Global Insight Perspective | |
Significance | GM is extending the offer of early retirement to almost 130,000 employees to the end of June 2006, in order to ensure good take-up of its package, in a move which could save US$2.8 billion in operating profit per year. |
Implications | No information has been given on how successful take-up has been so far, beyond a basic 'positive' response indicated by the company. Separately, GM is ending its price reduction waiver with bankrupt supplier Delphi, which should help its margins but put the supplier under further margins pressure. |
Outlook | Avoiding a strike at Delphi is critical for both the supplier and its former parent GM. A widespread strike at Delphi, still by far GM's biggest supplier, could disrupt its entire North American production schedule and cost billions in lost sales. |
Not Happy Yet?
General Motors (GM) yesterday announced that it would give its own labour workforce, as well as Delphi employees, further time to consider its early retirement package offer. The company has extended a deadline until the end of June for 113,000 GM hourly workers, as well as 13,000 Delphi workers for whom it is still responsible, to consider their options more fully. This extends their 'thinking time' by between two to four weeks on average.
The buyout package is actually a concoction of multiple different offers to its workforce, following agreement between GM, its former supplier and the main union, the United Auto Workers (UAW), to speed up an original restructuring plan for 30,000 job cuts and nine facility closures scheduled for 2008. A GM spokesperson has said that the plan it has proposed has been well received, though there is no information about how many people are actually taking up offers. It is known that offers include such options as receiving US$35,000 to retire early for some workers, and receiving up to US$140,000 for ending all ties with GM. The move could save the automaker around US$2.3 billion in pre-tax costs per year, according to some analysts, if up to 50% of those eligible for the scheme take it up.
No More Pricing Relief for Delphi
In other developments, Delphi, the components supplier that was formally part of General Motors, has announced that it has been unable to agree on a system with its former parent to extend components pricing relief. The statement refers to a deal by which GM had for the last six months been paying higher prices than actually required to Delphi. GM made the decision, in November 2005, to waive agreed-upon price reductions in order to help Delphi out of bankruptcy until March 2006. Delphi applied for Chapter 11 bankruptcy protection in October 2005. GM's move at the time was intended to buy Delphi time to implement necessary salary and benefit reductions with its unions.
On 31 March 2006, Delphi filed papers requesting that the authority reject both its existing labour contracts and many unprofitable contracts to supply its former parent. Both subjects are set to be debated this month. It is understood that on finding out that its contracts were being disputed, GM decided to push for the original agreed terms of the supply contract. Delphi has sent a note to regulators to the effect that neither company could agree to satisfactory terms to extend their November 2005 agreement. As a result, sales will now reflect price reductions since the beginning of April 2006, which will decrease Delphi's operating margin across the majority of its contracts.
Delphi Earnings Revision Prompts More Scrutiny
In a further blow to the supplier, Delphi has also revised downwards its 2000 net income figure. Already scrutinised for its financial filings since it was spun off from GM in 1999, the supplier has just restated net income for 2000, down from US$817 million to US$748 million. The error was due to an increase in its warranty reserves. Although the mistake does not affect shareholder equity calculations, according to the company, it will further raise doubts about financial transparency at the company - as has happened with GM already this week, which has apologised for accounting errors that it has made.
Outlook and Implications
Delphi is thought to have saved millions of dollars from GM's not enforcing its price reduction contracts over the last six months. Although a dollar figure on these savings is not available, a 1% price increase on Delphi's GM's contracts would have been worth US$29.54 million in the third quarter of 2005 alone. In that quarter GM sales accounted for 47% of all Delphi's revenues.
Despite the scale of potential savings, Delphi remains entrenched in the mire. It is not even aiming to emerge from Chapter 11 until 2007, forecasting a loss of around US$2 billion on an operating basis this year. It already has plans to cut around 8,500 jobs, and divest or mothball 30% of its global facilities, in a bid to regain profitability and long-term viability. In order to do this, it needs primarily to reduce the burden imposed by its U.S. hourly employees - with a view to eliminating two-thirds of the current 33,000 U.S. hourly workforce by the end of the decade. Of course, unions are not delighted by this proposed course of action, especially as they represent almost the entirety of Delphi's hourly workforce.
Yesterday Delphi said that there had been no agreement yet regarding a timeframe for its labour disputes or GM contracts, although both sets of talks are continuing. Although things look desperate for the unions, neither company would want a strike to ensue. Unions have continually raised the prospect of a strike if talks are not successful, and Delphi has admitted that its first-quarter revenues may have benefited from some stockpiling in anticipation of union action. Delphi has warned that a bankruptcy court could cancel its labour agreements, instead of allowing the company to end its own, in a move which would make a strike much more likely.
A widespread Delphi strike could be enough to push GM over the edge itself. As a result, talks between Delphi and unions are likely to remain tense, with the knowledge that there is more at stake than just the two parties at the table.