By Dina ElBoghdady
Washington Post Staff Writer
Saturday, April 1, 2006
Those in the business of selling everything from brakes to bumpers can just about pinpoint when their already tense relationship with U.S. automakers began showing signs of extreme strain: 1992.
That's the year General Motors Corp. lost $23 billion, initiated a shake-up in its corporate ranks and named the penny-pinching J. Ignacio Lopez de Arriortua as chief of purchasing. The hard-nosed negotiator called his subordinates "warriors" and made them wear their watches on their right wrists, a reminder of the changing times.
"That's when General Motors started playing hardball with suppliers," said Neil DeKoker, president of the Original Equipment Suppliers Association. "Most of the other automakers followed suit, and that's when the constant cost-cutting demands became entrenched."
Another turning point came in 1999, when GM decided to focus on building cars and spun off Delphi Corp., its parts division, which became the nation's largest auto parts supplier with 33,000 unionized hourly workers in the United States.
Today, the companies are still feeling the effects of that decade.
Delphi filed for Chapter 11 bankruptcy protection in October, citing the high labor costs it inherited from the union contracts negotiated by GM. Since then it has been pressing the unions to accept deep wage and benefits cuts. But when the unions rejected its latest offer, Delphi yesterday asked a bankruptcy court judge to void the labor contracts. Now the unions are threatening to strike, a move that could cripple production lines at GM, the world's largest auto maker.
The relationship between GM and Delphi "reminds of me of something Keith Richards said of his relationship with Mick Jagger: 'It's a marriage made in hell, and neither one of us can get out of it,' " said Robert Chiaravalli, a labor lawyer and principal at the consulting firm Strategic Labor and Human Resources.
GM is Delphi's largest customer, generating more than half of Delphi's annual sales. But since the spinoff, each company argues it's been dragged down by the troubles of the other, said Kevin Tynan, a senior equity analyst at New York-based Argus Research.
"The way Delphi sees it, it never had a chance to be competitive," Tynan said. "In Delphi's eyes, GM let them go bankrupt."
Meanwhile, GM considers it's done its part to ensure Delphi's financial health, granting the supplier a sweetheart deal on prices, said Jim Gillette, director of supplier analysis at consulting firm CSM Worldwide.
" GM contends they have been paying above-market pricing to Delphi for a number of years to keep Delphi in business," Gillette said.
But yesterday, Delphi asked the court to rework "current unprofitable supply contracts" with GM. "We simply can't continue selling our products at a loss," Steve Miller, Delphi's chief executive, said in a written statement.
Delphi also sent a letter to GM yesterday asking to change the terms of more than 400 commercial agreements that are up for renewal.
Years ago, relationships were much different. DeKoker of the Original Equipment Suppliers Association said that in the 1960s and '70s, in years when labor and material costs went up, suppliers would pass the cost on to automakers that would then increase their sticker prices.
But in the 1980s, as the growing popularity of Japanese cars began eating into the Big Three's profits, U.S. automakers were reluctant to pass on the cost to customers for competitive reasons and began pressing suppliers to cut prices, a pattern that continues today even as the production costs keep climbing, DeKoker said.
From 1998 to 2005, the cost of steel went up more than 30 percent and the cost of health care jumped more than 40 percent, he said. Yet the price of U.S. vehicles dropped by 3.5 percent on a constant dollar basis.
Meanwhile, U.S. automakers were losing market share to foreign companies, and their profit per vehicle kept slipping. For example, GM lost $1,227 on every vehicle it made in North America in the first half of 2005, while Toyota Motor Co. made a profit of $1,488, according to Harbour Consulting of Troy, Mich.
Toyota helped keep its edge with a relatively young workforce compared with GM, which is saddled with high health-care costs, retiree benefits and pensions for its older workers. GM has 2.5 retirees for every active employee.
"The wages paid by the international automakers are about equal" to those paid at GM and Ford Motor Co., said Greg Gardner, a spokesman for Harbour. "But the benefits are not."
Also, the plants Toyota has in this country tend to be more productive, Gardner said. The least utilized of Toyota's six North American plants ran at 96 percent capacity in 2004, he said. At GM, the least utilized plant ran at 8 percent capacity, yet GM has to pay the hourly workers there even if they're not building cars because of union contracts.
Miller, Delphi's chief executive, has predicted his company and GM will pull through, despite the challenges. Still, he told Washington Post reporters at an October meeting that he felt sorry for Rick Wagoner, GM's chairman and chief executive.
"My problems are more urgent," he said. "His are more serious."
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