Potential Delphi strike could hit GM hard

[Lost Sol]

FYI

By Jui Chakravorty
Thu Nov 17, 7:12 PM ET



As General Motors Corp. (NYSE:GM - news) considers contingency plans in light of a potential strike at its main auto parts supplier, analysts fear a walkout could cost the troubled automaker billions of dollars.

Bankrupt Delphi Corp. (Other OTC DPHIQ - news) plans to ask the court to void labor contracts with its unions if a deal is not reached by December 16, and analysts worry that a strike could shut down some GM and Delphi plants.

United Auto Workers leader Ron Gettelfinger on Wednesday said the union was on a "collision course" with Delphi, prompting analysts to believe a work stoppage is more likely than many had previously thought.

"We think a Delphi strike is unlikely, but that the probability of work stoppages at certain facilities is high and could still be very damaging to GM," Goldman Sachs analyst Robert Barry said in a research note on Thursday.

Barry also said that GM may offer incentives to Delphi employees to avoid a strike, but that would be a "cash drain" for the world's largest automaker.

"We are looking at contingency plans, but can't really elaborate on what they are specifically," GM spokesman Stefan Weinmann said. "And we are not saying that we already have one in place."

GM shares, which have plummeted about 46 percent this year, fell to a new 18-year low of $20.65 on Thursday.

GM has lost nearly $4 billion so far this year due to high health-care and commodities costs, stalling sales of big sport utility vehicles as high gasoline prices have made those cash cows less popular, and the loss of U.S. market share to foreign rivals.

To compound problems, GM, which spun off Delphi in 1999, could face up to $12 billion in liabilities for the supplier. GM agreed during the spin-off to pay retirement expenses for some former GM workers if Delphi stopped payments. The automaker has said it expects the eventual figure to be about $6 billion.

Barry said he would not be surprised to see a deal with the UAW and Delphi raise the needle on the liabilities GM would have to pay.

TOUGH SPOT

John Henke, president of Planning Perspectives, a management consulting firm specializing in buyer-supplier relationships, said the car maker is "stuck between a rock and a hard place."

"The classic preparation for something like this is to stockpile inventories of parts," Henke said.

"But the downside to that, especially because GM is trying to watch its expenses, is that it would incur carrying costs for the parts that would sit there until they were ready to be put in a vehicle and be shipped off to a lot."

Delphi did not immediately return calls for comment.

UBS analyst Robert Hinchcliffe has said a strike at one or two strategic plants would force GM to burn through $19 billion in cash and liquid assets in about 10 weeks. Deutsche Bank analyst Rod Lache said GM may burn through $13 billion in cash if the potential strike were to last a quarter.

BNP Paribas said a strike at Delphi, which it called "highly likely," would force GM to burn through a "significant portion" of its cash.

JP Morgan analyst Himanshu Patel on Thursday said a voluntary bankruptcy at GM is unlikely and would lead to an abrupt decline in sales.

"Consumers are unlikely to continue to buy $30,000 cars from bankrupt (automakers) given the priority placed on quality, warranty, resale value and after-market support," he said.

BRIEF RESPITE

GM shares closed up $1.34, or 6.3 percent, at $22.63 on the New York Stock Exchange, after spiraling to a new 18-year low earlier in the day.

The stock rose as Standard and Poor's upgraded it to "hold" from "strong sell," saying it was trading near the rating agency's $22 target price.

S&P also said it does not expect a bankruptcy for at least 12 months, citing enough near-term liquidity and the unlikelihood of a strike at Delphi.

However, S&P on Thursday warned that it may still cut GM's credit rating deeper into "junk" territory, pointing to Delphi's bankruptcy filing, the prospect of supply disruptions at GM, and other concerns.