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American Drive
American Drive
- ISBN 13:
9781250010827
- ISBN 10:
1250010829
- Format: Hardcover
- Copyright: 09/18/2012
- Publisher: St. Martin's Press
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Summary
Politicians talk about creating jobs and fixing the economy. Here's the way to do just that An executive with thirty years in the trenches of the hard-nosed Detroit automobile industry, Richard Dauch had long dreamed of running his own manufacturing company. In 1994, he took on the challenge of his life: buying a lagging axle supply and parts company along with five rusting, unprofitable, union-controlled, near-decrepit plants in the heart of a crime-ridden Detroit slum. Renaming his company American Axle and Manufacturing, Dauch set out to create a world-class industrial manufacturer. He bought and bulldozed the crack houses that surrounded the company; rebuilt the plants; struck tough bargains with unions; solved quality problems that were costing tens of millions every year and alienating customers; trained and empowered his company's workers at every level; and within one month of opening the doors had turned an astounding $60 million in profit. In American Drive,Dauch narrates the story of AAM against the backdrop of nearly fifty years in the auto industry, from its glory days to its decline in the face of foreign competition, the government bailouts, battles with unions, and the recent financial crisis. Tough, smart, inspiring, and opinionated, Dauch offers memorable lessons on leadership, communication, negotiation, and making profits in difficult times. Dauch's story transcends the auto industry and draws a blueprint for job creation, economic growth, and excellence in America.
Author Biography
Read moreRICHARD E. DAUCH is chairman, CEO, and co-founder of American Axle and Manufacturing. He is a former manufacturing executive at Chevrolet, Chrysler, and Volkswagen, and has worked in the automotive industry for more than forty-eight years.
Table of Contents
Read more“Leadership is difficult to define, but I know it when I see it. Dauch is a born leader whose ability to inspire loyalty and extraordinary performance is a natural phenomenon.” —Lee Iacocca, former chairman and CEO of the Chrysler Corporation
“The story of Dick Dauch and his success in business, in the community, and with his family makes a great read. There are important lessons for all of us—about discipline, courage, passion, education, competitiveness, loyalty, and values. Read it and marvel. Read it and learn.” —Dr. Martin C. Jischke, president emeritus, Purdue University
“Dick builds strong teams that share a desire for enterprise and personal success. He provides clarity of purpose, rules of engagement, and rewards systems that result in exceptional business performance.” —Jim McCaslin, former president and COO of the Harley Davidson Motor Company
“Dick is an inspirational leader, a straight guy, somebody you would follow over a hill out of your trench into battle. He has a terrific command personality. In my business, when you have a company with a good structural situation and investment premise, and your management is a ten, which is what Dick Dauch is, you’re going to have a terrific success.”—Stephen A. Schwarzman, chairman, CEO, and co-founder of the Blackstone Group
“I most admire people who operate well in times of adversity. Even in the worst of times, Dick Dauch had a positive sense of the future and was committed to investing in the future.”—Peter G. Peterson, chairman of the Peter G. Peterson Foundation and co-founder and chairman emeritus of the Blackstone Group
“Dick Dauch took a group of underperforming assets and built a business that is arguably among the top suppliers in the automotive industry by developing a vision that focused on execution, quality, and a can-do attitude.”—Roger S. Penske, chairman of the board and CEO of Penske Automotive Group, Inc.
Supplemental Materials
Read moreWhat is included with this book?
The New copy of this book will include any supplemental materials advertised. Please check the title of the book to determine if it should include any access cards, study guides, lab manuals, CDs, etc.
The Used, Rental and eBook copies of this book are not guaranteed to include any supplemental materials. Typically, only the book itself is included. This is true even if the title states it includes any access cards, study guides, lab manuals, CDs, etc.
Excerpts
Read more1
The Wheels Come Off
Adversity has the same effect on a man that severe training has on a pugilist: it reduces him to his fighting weight.
—Josh Billings
It was late summer 2009 when I reached the rock bottom of my professional career in a highly visible and dramatic crisis that threatened economic doom for my company, American Axle & Manufacturing (AAM), along with the trusty crew that had helped me create the company and steer it for sixteen years through the choppy waters that always beset the auto industry.3 I stood at my office window on the seventh floor of our headquarters on Holbrook Avenue in Detroit, overlooking our lineup of clean, modern factories—now mostly empty and inactive—that we had worked so hard to rebuild. I recalled the grotesque array of rust-bucket manufacturing plants surrounded by drug dens, vacant boarded up houses, and rubbish-strewn parking lots that greeted us when we took over from GM on March 1, 1994. I swelled with pride to think of the countless hours of hard work, thoughtful planning, and creative innovation we brought to bear to transform that industrial wasteland into a world-class, competitive, global company. We had made a name for ourselves of which we were all justly proud. Now, because of forces beyond our control, it was all teetering on the brink of destruction.
