Tuesday, May 26, 2009

GM’s Parts Problem

Lawyers are predicting that the General Motors bankruptcy, expected to be filed June 4 in New York, will be the most complicated legal case ever. The case has not been filed yet, and it is already hitting a snag.

The problem is that Delphi, GM’s largest supplier, is already in bankruptcy, and has been since 2005. Delphi missed a deadline last week to offer a plan to emerge from bankruptcy. If a solution is not found for Delphi, it could be put into liquidation as early as next week.

And that would turn GM’s restructuring plan on its head. The plan is to split off its “viable” businesses in order to keep them going. Yet the business segments that GM has identified as viable are the same ones that would be hit hardest by a Delphi shutdown. Every single vehicle at Chevrolet and Cadillac would need adjustments in its engineering design to use alternate parts. If GM approached this challenge in its usual bureaucratic fashion, its factories could sit idle until 2012.

As serious as that sounds, Delphi is so far down the list of problems at GM that it could not really focus on the problems at its largest supplier until the court deadline had already been missed. GM was, for example, trying to work out a deal with its bondholders. That won’t be a problem in bankruptcy court, where the rules of bankruptcy will likely dictate that bondholders get nothing at all, but even in bankruptcy GM cannot avoid its parts problem.

That’s because GM has to prove to the bankruptcy court that it can be a going concern, that it can compete with other automakers. If it cannot show this, the court is obliged to have it liquidated. And in the long run, the main thing that keeps GM from being competitive is its attitude toward parts. GM uses far too many custom parts, and endures the resulting errors and costs, because it does not fully recognize the costs and risks of custom parts when it draws up its designs. Delphi’s bankruptcy is not really the result of accounting fraud, but of the hidden costs of the custom parts that its biggest customers, GM most of all, insist on.

This is a problem that GM has barely touched on in its reorganization plans, yet GM’s continuing operations — and those of Delphi — ultimately depend on reaching some kind of solution in this area.