Text of remarks by Delphi’s Steve Miller

The following are prepared remarks made by Delphi Corp. Chairman and CEO Robert “Steve” Miller to reporters in Washington, D.C., on Friday: 
Thank you for taking the time to meet. 
October has been a watershed month for the key automotive sector, with Delphi’s bankruptcy and GM’s historic rollback of retiree health-care benefits. 
First, I’d like to share my perspective, starting specifically with Delphi and then, since this is Washington, I’d also like to talk about public policy implications. Then, I’ll be happy to respond to your questions. 
At its birth at the spin-off in 1999, General Motors had created Delphi, the world’s largest auto supplier, with both the incredible blessing of sophisticated automotive technologies and the curse of uncompetitive labor contracts. By agreement, Delphi was saddled with automakers’ wages and benefits, yet it expected to compete with other US-based suppliers, many of which were organized by the same unions, but were paying less than half the automaker wages and benefits for their workforce. 
The spin-off of Delphi was the right concept for GM. No automaker can successfully compete in the long-term, while paying above-market labor costs for the systems and components for their vehicles. The basic idea was for Delphi to outrun the legacy problem of its inherited labor costs by diversifying its customer base and global footprint. That strategy sounded good, but ultimately failed. 
So what went wrong? Three things. 
One. The spread between automaker’ labor costs and competitive supplier labor costs has widened sharply over the past decade, driven by globalization and by rising health care and pension costs. 
Two. Given our high fixed costs and inflexible labor rates, the recent sharp declines in our shipments to GM due to their market share losses have been devastating. 
Three. The game plan for Delphi included ‘flow-backs’ to GM of excess Delphi workers. But GM has had no room to accept Delphi employees, resulting in a $100 million penalty last quarter alone for 4,000 idled workers in Delphi’s jobs bank, drawing full pay and benefits. 
So what’s happening now? 
For one thing, our Chapter 11 process is limited to our U.S. corporate entities. So half of our business, which is located overseas, is not included in the filing. 
Our customers are continuing to receive shipments on time, under contractual terms, throughout our restructuring. 
Our workers are continuing to receive their current pay and benefits until we are well into the Chapter 11 process. Under the bankruptcy law, we are required to bargain with our unions in good faith. Despite all the noise, that process is under way. As is usually the case, we hope to arrive at an equitable settlement without court-authorized rejection of the labor contracts. Rejection results in a free-for-all, wherein management can impose contract modifications and the union is free to strike. Nobody wants to end up there. I believe we will find solutions that we can all live with. 
Behind all the motions, hearings and ongoing negotiations are the lives and livelihoods of thousands of our workers. These are honest, loyal, hard-working people who took a job at GM or Delphi and played by the rules. They cannot be blamed for pursuing the American dream. They expected us to live up to our promises and we fully intended to deliver. All of us have been caught short by fast-changing global economics. Our people are being severely impacted. I don’t blame them for being frightened, uncertain or even angry. 
It is a very difficult — and a very humbling — job to be the CEO of a company going through this transformation, knowing that my decisions will affect so many. I expect a continuing heavy barrage of criticism for my role here, but I will not shy away from facing up to the harsh realities of our situation. 
Let me turn now to what I think is the broader context in which the Delphi reorganization is being played out. 
Globalization is a fact of life these days. The implications for America are enormous. And it boils down to this: If you want your kids to live well and be in control of their own destiny, get them a great education. At one time in America a high school diploma and a job at the local factory was the ticket to success, but no longer. Nonetheless, globalization doesn’t deserve all the blame for what’s happening. There’s more to the story. 
My recent experiences have been with three industries that are undergoing profound change: as CEO of Bethlehem Steel, as a board member at United Airlines, and as CEO at Delphi. 
Steel, airlines, and autos. Different industries. Similar painful transformations. 
What these three industries have in common is an implied social contract that has evolved over the past half century between oligopolistic competitors, in capital-intensive businesses, and fostered by workforces organized by strong centralized labor unions. With the enormous leverage inherent in the threat of prohibitively expensive work stoppages, unions in these industries were able to elevate their workforces above the standards enjoyed by most other Americans, while their employers passed along the costs to customers. 
Elaborate defined benefit retirement programs, spurred on by favorable tax treatment, saddled future managers with growing burdens. Back in the days when you worked for one employer until age 65 and then died at age 70, and when health care was comparatively less sophisticated and inexpensive, the implied social contract inherent in these defined benefit programs perhaps made some economic sense. It no longer works in today’s economy. 
