October 15, 2005

Excerpt of the Day: Barone on the Domestic Auto Industry

Filed under: Business Moves,Economy — Tom @ 4:16 pm

Delphi is in bankruptcy and its cousin Visteon is hurting badly (note the $13.61 loss per share), as are parents General Motors and Ford.

Michael Barone (second item in his October 14 entry) wonders how this came to be:

How did this come to pass? Most of the leaders of the UAW and the Big Three companies who negotiated these generous contracts were very smart men, and they thought that the costs could be passed along to consumers. For the two decades immediately after World War II, they were, because the Big Three auto companies had no effective competition. Then sales of imported cars started rising. The Big Three executives can be criticized for not responding to this challenge. They, like the UAW, sought to wall themselves off from competition by getting the government to limit imports or to require certain percentages of “domestic content” in autos sold in the United States. But those policies triggered a response by Japanese, German, and ultimately Korean firms: They built plants in the United States, almost all of them with nonunion workforces. Pay was generous, but the costs imposed on companies were much less than those imposed by UAW-Big Three contracts. The workforces of the Big Three are much smaller than they once were, so the companies have many more retirees to provide for than active workers.

….. The lesson: In a dynamic economy, it’s a bad idea for individuals to depend entirely on one large corporation. Large corporations can get smaller.

Quite a few echoes from here almost six months ago.



  1. Tom,

    Do you feel Delphi’s decision to seek bankruptcy protection now rather than to avoid it longer is tied to impending changes to the bankruptcy laws? Personally, I am of the opinion that some stock’s prices have been stagnant waiting for the deadline to pass. For example, I’ve heard KKD’s finances are actually improving but people are scared off the stock for fear they’ll file. Sort of related, Drudge has an item today about people rushing to file ahead of the changes. Any thoughts?

    Comment by LargeBill — October 15, 2005 @ 4:43 pm

  2. Yes, because of the “retention bonuses” paid to execs to keep them around after bankruptcy, because they are oh-so-valuable they can’t be lost:

    Delphi’s Pre-Bankruptcy Trough-Filling Is Odious: Mark Gilbert

    Oct. 12 (Bloomberg) — You’re an executive at a company teetering on the edge of bankruptcy. The unions are deaf to your pleas to cut back on pay and benefits for your workers. Your former parent company won’t sign that fat check you need to stave off Chapter 11. The end is nigh. What’s your key priority?

    Duh! Your key priority is to divert as much cash into the managerial pay accounts as possible in the short time remaining before you lose the keys to the executive washroom. Next, ensure your snout is buried as deeply in the trough as the law allows — especially if the law is poised to shallow that trough.

    The new law restricts these bonuses. I can’t remember the exact mechanics, but the fact is the Dephi execs’ ability to feed at the trough if they had filed this coming Monday instead of a week or so ago would have been very limited. This is one of the very few good things about the new bankruptcy law.

    I haven’t studied KKD a lot, but it seems to have the earmarks of a total collapse, but again only from a cursory following of the news.

    As to the new law, I was opposed to it at the consumer level for a bunch of reasons back in March and April, haven’t said much on it since, and still think consumers, especially in the top half, are getting very unfair treatment. I have a post or posts in sort-of draft mode, but the whole thing is a monster. I hope I can get it done tonight/tomorrow.

    Comment by TBlumer — October 15, 2005 @ 4:49 pm

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