Friday, March 31, 2006

GM, DELPHI and Profound Consequences

I've spoken of GM and Delphi's precarious situation on several past occasions, and how their predicaments are only the most recent indicator of broader problems in the US economy (lack of competitiveness). Well, I humbly believe the old adage "As goes GM, so goes America" is on right on the mark in this situation, and I don't think GM will get out of its pickle without filing for bankruptcy... which I believe is right around the corner.

Bottom Line: These two companies are at a serious competitive disadvantage in the world marketplace due to the high cost of union workers, soaring health care, expensive pension plans and dwindling market share.

Please allow me to provide a readers digest version of the situation, so many of my new readers understand what is going on here.

Delphi is a spin-off of the original GM and is responsible for manufacturing many of the parts GM uses to build their cars during the assembly process. These two are tied at the hip and both need each other to survive.

GM, over the last couple of years, has been losing a large portion of their auto market share, while at the same time they have been losing $ billions due to increasing health care costs, legacy pension plans, poor investments, high union wages, too many manufacturing plants, to many auto brands, and other issues... If it were not for the available liquidity in GM's bank accounts, they would have already needed to have filed for bankruptcy protection. Last year alone, GM lost $10.6 billion and the picture is not getting any prettier today.

Recently, Delphi filed for chapter-11 bankruptcy, as there was no way to stop the bleeding of red ink. Their only hope for survival is massive restructuring and across the board cost savings.

Over the past couple of weeks, Delphi and the United Auto Worker Union (UAW) have been trying to come to an agreement on wage and benefit cuts, and each side has been playing hardball. The Unions do not want to give in to the drastic cuts (drop in wages from $27hr to $16.50 hr) and Delphi cannot survive without them.

With zero luck in their recent UAW discussions, Delphi today filed a request through a Federal bankruptcy judge, asking to allow cancellation of their Union contracts.

If the Judge grants Delphi's request, the UAW has threatened an all out strike, which would shut down Delphi part production.

Without Delphi parts, GM would be unable to keep their own assembly lines moving. GM would then end up in a standstill, would lose over $1 Billion per week and would probably end up filing for bankruptcy themselves.

A GM Bankruptcy would send shockwaves through the bond market, derivatives market, stock market, etc and the ripple effects would be felt worldwide.

With that said, we'll have to wait until May 9th or 10th for the Court hearing, but keep your eyes on this issue, as it could have far reaching and very profound consequences.


Rob Dawg said...

Is GM playing hardball with the unions or with the Feds? I suspect the latter. This might be the excuse for national health insurance.

Out at the peak said...

If you look at the open interest for GM OTM Jan 2007 Puts, it's quite alarming. There are a lot of people thinking price will go under $10/share. 1.4M contracts betting GM will go under $20, and only 400K contracts betting GM will go above $20 in Jan 2007.

contrarian2day said...


National health insurance? Absolutely no way we could afford it... We're already a bankrupt country, we just aren't aware of it yet. National Health Care would quickly overwhelm the budget..

Peak, Thanks for the Startling numbers... I'd hate to see it happen, but Bankruptcy is probably their only option.