The Canary in the Mineshaft.
Detroit. The news of Delphi's bankruptcy filing may be just another piece of business news to those who don't live around these parts, or for those who don't have a vested interest in the U.S. auto industry, but the sad fact of the matter is that this development is just the tip of the iceberg in a fundamental shift that not only threatens to decimate the U.S. auto industry, it's one that will ultimately affect this nation's economy - no matter where you live or what you do.
The Delphi bankruptcy is the latest major crack in the pressure cooker that the U.S. auto industry has become over the last two decades - only this one is definitely the tipping point into a dimension that industry insiders have been dreading. Lower cost competition from around the world has changed the auto manufacturing landscape completely - and Detroit has been operating under a model that has been obsolete for years. Strapped with a crushing wage and benefits structure negotiated in an environment fueled by an optimism that in retrospect had absolutely no right to exist, the American car companies and the United Auto Workers union are now facing a future that revolves around a harsh reality that comes down to this one simple but all-encompassing statement: change or die.
The bottom line in Delphi's situation is that its cost structure is more than double that of the other suppliers it competes against. And this simply cannot continue. When Robert S. (Steve) Miller, Delphi's chairman and chief executive officer (and a turnaround specialist of note who was brought in this summer to try to make sense of this mess), informed the UAW that he was seeking wage and benefits cuts from its membership of up to as much as 63 percent, union management scoffed at the outrageousness of the idea. And even though Miller knew that he would get that reaction, he also knew that he had to make all parties involved understand the severity of the issues he was dealing with right up front. And what he's dealing with is the fundamentally flawed foundation on which Detroit's model has been based on for too long - thus, the tip of the iceberg.
Delphi (a huge supplier to GM with 300 plants in 38 countries and upwards of 185,000 employees) is caught in the crosshairs of Detroit's dilemma - which comes down to an unworkably high cost structure fueled by a "perfect storm" of sky-high wages, remarkably generous health care costs and crushing pension obligations. In its present configuration, Delphi is simply unable to compete in a world crawling with low-cost parts suppliers who are free of those same financial burdens.
The logical scenario that will unfold with this bankruptcy is that Delphi and the UAW will not come to an agreement to reduce the pay package, and then the bankruptcy judge will dissolve the agreement with the union. And once that happens, Delphi will be free to rebuild the company either with the union's participation - or without it.
But the other issue in the equation is that it's becoming more apparent by the hour that there's no separating Delphi's problems from GM's. We could be on the verge of a seismic development in which GM's downward spiral could be accelerated by Delphi's swoon. Kirk Kerkorian looms large in this scenario, and he's poised to move in before things get any uglier for GM. The Delphi situation may, in fact, play right into Kerkorian's hands. With GM's debt rating being lowered again, Delphi may force GM into a doomsday scenario that would have been unthinkable even a few months ago - one that involves acquiescing to Kerkorian's wishes as orchestrated by Jerry York or succumb to a bankruptcy of its own. The situation is that precarious.
Delphi, in effect, is the equivalent of the canary in the mineshaft, signaling an entire industry - and the nation - that the domestic auto industry is at the precipice of unthinkable disaster. Detroit is competing at a dramatic disadvantage in every phase of the game - and its stratospherically out-of-whack cost structure is just one part of it. The other part lies in the predatory trade policies, currency manipulation practices and home market protectionism as practiced by Japan, Inc., Korea and China that Detroit is dealing with on a daily basis.
It would be easy to write off Detroit's predicament as a self-induced set of problems, something that's an issue only for the "fly-over" states to deal with. But the problems Detroit faces - the health care costs, the pension costs and the gross trade disadvantages - are problems America now must face as a nation. Don't believe it? Between one in seven and one in nine jobs in this country are still either directly or indirectly connected to the domestic automobile business. Quite simply, if the domestic auto industry goes down for the count it will affect every corner of this nation and impact the national economy far beyond the devastation caused by the two recent hurricanes. It would be a catastrophe of almost incalculable proportions.
Thinking locally, there is no mystery as to what kind of effect the implosion of Detroit will have on this region. Remember, we're talking about a way of life that was propelled from the very beginnings of this industry by Henry Ford paying workers the unheard of sum of $5.00 per day to build his cars. From there, countless generations of American families lived out their lives fueled by an industry that for the most part provided a comfortable living, excellent health care benefits and a future retirement scenario that they could count on.
All of that is on the verge of going by the wayside - permanently.
In 2007, the UAW and the domestic automakers will enter into contract negotiations. If anyone thinks that the scenario discussed will be dramatically different than the scenario proffered by Steve Miller for Delphi - they will be sadly mistaken. Detroit is simply running out of time and running out of options. Detroit can't afford to continue building and selling cars at a loss, so the entire foundation of the industry - the gold-plated wages, health care and pension costs - will have to be blown up and the entire business model will have to be fundamentally altered.
It will mark the end of an era and really the destruction of a culture that has grown up in this region over 100 years. And the very existence of the UAW itself will not only be severely tested, it could very well become part of the past too.
The implosion of Detroit will also be a dramatic wakeup call for the nation itself. This country cannot continue on the path it's going without dealing with the fundamental issues of health care and pensions. And our government simply cannot continue to allow its trading partners to competitively exploit our industries - to the long-term detriment and deterioration of our own manufacturing base.
The Delphi bankruptcy marks the beginning of the end for an industry and a way of life, as we know it. It also affords this industry and the country a golden opportunity to reinvent and reposition itself for a brighter, more competitive future.
Suffice to say, these next few months will be the most pivotal in the history of the domestic automobile industry.
Thanks for listening, see you next Wednesday.
Automotive consultant Peter M. DeLorenzo founded Autoextremist.com - an Internet magazine devoted to news, commentary and analysis of the automotive industry, automotive marketing, strategy and product development - on June 1, 1999. Since then, Autoextremist.com has become a weekly "must-read" for leading professionals within and outside the industry, including top executives at the car companies, suppliers, dealers, journalists, financial analysts, enthusiasts, and people directly involved in motorsports. Prior to launching the site, Peter spent more than two decades in automotive advertising and marketing, holding top-level positions as Creative Director and Executive CD at ad agencies in Detroit and New York. In addition to his editorial opinion work on Autoextremist.com, Mr. DeLorenzo regularly consults for enlightened automobile companies and is a national commentator on the auto industry. The opinions expressed by Mr. DeLorenzo are his and his alone and do not necessarily reflect those of his clients.
