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The Debacle of Delphi

The industrial welfare state forces the auto-parts giant into bankruptcy.

12:00 AM, Oct 21, 2005 • By RICHARD BURR
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WHEN THE LARGEST INDUSTRIAL BANKRUPTCY in American history happened more than a week ago, Washington barely noticed. But the fight between the automotive parts giant Delphi Corporation and its unions could take a big bite out of taxpayers' wallets.

The rhubarb started when Delphi, the former in-house parts supplier for General Motors, warned that it was near financial collapse. It couldn't afford to keep paying its workers $25 to $31 an hour, about $52,000 to $64,500 a year--plus benefits. Delphi Chairman Robert "Steve" Miller wanted the union to agree to a 60 percent wage cut to $10 to $12 an hour and other concessions. He also sought a bailout from GM, which provides most of Delphi's business. Both GM and the UAW balked, so Delphi filed for bankruptcy.

No one likes to see workers lose their jobs or see their pay and benefits cut. But the industrial welfare state that the union created with the automakers' blessings no longer makes economic sense, if it ever did.

DOMESTIC AUTOMAKERS have had to pay off the UAW for productivity improvements--more automation, flexible job rules and job cuts--which were needed to compete with foreign competitors. This invariably required putting more people on the private dole. For example:

Get paid for no work. More than 12,000 auto workers, including 4,000 from Delphi, are put in a "jobs bank," meaning that they show up at a plant and spend the day doing no work. Others do community service. Including healthcare and pension benefits, the cost runs from $65 to $71 an hour per worker--$135,000 to almost $150,000 a year. This program comes after a worker is laid off and has exhausted their company-financed unemployment benefits, which are equal to 95 percent of their former pay. The total cost to the industry is $4.5 billion a year and growing.

Retire early with full benefits. A "30 years and out" rule lets workers who are hired as early as 18 retire before they turn 50. If their health is good, they collect a pension and fully paid healthcare for another 35 years or more. By contrast, Miller says, at Delphi salaried staffers have to go on Medicare after they turn 65.

Work nine and a half months, take off two and a half months. Workers annually receive six weeks of vacation and 16 holidays. Every two years, they add a holiday for state or federal Election Days--a de facto political contribution to the Democratic party.

This kind of welfare was tolerable when the Big Three automakers dominated the market. But GM, which once claimed 50 percent of the American market, is clinging to about 26 percent today. Even during what is supposed to be an economic recovery, automakers and their suppliers are struggling; GM lost $1.6 billion in the third quarter alone. Ford lost $284 million overall in the third quarter, with its North American auto operations losing $1.3 billion. And both Ford and GM say they plan to cut more factories.

GENERAL MOTORS has a more perilous situation than Social Security. At least that federal program can claim three workers for every retiree. GM has more than three times as many retirees and dependents as it has workers. Delphi's Miller and the Bank of America warn that GM eventually could go bankrupt.

It doesn't help matters that salaried workers pay more for healthcare benefits--about 27 percent of costs--than union workers do.

"Paying $65 an hour for someone mowing the lawn at one of our plants is just not going to cut it anywhere in industrial America for very long," Miller said at a press conference last week.

The feeling is shared. When U.S. Rep. David Camp visited farmers in his Michigan district last week, says spokesman Sage Eastman, one of them said about the auto pay package: "(Expletive), what am I doing farming?"

The UAW grudgingly recognizes the problem. Its most recent contract included modest healthcare co-payments for workers. On Monday it opened an agreement with General Motors to give $1 billion a year worth of healthcare relief (GM spends almost $6 billion annually on healthcare).

But Delphi will remain a sore point because factories can be closed and labor contracts torn up in bankruptcy. To complicate matters, the company gave its top managers an 18-month severance package a day before the filing as a way to keep them around through the restructuring.

UAW President Ron Gettelfinger called the severance package "a disgusting spectacle." An "angry" Michigan Gov. Jennifer Granholm lashed out at "an apparent indifference in Washington to the human pain that so-called free trade has brought to average, patriotic, hard-working citizens who believe in keeping promises."

And UAW leaders say they aren't ruling out a strike if the bankruptcy court nullifies its Delphi contract. That would shut down an important part of the national economy, since automakers rely on daily parts shipments to make vehicles. Delphi's Miller says a strike would escalate the number of plant closings and job cuts. But a walkout would cost GM business and pressure it to cave--a course the company has traditionally chosen.

A strike would also create a public spectacle which could pressure the Bush administration and Congress to step in with a bailout. Don't be surprised if Michigan's governor and Democratic congressional delegation propose a federal worker-focused package of subsidy and trade protectionism. They put together a similar wish list two years ago when "offshoring" or the outsourcing of jobs to foreign countries became popular.

And they may have a powerful ally in Sen. Hillary Clinton, who has a Delphi plant in New York. Clinton called Miller last week to chat about the factory, as well as pension and healthcare issues.

ANY BAILOUT SUBSIDIES of workers or companies should be a tough sell. Delphi isn't a saint. The federal government has found accounting misconduct in the company and a criminal investigation is ongoing.

Besides, the automakers and their workers made their welfare pact and now need to wean themselves from it. Congress is besieged with spending requests for Hurricanes Katrina and Rita. The Pension Benefit Guaranty Corporation is $23 billion in the hole and growing. Domestic automakers would love to have taxpayers subsidize their healthcare costs, but Americans may begrudge financing gold-plated benefits that many don't have themselves.

The UAW and mismanagement have already bankrupted one company. The industrial welfare state shouldn't drag Uncle Sam down with it.

Richard Burr is the associate editor of the Detroit News editorial page.