Steve Miller--after a long and stellar career helping to take companies that few thought could survive to sustainable profitability--talks about what he tried to do with Delphi: Full text of remarks by Steve Miller, chief executive of Delphi, to the Financial Times, Monday, October 10:
Delphi, and its predecessor companies that became part of General
Motors, have over a century of tradition as the world's leading source
of advancing automotive technology.
At its birth at the spin-off in 1999, General Motors had created the
world's largest auto supplier, with the incredible blessing of most of
the sophisticated technologies that make up an automobile, but with the
curse of uncompetitive labour contracts. By agreement , Delphi was
saddled with OEM wages and benefits, yet expected to compete with other
suppliers, often organised by the same unions, paying less than half the
OEM levels for their workforces.
Even today, Delphi represents perhaps the finest amalgamation of
automotive technologies and component manufacturing capabilities in the
world. Fully half the revenue base is in profitable, growing, and
technically sophisticated products on a global footprint.
The spin-off of Delphi was the right concept for GM. No automaker can
compete long-term paying punitive wage and benefit costs for the labour
involved in the parts content of the finished automobile. And the
growing sophistication of today's motor vehicles is simply beyond the
scope of a single organisation to manage.
The basic idea was for Delphi to outrun the problem of its inherited
labour cost burden by diversifying its customer base and global
footprint. Overall, it did an excellent job. In the most recent quarter,
GM was down to 49 per cent of total revenue, compared to over 80 per
cent at inception.
So what went wrong? Three things:
One: The spread between OEM labour costs and competitive supplier labour
costs has widened sharply over the past decade, driven by globalisation
and by rising health care costs.
Two: The sharp decline in GM market share has reduced GM North American
production volumes by a million units per year, from 5.5 million to 4.5
million units, in the last three years. The impact on Delphi has been to
reduce revenues by several billion dollars a year worth of parts. Given
our high fixed costs and inflexible labour costs, the result has been
Three: The game plan for Delphi included 'flow-backs' to GM of excess
workers at Delphi freed up by improved productivity, The theory assumed
that GM would have plentiful openings due to retirements of its ageing
workforce. But GM's severe production declines have offset its own
workforce attrition, and it has had no room to accept excess Delphi
workers. Delphi has therefore had to pay 4,000 idled workers in its
'jobs bank' full pay and benefits amounting to about $100 million per
The resulting financial pressures have forced Delphi to seek Chapter 11
protection while we reorganise. We had hoped to work things out with our
unions and with GM, but despite good and constructive discussions, time
ran out. Nonetheless, those discussions will continue. The unions are
involved, because our labour contracts are simply unaffordable and must
be changed. GM is involved, because it is contingently liable, through
contractual arrangements dating back to the spin-off, to make up for any
denied retirement benefits of the Delphi workforce in the event of our
financial distress. The amount of liability is hard to quantify, but
even GM admits it could exceed $10bn.
So what happens now?
Actually, very little changes immediately.
I had over the past month been saying that if we ended up going into
Chapter 11, we would be well financed, well organised and well planned.
I meant it. And we are. This stands in stark contrast to some other
bankruptcies, most notably David Stockman's Collins and Aikman, which
tumbled into a chaotic bankruptcy that left customers on the hook for
over $100 million in penalties to resuscitate production to keep their
assembly lines running. That was a disgrace and an embarrassment to the
entire supplier community.
Our Chapter 11 process is limited to our US corporate entities, so half
our business, which is overseas, is completely unaffected by the filing.
Our Chapter 11 process will not adversely affect our customers, period.
We will continue shipments on time, under contractual terms, throughout
our restructuring. I pledged that during my previous Chapter 11
experiences as a CEO of automotive suppliers Bethlehem Steel and Federal
Mogul, and I delivered. I intend the same outcome at Delphi.