In the steel industry, we were being run off the road, not so much by imports, but by domestic competitors such as Nucor and Steel Dynamics. They paid equally good wages, but needed half the labor hours per ton to do the same job. You may have seen the fine article in last Saturday’s NYTimes about Bethlehem Steel. Now part of Mittal Group, there are 8,000 well paid workers producing the same tonnage that 12,000 workers did just three years ago. How can that be? The elimination of antiquated work rules and job classifications is the biggest part of the answer. 
In the airline industry, Delta and Northwest were shot down by Jet Blue and Southwest, not Air India or Air China. Worker productivity is a big part of the difference. 
And in the auto industry, Toyota, Nissan, and Honda are competing from assembly plants in our back yard, but without the crippling work rules and social costs embedded in Big Three labor contracts. In each case, the old oligopoly has crumbled, not so much from globalization, but from upstart domestic competition. 
This is part of the story of Delphi. We can compete on American soil with many of the components we make, but only if we have labor contracts that are competitive with domestic competition. 
Today, traditional defined benefit programs are an anachronism, and we are witnessing the slow agonizing death of defined benefits as industrial compensation policy. That is not all bad. First, the lack of portability of defined benefits forces people to stay with one employer, even though we have a much more mobile and flexible population these days. Second, the notion of having all your retirement eggs in one basket — your employer — is a concentration of risk that is simply ill advised for anyone in today’s fast-moving economy. Finally, these programs have a way of toppling traditional large employers. No company should be making open-ended promises to its workers for events fifty years down the road. One of the more visible examples is GM, a junk bond credit these days as it staggers under a burden of $170 billion of combined pension and health-care obligations. 
Add to the mix that people are living longer these days. And medical science is rapidly expanding the capability to spend vast amounts of money to keep individuals alive for decades. Of course, that is a good thing. But the question is, how do we pay for it? As a society, we must generate enough wealth in our working years to support our income aspirations and health-care needs in our sunset years. It’s getting tougher all the time. 
In the midst of these trends, the unions in the traditional steel companies and the traditional auto companies successfully bargained for ‘thirty-and-out’. The theory was, create more jobs by retiring people sooner. And isn’t working thirty years in a factory enough? What this means is that people can start work at age 20, retire at age 50, and expect full pensions and health care until age 90 or so. In real terms, this idea says that you will enjoy the fruits of your labor for more years than you were actually at labor. As a society, somebody has to pay. And to the shock of the Big Three automakers, they’ve found that consumers won’t pick up these costs when they have choices. As someone said, buy a Hyundai and get a satellite radio as an option. Buy a Chevy, and social welfare comes as standard equipment! 
Things are about to get messy for the Big Three in coping with all of this. The current labor agreements expire in 2007. Stay tuned for a historical collision point of all these social and economic forces. 
My worries — and the scope of this problem — go well beyond the auto industry. What I am describing is also embedded in the ongoing debates over Social Security and Medicare. The overwhelming voltage in the political third rail of touching these entitlements will forestall corrective action for years, but the problem will only grow. Think of the coming inter-generational conflict, as young people increasingly resent having their wages reduced and taxed away to support social programs for their grandparents’ income and health-care concerns. 
Now, let’s talk about pensions. It is an important topic that I’d like to spend a few minutes on today. 
Delphi’s pension plans have been the object of much speculation. We have about a $5 billion shortfall in our plan assets to our plan liabilities. Some have speculated that Chapter 11 means automatic termination of the plans. That is simply not true. 
As background, I have been involved in a leadership position in about ten corporate restructurings, starting with Chrysler in 1980, and now at Delphi. Half of them involved Chapter 11. Usually, the pension plans survived intact. Only at Bethlehem Steel did the PBGC (Pension Benefit Guaranty Corporation) take over the pension plan. There we had 12,000 active workers in six steel mills, all bleeding red ink, trying to support 130,000 dependents. The math did not work. The PBGC justifiably took action to terminate the plans. 
At Delphi, we have made no decision to terminate our pension plans. The big question will be whether we can formulate a Plan of Reorganization over the next few months that can generate sufficient capital to support continued efforts to restore funding of the plans. 
For starters, our labor agreements need to be modified such that we have profit margins sufficient to repay the pension plan shortfall out of future years’ profits. This will put the unions in the difficult position of perhaps having to make trade-offs between maximizing the pay and benefits for active workers versus maximizing the chances for saving the pension plans. It is a calculus made infinitely more complex by GM contingent benefit guarantees for our retiree benefits. 
Second, we need to keep key customers confident in the future viability of our business. 
