Bad for GM, Bad for America

The United Auto Workers, as you might imagine, has branded the proposal unacceptable and threatened a strike. Delphi has responded by asking the bankruptcy judge for a ruling that would allow the company to unilaterally break its union contracts with the company's 34,000 union workers and its 12,000 union retirees. The first hearing in this game of chicken is scheduled in U.S. Bankruptcy Court in New York on May 9 and 10. A ruling on the labor contract is unlikely until June.

A strike at Delphi would cripple GM by shutting down almost all of the auto giant's North American production. General Motors last faced a long strike in 1998, when a 54-day work stoppage closed 95% of its North American operations. Merrill Lynch estimates that a 60-day strike at Delphi would cost General Motors $7 billion to $8 billion in cash.

That sum wouldn't just come from lost production. It also comes from swings in the company's cash flow created when hard-pressed suppliers, also shot down by a Delphi strike, increase their demands that GM make prompt payments of existing bills. Payables -- what GM owes suppliers -- stand at $26 billion. And they're paid in cash. That's a significant figure, even for a company like GM with $20 billion in cash.

You'd think $20 billion in cash would be enough to reassure the credit-rating agencies that have graded GM's debt "junk" or, to be polite, "below investment grade." But it's not, because there are so many demands on that cash, including the recent early retirement offer to workers at GM and Delphi that could cost GM $2.2 billion in cash, according to estimates by Bernstein Research, and $5.4 billion in pension obligations. And then add in whatever size loss General Motors is likely to show this year on its car-making operations.