Even before GM spun off parts maker Delphi in 1999, critics questioned the new company’s viability. Delphi depended on GM’s business for its survival. While bean counters talked-up diversification, new markets, etc., the 800-pound General in the room wasn’t going away– especially with all the GM-obligatory Delphi-related job, pension and wage benefits secured by the United Auto Workers. And GM’s need for parts. Since then, Delphi done well abroad and lost money hand-over-fist in the U.S. And so Delphi failed, filing for bankruptcy protection in 2005. But here’s the thing: GM wants Delphi to survive as is. The money they’re proposing to pour in– $650m loan agreed, $300m more proposed– seems a good money after bad mistake. Until you realize that a semi-viable Delphi guarantees the ailing automaker a supply of mission critical parts at a price they like. That’s right: $950m (and the rest) is less expensive than paying full freight for Delphi’s parts, which cost GM $3.12b in the first half of 2008. If Delphi goes into Chapter 7 (liquidation), GM’s either going to have to buy out the factories that make their stuff (with what money?) or face a more “realistic” pricing structure from the factories’ new owners. What’s good for GM isn’t good for Delphi’s investors and creditors, and don’t they just know it. “A group led by Highland Capital Management LP said in a letter to Delphi’s board of directors that the new financing by GM would benefit only GM while stripping worth from creditors imperiled by Delphi’s continuing massive losses in North America,” Automotive News [sub] reports. And there you have it. Until you don’t. Delphi’s Chapter 7 is coming; it could well be the straw that breaks GM’s back.
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Rumor at one of Delphi’s plants says Dec 10th is when all hell breaks loose. That’s when GM takes control of Delphi and re-assimilates it back into the collective. That will wreak havoc on the other car makers that Delphi makes parts for. They run the chance of losing their parts for their production. This is going to get real ugly real fast.
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Sad. I spent a very interesting four years at Packard Electric; nice people and a good place to work.
Pundits agree the latest iterations of the Cadillac CTS and Chevrolet Malibu are above average. Both achieved 4/5 stars on the TTAC rating scale; known for parsimonious endorsements.
A car is the sum of its parts. The long term reliability of one assembled from the cheapest crap available for a company nearing insolvency by a company in bankruptcy protection has to be concerning for knowledgeable potential purchases. It was a deal breaker for me.
There may be some real ‘red meat’ to this scenario: big hedge funds have been loading up on GM options in the Jan-Mar 09 timeframe. Traders that are watching the action say that the bets involve extremely out of the money prices….i.e., big expected swings in GM’s price.
Can anyone think of any other reason other than Delphi?
I figured out where GM’s part of their $50 Bln ‘loan’ will go. To buy back their part of Delphi. Not directly of course, but it all goes into the same pot of money -it’s just how you categorize it.
Could somebody explain to me in layman terms,what is motowner saying in his post?
What Motownr is saying is that some Wall Street types are planning on making money off of short term changes in stock price resulting in positive and negative news about GM. When stock gets as low as GM’s is right now, compared to where it used to be, even fairly mundane news can result in big spikes in the price. I’m guessing GM options for 2009 can be had for next to nothing, therefore, if there isn’t a huge disaster, they think you can make some money on the stock. Unless you are a daytrader, I don’t think what Mtownr had to say has a whole lot of relevance to your life.
One thing that’s been mentioned on TTAC before is that GM is still part of the big equity indexes, so our “safe” mutual funds have to own GM to track the index, even if they wouldn’t do so if the stock wasn’t in the index. As long as GM is in business and hasn’t been dropped by the indexes, the stock will have some value, probably more than the company is worth.
I talk with a lot of GM retirees, and I am astounded at how many have a big chunk of their retirement funds locked up in GM stock. Do not ever put more than a token amount of your retirement money in your employer’s stock. Even if the retirees’ pensions are guaranteed by the Pension Benefit Guarantee Corp, they will still feel the hurt with a GM bankruptcy.
Maybe Robert & Company can update us on the status of the funding of the UAW healthcare Veba, how much GM has contributed and when the next $ is due.
Conslaw:
I talk with a lot of GM retirees, and I am astounded at how many have a big chunk of their retirement funds locked up in GM stock. Do not ever put more than a token amount of your retirement money in your employer’s stock.
I wouldn’t be that strict. A lot of old tech and pharma employees did very well holding a significant fraction of their retirement in company stock.
I’d go to 25 percent IF the firm I worked for was fundamentally sound.
Of course, one needs to be brutally ruthless and objective (characteristics probably rare in GM retirees). If you or the market deem a your firm’s stock troubled, take whatever window given to adjust your portfolio (including dumping of all your firm’s stock).
Actually, an observant, long term employee can develop a ‘feel’ for their employer’s prospects. Adjust when necessary and you’ve become a de-facto ‘insider-trader’ when it comes to your retirement fund.
How has Visteon aka ACH (automotive Components Holdings) faired compared to Delphi?
Same business, spinoff from Ford – also in trouble at one time. Dunno what their current situation is. Used to work on alot of projects for them through m previous employer.
Thank you conslaw.
Gardiner Westbound stated:
A car is the sum of its parts. The long term reliability of one assembled from the cheapest crap available for a company nearing insolvency by a company in bankruptcy protection has to be concerning for knowledgeable potential purchases. It was a deal breaker for me.
The parts might be made by the lowest bidder, but you won’t find a better bunch of people to work with that makes sure they deliver a quality product, no matter what. Like the Debt2.8 (I don’t know who started that name, but it’s the greatest), Delphi’s problems are the BOD, upper management and a piss poor business plan. But the grunts that do the work, the engineers all the way to the shop floor folks, are the best. Which is why many are jumping ship.
The purpose of Delphi was not to create a competitive parts supplier but to legitimetly dump all those high priced employees tied to all that unpaid for retiree benefits.
Delphi IS an absolute success for GM.
Can anybody argue this point?????
joeaverage:
VISTEON and FORD saw the day of reckoning coming and worked together to keep VISTEON out of bankruptcy. A deal was negotiated with UAW approval in 2005. FORD basically took back money losing plants and formed an LLC to sell them or shut them down. Here is the press release:
http://media.ford.com/NEWSROOM/release_display.cfm?release=21794
FORD still accounts for about 50% of VISTEON business though, down from about 75% before the deal. (educated guess, could be off by +/- 10%)