GM’s Delphic Albatross

At one time, Delphi was just another component of the vast vertically integrated manufacturing, management, and marketing colossus that was the Big Old General Motors. But in the early 1990s, GM decided to de-integrate and created the Automotive Components Group as a separate entity. About a decade later, this entity became Delphi. By 2005, Delphi was bankrupt. The bankruptcy gobbled up four years, with Delphi only emerging recently. And now GM wants to draw almost $3 billion in loans from an escrow account it has with the Treasury, its majority owner, to help Delphi out.

GM is just completely and totally stuck with Delphi. It borrowed Treasury funds right after Delphi emerged from bankruptcy to finance a new steering-components company. According the the New York Times, GM has spent more than $12.5 billion on Delphi since the company was formed in 1999. Add to that a few billion more. Why? GM needs parts, Delphi’s retirees need to have their pensions funded, yada yada yada. The story isn’t that complex.

But it makes you wonder why GM’s vertical-integration model of parts-sourcing was jettisoned in the first place. When GM spun off Delphi, it was trying to rid itself of retiree benefits obligations. All this did was eventually create the current situation, where GM has to rely on Treasury to provide funding so that GM can in turn maintain its parts pipeline, as well as “top up” the Delphi pension fund (but only for UAW retirees). Yes, it’s enough to give you a headache. And you don’t want to think about the Pension Benefit Guaranty Corporation, the federal agency that’s now responsible for Delphi’s pensioners.

Vertical integration, with its paleolithic Ike Era associations, was supposed to have been killed off for the greater good of an advancing manufacturing model that sought to relentlessly rid itself of waste and please Wall Street. At this point, however, Delphi functions as a good case study in why de-integration is arguably worse, at least in an industrial sector, like automobiles, where components are in constant, if quantitatively unpredictable, demand and chunks of the workforce have had historic access to collective bargaining.

So does GM’s—and now the taxpayer’s—experience with Delphi mean that vertical integration is due for a comeback? My theory is that vertical integration has simply migrated, stealthily, to other industries. Apple (APPL), for example, is basically a very successful, modern-day vertically integrated enterprise. Ironically, Apple is in the tech sector, where mountains of anti-vertical-integration gibberish have been piled up over the years, peaking...about the time that Delphi was spun off from GM. Timing is everything, right? The Delphi spin-off coincided with the high-point of dot.com mania, and the Delphi bankruptcy coincided with the birth of Web 2.0.

But convergence never happened! Tech has been questionably profitable, in spite of all the blue-sky rhetoric pumped out by its evangelists, while old-line manufacturing companies, although subjected to many struggles over the past 30 years, can still make money, as Ford (F) proved this week. So maybe GM and Delphi should just face an obvious reality: They were meant to be together, and always will.

UPDATE: Actually, it’s all about Obama helping the unions. Savage stuff from the Detroit News.