REVIEW &OUTLOOK

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 structure.

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 operations.

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 pensions.

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.