Our suppliers have the assurances that we have the liquidity to pay them
on time, in full, for continuing shipments. Payables for goods delivered
this past month to US operations will be delayed pending resolution of
our Chapter 11 case, but we will have the ability to assist particular
suppliers for whom this imposes an undue hardship that might threaten
our production schedules.
Our people will continue to receive their current pay and benefits until
we are well into the Chapter 11 case. Under the bankruptcy law, we are
required to bargain with our unions in good faith, and to provide
sufficient information to establish our case for reduced labour costs.
This will take a number of months. In most cases, managements and
companies arrive at an equitable settlement. If we should fail, however,
then we can appeal to the court to allow a rejection of the current
labour contract. If granted, the results is a free-for-all, wherein
management can impose whatever terms it chooses, but the union is free
to strike. Nobody wants to end up there, which is why a settlement is
reached in almost all cases.
Our pension plans have been the object of much speculation. We have
about a $5bn shortfall in our plan assets to our plan liabilities. Some
have suggested that Chapter 11 means termination of the plans. That is
simply not true, at least at this point in time.
As background, I have been involved in a leadership position in about 10
corporate restructurings, starting with Chrysler in 1980, and now at
Delphi. In about half the cases, we have had to use a Chapter 11
process. In most of those cases, however, the pension plans survived
intact. In only one case did the PBGC take over the pension plan, and
that was Bethlehem Steel. There, we had 12,000 active workers, in six
steel mills, all bleeding red ink, trying to support 130,000 dependents.
The math could not work. The PBGC took action to terminate the plans,
and I had no way to stop it.
At Delphi, we have made no decision to terminate our pension plans. The
big question will be whether we can formulate a plan of reorganisation
over the next few months that can generate sufficient capital to support
continued efforts to restore funding of the plans. To do so will require
the participation of many parties.
First, our unions will have to agree to modifications of our wages and
benefits at our continuing operations, such that we have profit margins
sufficient to repay the pension plan shortfall out of future years'
profits. This will put the unions in the difficult position of perhaps
having to make trade-offs between maximising the pay and benefits for
active workers versus maximising the chances for saving the pension
plans. It is a calculus made infinitely more complex by the GM
contingent benefit guarantees.
Second, we will need to reach an understanding with GM as to our future
business prospects as a continuing supplier to them. Without GM's
business, Delphi would lack a healthy revenue base to support our
accumulated pension obligations.
Third, we will probably require some forbearance from the PBGC as to our
funding schedule. It is too soon to quantify what our needs might be,
and it is a hot topic in Washington these days so we don't even know for
sure what the legal requirements are going to be.
Fourth, we would have to convince the other creditors in our bankruptcy
case that we should reorganise in a way that holds the PBGC harmless,
even though they are an unsecured creditor.
Behind all this financial drama are the lives and livelihoods of
thousands of our loyal and dedicated workers. These are honest, hard
working human beings who played by the rules and cannot be blamed for
pursuing the American dream by taking a job at GM or Delphi. They
expected us to live up to our promises, but have been caught by fast
changing global economics. They are being severely impacted and
disappointed. I don't blame them for being angry. But neither do I fear
production disruptions. They are adults, and they understand that
industrial action can only hasten plant closures and further jeopardise
It is a very difficult job to be the CEO of a company going through this
transformation, knowing that my decisions will affect so many. But we
are at the mercy of forces beyond our control, and so we must face up to
the hard choices ahead of us. I expect continuing heavy criticism for my
role here, but I will not shy away from pointing out the harsh, simple
realities of our situation.
What will happen to Delphi?
If we do this right, Delphi will remain one of the world's leading
global automotive suppliers. Yes, with a smaller US manufacturing
footprint. And with a more focused approach to selected product lines
where we can be the technology leaders and the category killer. But it
will be a jewel of a company, and a technological powerhouse for years
If we do it badly, Delphi may be broken up into small pieces, and
America will have lost some of its precious industrial treasures. The
impact of a collapse could potentially injure most of the world's
automakers, and perhaps fatally wound General Motors. I am absolutely
determined not to let that happen.