InThe Perfect Stormby Sebastian Junger, a fishing boat named theAndrea Gailis caught up in violent weather when a hurricane coming up from the south encounters two powerful weather fronts coming from the northwest and the northeast, producing gale winds and massive seas that spell doom for that boat and everyone on it. TheAndrea Gail’s crew was composed of veteran seamen who knew what they were doing. They brought many years of experience and knowledge to their work. They were tough and resourceful. But sometimes knowledge and experience and toughness are not enough. Sometimes the impersonal forces of nature will overwhelm the most resilient people. That storm was like nothing those fellows had ever seen, and it swallowed them.
I and my team, like the crew on that fishing boat, were seasoned veterans, in our case with four decades in the auto industry. We knew we were in a difficult business and took nothing for granted. We foresaw every known contingency based on our years of experience dealing with all manner of challenges and crises that attend our industry—changing product lines, labor disruptions, economic downturns, intensifying and sometimes unfair foreign competition. We had seen it all, or thought we had. We knew what we were doing, and we were tough, but nothing in our experience prepared us adequately for what we were facing this time. We were caught up in a perfect storm of converging economic forces that threw the entire U.S. auto industry into its worst tailspin since the Great Depression and left many once-great companies in bankruptcy. The question was, would American Axle & Manufacturing be one of them?
We had the first hints of trouble to come in 2005 when our profits fell for the first time ever. Our net income in the fourth quarter fell to $4.5 million, down from $31.3 million in the same period the year before. Our full year income for 2005 dropped to $56 million from $159.5 million in 2004. Times were hard, but we were still making profits, which is more than I could say for the competition. In fact, by early 2006, several Tier One auto suppliers, many of them our major competitors, had already gone into bankruptcy—among them Delphi, Dana, Collins & Aikman, Federal-Mogul, Meridian, and Tower Automotive.
We were better prepared for lean times than the competition. Robert Sherefkin, writing inCrain’s Detroit Businessin March 2006, attributed the plight of Dana to competition from us, quoting a Dana manager who said we put a lot of pressure on their margins. “AAM is still vulnerable,” he wrote, “profits fell last year, but it has weathered the storm better than most, and certainly better than Dana.”
The storm was only beginning. General Motors, our biggest customer, was reporting declining sales and planning severe employee cutbacks. Of course, this was nothing new. For as long as I had been in the auto industry—including tours at GM, VWoA and Chrysler—we had endured boom and bust cycles. The major auto companies and their suppliers would lose money during a recession, then recover when the economy bounced back. But this time the bounce back was to be a long time coming. The overall economy was beginning a nose dive that we now realize was the leading edge of the longest and deepest recession since the Great Depression—but we did not realize it at the time.
The proximate cause was the housing bubble that finally burst, as bubbles always do eventually. Over a period of several years, housing prices had risen at a dizzying pace, making consumers feel much wealthier than they actually were. All of that paper wealth had helped boost sales of cars, trucks and SUVs—our bread and butter vehicles—but that wealth, and the consumer confidence it generated, disappeared almost overnight. Within a couple years, housing fell through the floor. Home foreclosures became commonplace. Millions of home owners found themselves “under water,” meaning they owed more on their homes than they were worth. People in that situation are unlikely to buy a new car, pickup truck, or SUV. Vehicle sales were beginning a slide that would only get steeper with each passing month and year.
The handwriting was on the wall, but few of us could read it. I was quoted in theDetroit Free Presson March 26, 2006, predicting that, “Everybody will start coming out of this thing in the second half of 2007.” I was basing that on past experience with previous recessions. I had no way of knowing that this recession would be in another class altogether.
Any recession by itself is bad enough, but even worse was the timing of this one—when the Big Three auto companies were more vulnerable than ever before because they had lost their competitive edge. Tier One auto suppliers like American Axle & Manufacturing were equally vulnerable because we were very dependent on the Big Three—in our case on GM and Chrysler—to purchase our products. That is a basic law of life in Detroit: When the Big Three catch a cold, Tier One suppliers like AAM get pneumonia.
A fundamental problem for GM and most Tier One suppliers like us, which left us acutely vulnerable to a steep economic downturn, was high labor costs resulting from inflated wage scales and extravagant benefits promoted and defended by the International Union, United Automobile, Aerospace and Agricultural Implement Workers of America (UAW). This situation had evolved over a period of several decades when the Big Three claimed the lion’s share of the U.S. market, and fell into a habit of caving to the UAW every time contracts came up for renegotiation. The companies figured they could just pass along the increased labor costs to consumers, and for a long time they were able to do just that. But foreign competition was undermining their market dominance and exposing the danger of uncompetitive wages and benefits. In a world of intense global competition, no industry can afford to price itself out of the market the way the U.S. auto industry had done. Our chickens were at last coming home to roost.
