Press Release
For Immediate Release, October 31, 2005
Contact: Patrick L. Anderson or Ilhan K. Geckil
517-333-6984
Taxpayers, Auto Manufacturers, Auto Parts Suppliers, All Affected;
Delphi’s Employment Likely to Fall by 12,500 in U.S. and Canada.
Michigan, Alabama, New York, Ohio Vulnerable to “Domino Effect” Job Losses Beyond Delphi
Delphi’s bankruptcy and the ensuing restructuring of its operations in the U.S. and Canada is likely to cost U.S. workers, taxpayers, and investors at least $9.2 billion, and Canadians another $800 million, by the time the company reorganizes in 2007, according to a 15-page preliminary report by the consulting firm Anderson Economic Group, LLC.
The report analyzed three separate scenarios and their likely effects as a result of Delphi seeking protection from its creditors under Chapter 11 of the bankruptcy code in early October, with the “optimistic” scenario assuming a successful emergence from bankruptcy within 2007. Two other scenarios—failure to reorganize by 2007, and a partial liquidation or sell-off of major operations—would involve significantly larger reductions in income and employment.
“Unfortunately, a soft landing is no longer possible,” said Patrick L. Anderson, Principal of Anderson Economic Group, “even our ‘optimistic’ scenario envisions a reduction in employment of over 12,500, and a loss in income of $10 billion before the company reorganizes in 2007.” He added, “A failure to successfully reorganize the firm would cause the damage to multiply to $16 billion or more.”
Summary of Effects, Under Optimistic Scenario, for US and Canada
The AEG report, which is based on an analysis of Delphi’s reorganization plans, and the structure of the North American automobile industry, indicates that the likely net impact in the year 2007 alone, under the optimistic scenario, would be approximately the following:
Delphi’s employment in the U.S. and Canada will fall by 12,500 from 50,600 to 37,950. Delphi has announced plans to close 11 plants and shrink its business by 20%.
The impact on auto manufacturers and Delphi’s suppliers will be substantial. The net impact, in terms of lost earnings, on auto manufacturers will be $4.6 billion, and the net cost to its suppliers will be $3.2 billion.
The total cost to GM, Delphi’s largest customer and holder of a contingent liability on its pension fund, will be close to $2.5 billion. Delphi, which was organized in 1995 as GM’s parts division, was spun-off from its parent company in May of 1999. The agreement between the two companies, however, left them intricately linked as Delphi adopted its parent’s labor contracts and GM had pension and benefit obligations to Delphi’s employees.
“We believe General Motors can and will survive the Delphi bankruptcy, if its restructuring results in an emergence from bankruptcy in 2007 and GM absorbing about $1 billion in underfunded pension obligations,” said Patrick L. Anderson; “However, a liquidation of Delphi would be very dangerous for GM.”
The net cost to workers will be about $2.1 billion. This includes the reduction in earnings and employment of Delphi workers and retirees, measured as total wages, benefits, and pensions. Both salaried and hourly employees would suffer.
Delphi’s $4.3 billion underfunded balance in its pension plan will be absorbed by a combination of U.S. taxpayers (through the PBGC), GM, and Delphi workers.
About two-thirds of lost Delphi production will be picked up by other firms’ operations in the US and Canada, without a substantial difference in price or quality. About one-third of the lost production would not be substituted within the U.S. or Canada, or would be substituted at a significantly higher price. The total impact figures are measured net of these substitution effects.
The gross reductions in earnings of workers would be substantially higher, but would be offset by increases in earnings of workers at other firms that won contracts producing products formerly produced by Delphi. The net impact on workers includes both the gains and losses.
“We assume most of the lost Delphi production is picked up by other firms in the U.S. and Canada, but given the worldwide overcapacity in the industry, some of it will be lost,” said Patrick L. Anderson, “Unfortunately, that means the job gains at firms that win former Delphi business will be far outweighed by job losses at Delphi, its suppliers, and its customers.”
Impact on Certain States Could be Severe
The report includes some observations about the likely regional effects of the restructuring that will occur during the Delphi bankruptcy.
The report includes a map showing the location of OEM assembly plants throughout the U.S. and Canada for GM, Ford, Daimler Chrysler, Toyota, and other manufacturers; as well as the location of Delphi plants. These plants are largely clustered in Michigan, Ohio, Alabama, and a handful of other states.
As documented in previous reports by Anderson Economic Group, the auto industry is strongly interconnected through a network of “just in time” logistics. Furthermore, the industry now has worldwide overcapacity.
Therefore, the closure of a major tier 1 parts operation in one state could cause a chain reaction of closures downstream to OEM assembly plants, and upstream to tier 2 and tier 3 supplier plants, in the same state.
For example, the likely cost to the State of Michigan, even under the most optimistic scenario, would be about $390 million in state and local taxes. These numbers would easily double if Delphi does not restructure in 2007 as planned, and instead is partially liquidated.
“The states of Michigan, New York, Ohio, and Alabama are vulnerable to a ‘domino effect’ of plant closures that go beyond Delphi, if the bankruptcy results in the closure of more than one major plant,” said Patrick L. Anderson. “Union and business leaders, as well as elected officials in those states, should be working to increase the odds their plants stay open,” he added. “Unfortunately, one or more of these states will inevitably be big losers, and we don’t know which ones right now.”
Authors Are Experts in the Field
The principal author of the report was Patrick L. Anderson, founder and Principal of Anderson Economic Group LLC. Anderson is an expert in the auto industry and author of over 90 published works, including Business Economics and Finance (CRC Press, 2004). Ilhan Geckil, an Economist with expertise in fiscal and economic analyses, and Caroline Sallee, Senior Analyst, also contributed to the report.
Anderson and Geckil were the 2004 winners of the National Association for Business Economics’ Edmund A. Mennis award for the best paper submitted to Business Economics. They have collaborated on a number of similar reports on the automobile industry, and on work stoppages, strikes, and other events, including the 1998 GM strike, the 2002 West Coast Port Shutdown, and the 2003 blackout.
Report Uses Conservative Methodology
Mr. Anderson is a prominent critic of exaggerated “impact” studies—such as those commonly employed for sporting events and public investments—and devoted a chapter of his book Business Economics and Finance to defining the proper methodology and criticizing exaggerations. The numbers cited in this report, while quite large, are therefore much more reliable that could be calculated using naive methods that ignore substitution effects, use exaggerated “multipliers,” or double-count effects.
About AEG
Anderson Economic Group, LLC is a consulting firm with expertise in economics, finance, market research and public policy. Our work in these fields is based on our core values of professionalism, integrity, and expertise. Since our founding in 1996, we have assisted clients including private firms, publicly traded companies, state & local governments, and non-profit organizations. Our experience includes markets throughout the continental United States, Alaska, Canada, Mexico, and the Caribbean.
AEG has particular expertise in the automobile industry, and its list of past clients include manufacturers and tier 1 suppliers such as GM, Ford, DaimlerChrysler, Honda, Delphi, Metaldyne, PBR and others; as well as dealers and dealership groups representing the Jeep, Mercedes-Benz, BMW, Suzuki, Ford, Lincoln-Mercury, Toyota, and Chysler brands; and trade associations such as the American Automobile Manufacturers Association, the Michigan Manufacturers Association, and the Michigan Chamber of Commerce.
Objectivity of Authors
Although the authors of the report have had substantial involvement in the automobile industry, at the current time AEG is not a party to the Delphi bankruptcy proceedings nor a consultant engaged for work in the proceedings. Please see the report for copyright notice and disclaimers.
Click here for the full report.
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