Auto industry rocked by Delphi bankruptcy

Congress has moved to address the issue, but a measure to fix the problem has stalled in the Senate. At issue is a provision that would raise premiums for companies whose financial condition have reduced their credit rating to “junk bond” levels.

That would further raise costs for GM and Ford, which have already been given “junk bond” ratings by Moody's Investors Service and Standard and Poor’s because of continued losses. Those sub-par ratings have already raised the companies' borrowing costs. (Fitch Ratings has cut GM to junk status but continues to keep an investment grade rating on Ford. S&P said recently it is reviewing the rating for the two biggest automakers and could downgrade them further early as mid-January.)

The impact of Delphi’s bankruptcy is also being felt further down the auto industry food chain. The part maker’s suppliers now face the prospect of tougher new terms at prices that may force some of them to close up shop. And Delphi’s customers — GM is still the largest — now face the prospect of higher parts costs, as Delphi works to cancel contracts negotiated at unprofitable prices.

No one suggests that bankruptcy filings by General Motors and Ford are imminent or even likely. Both companies have stockpiled billions of dollars in cash to weather another downturn that has become an inevitable part of the industry’s life cycle. But that cycle now appears to be broken.

Though the U.S. economy remains relatively healthy, GM posted a $1.2 billion loss in the second quarter — on top of a $1.1 billion first quarter loss, the worst in more than a decade. And the company’s market share has fallen to all-time lows, as buyers have switched to Toyota, Nissan and other rival Asian automakers.

Even before rising gasoline prices began to erode sales of highly profitable SUVs and light trucks, the American automotive industry faced an uphill battle to profitability.

Much the way newer, low-cost carriers have upended the economics of the airline industry, Detroit’s overseas rivals are forcing their older, higher-cost competitors to slash costs to stay competitive. U.S. automakers spend less money on steel, for example, than they do on health care benefits — a cost its Japanese and European rivals do not face because of national health care programs.

GM’s response has included plans to close plants and cut 25,000 American jobs by 2008. Those cuts will certainly reduce overall costs, but as the automaker shrinks, the cost of pension payments and retiree health benefits is spread over fewer cars, increasing the labor cost of each car, and making it even tougher to offer competitive prices against lower-cost Asian manufacturers.

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