Delphi in Trouble

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Case Details:

Case Code : BSTR189
Case Length : 20 Pages
Pages Period : 1995-2005
Organization : Delphi Corporation.
Pub Date : 2005
Teaching Note :Not Available
Countries : US
Themes: Failure of Strategy
Industry : Auto and Ancillaries

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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"Having been unable to resolve our US legacy issues out of court, we determined it was in Delphi's best interest to address the US cost-structure issues through the Chapter 11 process now while our liquidity position is strong."¹

- Robert S. "Steve" Miller, Chairman and CEO, Delphi Corporation, on the reasons for filing for bankruptcy in October 2005.

Introduction

On October 08, 2005, the largest auto component manufacturer in the US, Delphi Corporation (Delphi), and its subsidiaries in the US filed for Chapter 11² protection in bankruptcy court in New York. The petition which did not include the non-US subsidiaries of Delphi, was filed a few days before a tougher bankruptcy law came into effect from October 17, 2005.

This was one of the largest bankruptcy filings in the US in terms of asset size and put the future of Delphi's US employees and shareholders at stake. Delphi stated in its bankruptcy filing that it was talking to its labor unions to allow the company to sell a major portion of its US manufacturing operations or phase them out by 2007 and reduce its North American workforce substantially, cut union wages upto 60%, reduce health care benefits and completely eliminate the company's pension obligations to its workers (Refer Table I for Delphi's Worldwide Operations). If the agreement was not reached with the labor unions, then Delphi planned to request the bankruptcy court to void the pension and other benefits contracts, it had signed with the unions.

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This would leave the workers in the dark. Delphi had been facing problems ever since it was spun off from General Motors Corporation (GM)³ in December 1999.

The prime reason why Delphi filed for bankruptcy was the huge labor benefits payments that the company was liable to pay to its employees. After December 2004, Delphi's outstanding labor benefits payments amounted to US$ 22.4 billion which comprised pensions worth US$ 12.8 billion and life insurance, health insurance and other retirement benefits worth US$ 9.6 billion. Delphi's wage rates were twice that of the US auto component industry average. Apart from the labor costs, Delphi was also hit by the slowdown in the US automobile industry and the increasing cost of raw materials like steel. The company reported a net loss of US$ 741 million for the first half of 2005 after incurring a net loss of a whopping US$ 4.8 billion for the fiscal ended December 2004.

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1] "Delphi files for bankruptcy," www.money.cnn.com, October 08, 2005.

2] Chapter 11 or Chapter 7 of the US bankruptcy law is filed when the company cannot pay to its creditors or service its debts. Sometimes, the creditors may force the company to file for bankruptcy. Under a Chapter 7 filing, the owner of the company or debtor can sell all the non-exempt assets and pay the creditors and pull out of business. If the sale of assets cannot meet the debt, then the remaining debt is wiped off. On the other hand, Chapter 11 filing allows the company to stay in the business and gives times to reorganize its businesses. The bankruptcy court supervises the reorganization process and permits the company to delay its payments to creditors during the reorganization.

3] Founded in 1908, GM is the world's largest automobile manufacturer. Headquartered in Detroit, Michigan, GM's popular brands include Buick, Cadillac, Chevrolet, Opel, Pontiac and Vauxhall. For the fiscal year ended December 2004, GM's revenues were US$ 193.5 billion and profits were US$ 3.7 billion.