Third, we will probably require some flexibility as to our required PBGC funding schedule. 
And fourth, we will have to convince creditors in our bankruptcy case that we should reorganize in a way that holds the PBGC harmless. 
Tough assignment. The jury’s out as to whether we’ll succeed. 
Putting aside Delphi’s predicament, the PBGC has accumulated a staggering deficit from the numerous recent plan terminations, and Congress is clearly worried about it. 
Here’s my take. On one hand, the pension problem is slowly being resolved as more and more of our private sector moves to defined contribution, 401(k) type of programs, which means no more legacy liability issues for the newer sectors of our economy. In recent years, the number of plan sponsors has declined from over 100,000 to fewer than 30,000. I think this long term trend is a good thing. We can still do something, however, to avoid further devastating train wrecks with remaining traditional defined benefit programs. 
Congress has been wrestling with this issue for several years. The big question surrounds this dilemma: Do you tighten the funding rules and risk tipping over more pension plans into the arms of the PBGC? Or do you loosen the rules, only to find more pension plans getting into trouble later? 
A number of companies, most notably some airlines, are pressuring Congress for relaxation of the rules. And I agree that more time to allow for a cure is preferable to plan terminations, which would further deepen the PBGC’s woes. 
Where I find myself at odds with my colleagues in much of the business community is the notion that one-size-fits-all solutions are appropriate. In a nutshell, I would tighten, not loosen, the rules; require all plans to be targeted at 100 percent funding. At the same time, I would give the PBGC the flexibility, with approval authority vested in its board, to cut tailor-made repayment plans that reflect the needs of particular companies that fall behind. And I would give the PBGC what I call ‘conventional weapons’, including the right to negotiate covenants, collateral packages, benefit freezes, and other mechanisms to protect the interests of the PBGC from catastrophic failures. Right now, the PBGC has only the “nuclear option” of plan termination, which they use sparingly and only when all is lost. 
One reason we seem to have so many plan failures is that our current accounting rules permit companies to use generous assumptions about the earning power of plan assets. These rules often end up underestimating the potential true economic shortfall in plan funding. The SEC is looking into this, and I expect some changes in the disclosure requirements so that we can at least face up to the problem. 
Point Two is that there is incredible lag time in addressing any shortfall. A stock market decline in plan assets occurring in January of Year One does not even get addressed by the contribution rules until September of the following year, and then the recovery requirement is spread over a bunch of future years. By the time the rules catch up with you, you may be hopelessly behind. Sure, there are other things companies would rather spend money on than shoring up the pension plan. But it was not the intent of the system to provide easy credit at the expense of the PBGC. I would require a mark-to-market exercise quarterly, rather than annually, and require recovery plans to be worked out with the PBGC promptly. 
What I am suggesting will not make our current problems disappear. But neither do I think Congress should be tinkering with a legislated rule set that can’t possibly fit widely different situations. And while I’m at it, why should airlines get an easier deal than auto companies? As noted in The New York Times a couple weeks ago, I have suggested changing the name of my company to ‘Delphi Airlines’ to get longer relief. 
To repeat my suggestion: Don’t loosen, but tighten the legislative rules. But give the PBGC the tools to deal with problem situations. 
Well, if you think the pension situation is bad, what about health care? 
Unlike pensions, which are pre-funded to some extent, retiree health care promises by and large are completely unfunded and without any Federal backstop other than Medicare. 
For some time, GM has been sagging under the weight of $80 billion in unfunded health-care obligations to retirees. Some have said GM is actually a giant HMO that happens to make cars! Just last week, they got some relief from the UAW in exchange for putting a billion a year or so into a VEBA, (Voluntary Employee Beneficiary Association) which reduces the reported accumulated liability to a mere $65 billion. 
We are reaping the harvest of years of putting more and more of our country’s social costs on the backs of private employers. We lament the loss of jobs to foreign entities that sell goods to our consumers without those burdens. How long are we going to put up with it? Why do you think the next big Toyota assembly plant in North America is being built in Canada? The calculus of health-care costs might have been a major factor. 
We could spend a month talking about all the things that could be done to reduce the cost of health care. It’s an important debate. Tort reform, prescription drugs, information technology, and health savings accounts all need to be part of the mix. Clearly it’s time to consider some bold proposals. I expect to join in the discussions as we search for answers. It won’t be easy. 
So there you have it. Delphi is a metaphor for nearly every economic and social issue gripping American manufacturing. These are huge problems that also present huge opportunities to at last confront our economic problems straight on and deal with them. 
Thank you for taking the time to hear me out. I’ll be glad to take your questions.