Let me turn to what I think is the broader context in which the Delphi
drama is being played out.
The two overarching themes here are globalisation, and our ageing
Globalisation is a fact of life these days. We no longer exist in a
national economy, but a global economy. This is a good thing, in that it
brings rising standards of living not only to Americans, but to all the
But what has been brought into sharp relief is the different value the
global market places on knowledge workers versus basic manufacturing
workers. I was struck by what I saw when I visited our Delphi operations
in Mexico last week. Our average hourly worker makes about $7,000 a
year, while the average salaried worker makes about $35,000 a year. A
spread of five times! The same spread, or wider, exists in all low-cost
countries. The implications for Americans are enormous, and it boils
down to this. If you want your kids to enjoy the great American dream,
get them a good education. The days when manual unskilled labour can
deliver $65 per hour are disappearing.
My recent experiences have been with three industries that are
undergoing profound change - as CEO at Bethlehem Steel, as a board
member at United Airlines, and as CEO at Delphi. Steel, airlines and
What those three industries have in common is a social contract, worked
out over the past half century with strong centralised labour unions, to
elevate their workforces with elaborate defined benefit retirement
programmes. Back in the days when you worked for one employer till age
65 and then died at age 70, and when health care was unsophisticated and
inexpensive, the social contract inherent in defined benefit programmes
perhaps made economic sense.
Today, defined benefit programmes are an anachronism, and we are
witnessing the slow agonising death of defined benefits as industrial
compensation policy. First off, they force people to stay with one
employer, and even though we have a much more mobile and flexible
population these days. The lack of portability of defined benefits is a
real issue. Second, the notion of having all your retirement eggs in one
basket - your employer - is a concentration of risk that is simply
inadvisable for anyone in today's fast moving economy. Finally, these
programmes have a way of threatening the existence of traditional large
employers. GM is a junk bond credit these days as it staggers under a
burden of $150 billion of combined pension and health care retirement
People are living longer these days. And medical science is rapidly
expanding the capability to spend vast amounts of money keeping you
alive for decades. Of course, that is a good thing. But the question is,
how can we afford it? As a society, we must we must generate enough
wealth in our working years to support our income aspirations and health
care needs in our sunset years. It is getting more difficult every year.
In the midst of these trends, the unions in the traditional steel
companies and the traditional auto companies bargained for
thirty-and-out. The theory was, create more jobs by retiring people
sooner. And aren't 30 years in a grimy factory enough? But this means
people can start work at age 20, retire at age 50, and expect full
pensions and health care til age 90 or so. In other words, enjoy the
fruits of your labour for more years than you were at labour. As a
society, somebody has to pay. And to the shock of the Big-3 automakers,
they've found that customers won't pay when they have choices.
Beyond Delphi, things are going to get messy for the Big-3 in coping
with all this. The current labour agreements expire in 2007, and it will
be a historical collision point for all these social and economic forces
that are at work. GM has already declared it can't wait til then to trim
its $80bn of accrued retiree health care obligations. Clearly, they are
headed down the same Chapter 11 path as Delphi, unless there is dramatic
change in their staggering legacy labour burden.
My worries go beyond the auto industry. What I am describing is also
embedded in our debates over Social Security and Medicare. The
overwhelming voltage in the political third rail of touching these
entitlements will forestall corrective action for years, but the problem
will only grow. I fear something like inter-generational warfare, as
young people increasingly resent having their wages reduced and taxed
away to support social programmes for their grandparents' income and
health care concerns.
I didn't come here to suggest answers for all this. I don't have
answers. But I just wanted you to view what is happening at Delphi as
simply a flash point, a test case, for all the economic and social
trends that are on a collision course in our country and around the
I cannot avoid the adverse impact this will have on the many fine people
who work at Delphi. But hopefully, I can help soften the blow, and help
preserve the magnificent industrial assets that a century of innovation
and hard work have brought us.