Major Auto Industry News – Part 1

Delphi and the United Auto Workers have reached a tentative agreement to buy-out or buy-down much of Delphi’s blue collar workforce and allow Delphi to come out of bankruptcy. (for details see www.freep.com)

There are a couple of subplots here:

1. General Motors is on the hook for much of the cost – Delphi was a spinoff of GM and GM retained many commitments. GM did not want Delphi to go Chapter 7.
2. The UAW had leverage this year, because a strike would have paralyzed GM. UAW leverage would have disintegrated in the future as GM moved to alternate suppliers.

Thus GM had a double interest in finding an amicable solution to this problem.

This is a costly victory for the UAW. At least 80% of all Delphi bluecollar jobs have or will be offshored soon, and eventually almost 100% of the blue collar jobs will be offshored. The UAW bought transition time and transition money, but not much else.

Former shareholders got zip as the company melted down in bad management and accounting fraud. The bankruptcy turnaround team of managers will get very rich.

This settlement will have an impact on this year’s Big 3 negotiations, although the dynamics are much different there, none of the companies would want a strike but all must get major cost concessions.

Long term, this probably spells the end of most auto parts manufacturing in the US, as other companies offshore to compete with Delphi and other offshoring leaders.

This could mean the loss of another 500,000 – 1,000,000 manufacturing jobs in the next decade (the tire business is also going overseas, but recent quality problems in China may slow this), with no replacements on the horizon.

To some economists, this job loss is a miracle of creative destruction and a major improvement in the economy. Others won’t be so happy. Based on recent experience, most of the former auto parts workers will never recover economically.

Should the government and public policy intellectuals care? Should anyone care. Is this just the march of progress? Is this the fruits of erroneous economic models?

Write away.