VideoYou didn't need an oracle to know that Delphi would end up in America's bankruptcy courts, which is where it sought protection from its creditors on October 8. The world's biggest maker of car parts has been crushed not least by the legacy of generous pension and health-care promises made in the past to its American employees. Despite Delphi's annual revenues of $28 billion, in a market increasingly served by low-cost workers in places like China and with raw-material costs soaring these benefits are no longer affordable. Delphi's future pension obligations alone are valued at $8.5 billion. Some $4.3 billion of that is "unfunded" — i.e., the firm has failed to put aside enough money to meet its obligations. Its unfunded healthcare promises are even larger.
Delphi's bankruptcy may have painful consequences for its workers and retirees, who, under Chapter 11 of America's bankruptcy code, could see their benefits slashed as the company restructures its liabilities in the hope of becoming profitable again. The bankruptcy will also affect General Motors (GM), the world's biggest carmaker, from which Delphi was spun off in 1999. Having declined to rescue Delphi, GM faces disruption to its supply chain. It might also have to honor guarantees it made in the event that Delphi ever came under "financial distress" — that presumably encompasses bankruptcy.
Estimates of GM's potential liability to Delphi range from $1.5 billion to $11 billion. Alas for the carmaker, such numbers are dwarfed by its own existing pension and healthcare burden, now so large that there is increasingly talk in Detroit that it too may be driven into bankruptcy. Steve Miller, Delphi's boss and a veteran of bankruptcy wrangles in other industries, predicted this week that GM would go bust inside the next three years unless it can win huge concessions from its trade unions — something Delphi failed to do.
The numbers are awful. GM's credit rating was lowered again by Standard & Poor's on October 10. GM expects to spend over $5 billion this year on health care alone, up by $1 billion since last year. That adds up to about $1,500 for each car made by GM, or some 3 percent of the firm's revenues. Much of this money is for GM's former workers: it now provides health insurance to over 1 million retired Americans.
GM says that its current pension-fund liabilities are fully funded, but that claim is controversial. Outsiders think that the firm's pension obligations are underfunded to the tune of $31 billion. Its unfunded liability for what are known as "other post-employment benefits" (OPEBs), which consist mostly of retiree health care, are estimated by industry analysts at almost $70 billion. That compares with GM's current stock-market capitalization of $15 billion.
What is bad for GM is bad for much of corporate America. Within the motor industry, Ford and Chrysler also face massive problems from "legacy costs" resulting from past promises to employees. Chrysler's prospects look least crippling, but then it was acquired by deep-pocketed Daimler a few years ago.
The motor industry is following a well trodden path. Four of America's leading airlines are now flying while bankrupt; in each case, the opportunity to shed unaffordable pension and healthcare costs has been a crucial factor in the decision to enter Chapter 11. America's steel industry went through a similar process a few years ago, emerging less burdened with legacy costs, but far smaller. Already, Wall Street analysts are starting to worry whether telecoms will be next, especially if the spread of low-cost Internet telephony drives down the revenues of the remnants of the old Bell companies. Although their pension liabilities appear to be well funded for now, AT&T and SBC, which are currently merging, have combined unfunded OPEB liabilities of $20 billion.
Such high-profile financial difficulties are forcing many Americans to pay attention. Company bosses fear that they too may find themselves heading for bankruptcy or, if not, that legacy costs will at least make them uncompetitive. Workers fear that they will lose benefits that they are counting on in old age.
Politicians are fearful too, suspecting that taxpayers may end up having to pick up the bill. The Treasury secretary, John Snow, is worried that a meltdown of corporate pension funds could become the "next Savings & Loan crisis," a reference to the scandals among thrift banks at the end of the 1980s that ended in a $200 billion government bail-out.
Already this year the Pension Benefit Guaranty Corporation (PBGC), the federal-government-backed insurer of company pension plans, has agreed to take on an unprecedented $6.6 billion in unfunded pension liabilities from bankrupt United Airlines, prompting allegations in Congress that airlines are trying to "dump" their pension obligations on taxpayers. The PBGC's liabilities now far exceed its assets, making it technically insolvent, though it has cash reserves that will keep it afloat for a few years yet.
Dealing with pension and healthcare problems is distracting America's bosses from their core business — assuming managing legacy costs has not become just that: GM has been described, not wholly in jest, as a pension hedge fund and health-insurance business that happens to make cars.
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