Equilibration can hurt

More on Delphi's bankruptcy from the WSJ. For those who don't follow globalization, Delphi (a huge auto-parts supplier spun out of GM) provides one of the clearest examples of the economic handwriting which has been on the wall for many years now. Previous posts here and here.

First, from an interview with Delphi CEO Steve Miller:

Mr. Miller: Globalization is a fact of life these days. What has been brought into sharp relief is the differing value the global market places on knowledge workers versus basic manufacturing workers. I was struck by what I saw when I visited our Delphi operations in Mexico last week. Our average hourly worker makes about $7,000 a year, while the average salaried worker makes about $35,000 a year. A spread of five times. The same spread, or wider, exists in all low-cost countries. The implications for America are enormous, and it boils down to this. If you want your kids to enjoy the great American dream, get them a good education. The days when manual unskilled labor can deliver a $65-per-hour wage are disappearing.

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WSJ: Last year, your predecessors negotiated a two-tier wage deal that lowered wages for new hires to the $12-to-$16-an-hour range. Your most recent proposal, according to the UAW, was $10 an hour in wages with a total package of $20. What is a competitive wage package for you?

Mr. Miller: You've got to think of two kinds of components. There are things that are labor intensive, very small. You can put a thousand of them in a box and ship them across the ocean. Those things are going to be made in low-cost countries. They're not going to be made in America. Not for $10 an hour or $5 an hour. They are going to be made for $2.

There are other components like manifold covers for engines that are huge assemblies with all kinds of sophisticated electronic parts and fuel-feeding parts. Those are high value and logistically so hard to handle they have to be made next to the customer, close to the final assembly plant. Those will be made in America. But they will be made by people who have competitive, American industrial wages. And a competitive American industrial wage is, all in, about $20 an hour, in round numbers.

And to get $20 an hour all in, and have a health-care plan, pay the workers' comp bill, which is high in the states we are in like New York, Ohio and Michigan, then wage, retirement, then, bang, at a $10 wage you are already hovering around $20.

Now, the UAW has organized workers that are in the $20-a-hour all-in range and they are suppliers and they compete with us. So this isn't about breaking a union. This is about simply transforming our workplace to be competitive with other U.S.-based suppliers for components that can be made in this country.

Second, an interview with Delphi's VP for Asia-Pacific operations.

Delphi Corp., which is preparing for a painful reorganization to pull through bankruptcy protection, pays its U.S. unionized workers $27 an hour. Throw in health and retirement benefits, and the cost is more like $65.

In China, Delphi pays its workers roughly $3 an hour, about a third of which goes to medical and pension benefits. Delphi also throws in a bus ride to work each day and free lunch in the factory canteen.

The huge difference in labor costs helps explain why Delphi's Asian division is profitable, and thus exempted from the company's bankruptcy filings. It also explains why the Asian division is hiring even more workers as it expands across the region, supplying not just General Motors Corp., but Toyota Motor Corp., Hyundai Motor Co., Nissan Motor Co., Honda Motor Co., Volkswagen AG and a slew of coming Chinese makers.

As a result, Delphi's Asian division is playing a major role in one of the world's largest hypergrowth markets, with customers from China to India to Southeast Asia buying their first automobiles along with their entry into the middle class.

Delphi is in trouble because "the U.S. is losing money, but we are not," says Choon T. Chon, Delphi's vice president in charge of Asian-Pacific operations. "Asia is our future."

Asia is still a small part of Delphi's overall annual sales of $28.6 billion. But its $1.1 billion in Asian sales of auto components is more than double what the company made in Asia five years ago and has been growing more than 15% a year. Indeed, Delphi's 35 ventures in plants and technology-development centers in Asia are providing a key growth engine that is likely to help drive the company through its current crisis.

The 58-year-old Mr. Chon, who has been head of Delphi's Asia operations since 2000, is charged with the important task of keeping the region's operations humming. The Korean-born Mr. Chon, an industry veteran who has worked for GM, Ford and Chrysler, isn't an executive who minces words. He has been explaining the bankruptcy filing of the U.S. operations to his staff and customers by likening Delphi's Asian operations to the children of a sick American mother.

"Our mother has a tumor. This tumor is the UAW," he says, referring to the powerful union that represents 25,000 of Delphi's employees in North America and 10,000 retirees. Still, he is careful to remain optimistic. "We know that she's going to come out of the hospital very well," he says, referring to the U.S. company's Chapter 11 bankruptcy-protection status.

The UAW has equally critical words for Delphi's management, saying it is "unfair that the law allows Delphi to put its U.S. operations into bankruptcy, while leaving its foreign operations untouched," according to a union statement. Benefits in China are far less expensive than those provided to UAW members in the U.S. Roughly $1 of every $3 Delphi pays for hourly labor in China goes toward housing subsidies, medical and employment insurance, and a modest pension scheme that few believe is big enough to provide a significant source of retirement income.

...Delphi, which has roughly 135,000 employees outside the U.S., has poured $500 million in investments in China since 1993, making a slew of auto parts -- sparkplugs, battery cables, brakes, radiators -- not only to supply the booming China market, but also to export from China to markets elsewhere. It is building similar operations in other countries with ambitions of developing their own auto industry, like Thailand and Indonesia. It is also building advanced technical-development centers in South Korea and Japan to work with the region's powerhouses like Toyota and Hyundai.

Like other U.S. companies, Delphi sees immense export possibilities from China. But for now the company is preoccupied with trying to keep up with demand in the domestic Chinese market. Two years ago, Delphi broke ground for a $40 million, 200,000 square foot car electronics-parts plant in the coastal city of Suzhou, employing 600 people. The original plan was to produce electronic gadgets for export, but China is growing so fast that managers changed the focus to supplying domestic customers.

Mr. Chon says the key to success in China is training local managers. A crucial job for the dozens of U.S. expatriates across the region is to train local staff to take over local operations. "I have told all my expats, 'When you leave, there are no more Americans coming.' "