Delphi, the largest U.S. auto supplier, files for bankruptcy

DETROIT -- Delphi Corp., the nation's largest auto supplier, filed for bankruptcy Saturday, sending shock waves through a U.S. auto industry already weakened by high labor costs and falling market share.

Delphi's bankruptcy, which is expected to result in plant closures and layoffs, is one of the largest in U.S. history.

Delphi filed to reorganize its U.S. operations in federal bankruptcy court in New York, where a hearing was scheduled Saturday. Delphi's non-U.S. operations were not included in the filing.

Delphi chairman and CEO Robert S. Miller said the company hopes to emerge from Chapter 11 in early to mid-2007.

Miller, a restructuring expert who was hired in July, had threatened to take the company into bankruptcy if he failed to reach a restructuring agreement with Delphi's former parent, General Motors Corp., and its largest union, the United Auto Workers. Miller set a deadline of Oct. 17, when U.S. bankruptcy laws are scheduled to change.

Miller said Delphi will continue negotiating with GM and the UAW to lower its labor costs. Miller said the three parties agreed to continue their discussions after a bankruptcy filing.

"We mutually concluded there was still too much of the complex work yet to be done," Miller said. "It was not going to be efficient to work right up to the midnight deadline to the change in the law."

Miller said nothing will change immediately. Delphi will continue to pay its 50,000 U.S. employees and suppliers and will ship its products on schedule.

Delphi has 31 plants in 13 states, including Michigan, Ohio, Alabama and California. The company has 185,000 employees worldwide.

"We are not going to adversely affect our customers," he said. "Our people will get their pay checks and will still have their health benefits. Retirees will continue to get their checks. Any changes to that will be dealt with in an orderly way."

Jim Gillette, supplier analyst for CSM Worldwide in Grand Rapids, said he expects a number of underperforming plants to be shuttered or sold and that the negotiations with GM and the UAW will be key to determining how many. He also said the bankruptcy could prompt other companies to file, too.

"This is not going to be an isolated incident," he said. "It's really going to be a rough few weeks and a rough few months for the industry."

GM said it planned to work with Delphi, the courts and the unions as the auto supplier restructures, and acknowledged the filing could cause supply problems in the future.

Delphi will finance its operations with $4.5 billion in loans, including up to $2 billion in debtor-in-possession financing from a group of lenders led by JPMorgan Chase Bank and Citigroup Global Markets Inc.

Based in the Detroit suburb of Troy, Delphi has struggled to make a profit since GM spun it off in 1999. It lost $4.8 billion in 2004 and nearly $750 million in the first half of this year.

Delphi, No. 63 on the 2005 Fortune 500 list of the country's largest corporations, had listed $17.1 billion in assets and $22.2 billion in debt in Saturday's bankruptcy petition. The company had $4.3 billion in unfunded pension liabilities at the end of 2004, according to a company filing with the U.S. Securities and Exchange Commission.

The largest corporate bankruptcy in the U.S. was WorldCom Inc., which had $103.9 billion in pre-bankruptcy assets.

Like Tower Automotive Inc. and other auto suppliers who have recently declared bankruptcy, Delphi has struggled with the high cost of steel and other raw materials as well as U.S. production cuts.

But Delphi also blamed its spinoff agreement with GM for saddling it with high labor costs. Under the agreement, Delphi is required to pay GM wages of $27 an hour to most of its 24,000 UAW-represented workers. That's double the level of competing suppliers, according to Standard & Poor's Ratings Services. Delphi also had to pay full wages and benefits to 4,000 laid-off workers in jobs banks, which cost it $400 million each year.

Delphi has a total of 30,000 U.S. hourly employees and 12,000 hourly retirees. About 6,000 hourly employees are represented by other unions, including the International Union of Electronic Workers/Communications Workers of America.

Delphi and GM have been tightlipped about the negotiations. But a letter sent from UAW leaders to union members in Kokomo, Ind., earlier this week said Delphi asked the UAW to accept wage cuts of more than 50 percent, to $10-$12 an hour, and eliminate the jobs bank. Delphi also called for a reduction in health care benefits and vacation time.

Delphi also has been plagued by an accounting scandal that the FBI and the SEC are now investigating. Six people have resigned because of the investigation, including Delphi's former Chief Financial Officer Alan Dawes.