirement packages that
auto workers have long enjoyed. Those benefits were negotiated for a growing
industry that is no longer growing, and, as in the steel industry before it,
the numbers no longer add up in the car business.
This is, as union leaders said in response to the filing, an extremely bitter
pill for the workers. But the truth is that this kind of benefit system was
probably never a good idea to begin with, even if it was a good deal for some
people for some time. Defined-contribution retirement plans, such as 401(k)s,
may put more of the onus on workers to both save for retirement and manage
their own investments. But they also give workers an asset that their
employers can't take away -- and one that they can take with them if they jump
to another job or a different industry.
Mr. Miller has defied expectations by denying he intends to dump Delphi's
pension obligations on the Pension Benefit Guarantee Corp., the government
pension insurer of last resort for companies that can't meet their
obligations. He notes that of the 10 restructuring efforts he's led, only one
-- Bethlehem Steel -- resulted in flipping the pensions to Uncle Sam. On the
other hand, Mr. Miller noted, the PBGC is technically an unsecured creditor
under bankruptcy rules; other creditors would have to agree to hold the PBGC
harmless in the restructuring in order for Delphi to continue to pay those
Compared to the auto makers themselves, Delphi is a small fry as pension
obligations go. And in the wake of the airline bankruptcies of the last year,
the need for reform of the PBGC and the moral hazard it creates has become all
the more apparent.
Legislation currently under consideration in Washington would allow the
airlines to freeze their defined-benefit obligations at current levels while
transitioning to a defined-contribution plan going forward. The legislation is
far from perfect, but it's a step in the right direction. There's no reason it
should be limited to the airlines, however; the auto industry is the much
bigger kahuna here. And Delphi's filing is an omen of what's to come.