At the time, a typical employee of the Big Three enjoyed a fully loaded wage and benefit package equal to about $75 per hour. I know that because most of our AAM associates enjoyed the same level of compensation as employees of Chrysler, Ford, and General Motors. Granted, we were not saddled with the same level of “legacy” costs as the Big Three—mainly pensions and medical care for legions of retirees—because we had launched relatively recently in 1994. Yet by the time our major Tier One competitors emerged from bankruptcy with dramatically reduced labor cost burdens, our competitive position was adversely affected. They were competing against Japanese automakers operating in the nonunion southern states that paid less in wages and benefits and carried fewer legacy costs. We were competing with other Tier One suppliers whose workers earned less than half what we were still paying. It is hard to compete and make a profit in that situation. Impossible, in fact.
Another major bone of contention, and one I spoke out about often, was the so-called “jobs bank,” a program in which laid-off hourly UAW workers were paid nearly full wages and benefits while their employers tried to find them new jobs. At the time, we had 1,100 workers in the jobs bank—receiving full pay for sitting around doing nothing.The Detroit Newssummed it up in an editorial on May 23, 2006: “Anyone with a lick of common sense knows that paying people not to work is bad for business. So called jobs banks at the Big Three and their suppliers with United Auto Workers contracts cost hundreds of millions of dollars a year to maintain with zero return for the companies.” The editorial said correctly that the auto companies were spending between $100,000 and $130,000 a year for wages and benefits for each employee sitting idly in a jobs bank, up to $2 billion in 2006 for employees, “many of whom have been reporting to the job to read, watch movies and do crossword puzzles for years.”
It was that kind of economic insanity that had been pushing the U.S. auto industry toward the brink for years, and when the big recession set in, it was to prove the straw that helped break the camel’s back.
But hindsight is always perfect. At the time, we assumed we were in for another typical economic downturn such as we had endured often before. We laid off workers in response to declining demand and we implemented a round of severe cost cutting. (I should stress here that cutting costs did not include research and development, which at AAM enjoys general immunity from the vagaries of market fluctuations. One of the biggest mistakes many companies make in times of stress is to consume their seed corn. Not in our darkest days did I ever lose faith in the future of our company, and we did not shortchange R&D.)
By late 2006, we were facing a difficult decision regarding our gear, axle, and likage plant in Buffalo, New York. In the early years of AAM, we recognized the Buffalo workforce as first rate and pumped substantial resources into that plant, even building a new multimillion-dollar paint facility there. But that workforce and its union were resistant to labor cost reductions, which meant that despite their efficiency, by 2006 we were losing money every day that plant operated. By then, five hundred of the plant’s associates were on layoff and seven hundred were still on the job. GM was in the process of canceling the Buffalo plant’s main product line, which had included axles for the Chevrolet Colorado, GMC Canyon, Chevrolet Trailblazer, and GMC Envoy. Sales of all of them were declining. The question on the table was whether AAM would make the substantial investments necessary to gear up the Buffalo plant to make products for GM’s revamped Chevrolet Camaro, a contract we had in hand.
Because of the uncompetitive wage and benefit structure in Buffalo, it came down to a question of whether we wanted to make money or lose money. When the Buffalo UAW local union refused to agree to cost reduction changes, we decided to send the new business to our plant in Guanajuato, Mexico, and shut down the Buffalo facility. It was a tough decision we did not make lightly, but it was a matter of survival. Life presents us with difficult choices.
As if to underscore the point, we reported a $62.9 million loss for the third quarter of 2006, the first quarterly loss in the history of the company. We ended up spending about $250 million in compensation to the associates in Buffalo and other AAM plants who lost their jobs because of the downturn and shifts in production. At the time, we were spending about $75 million a year to pay 1,400 idled workers in the jobs bank, a cost which we were determined to reduce, but to do it we had to transition many of them out of the company. We used buyouts that ranged up to $100,000 per for associates with ten years or more of service. After twelve years of uninterrupted success, all of a sudden we were hemorrhaging cash. Not surprisingly, we began to see warnings in the business media that AAM was living on borrowed time. One New York analyst said we were an “ax-cident waiting to happen.” We chief executives hate to read that kind of thing about our companies.
I should add yet another aspect of the economic storm that engulfed us in that dark time: soaring energy prices. Our country has suffered for a long time from lack of a sensible energy policy and in 2006 the price of gas at the pump began to rise rapidly, eventually cresting above $4 a gallon for most grades. At that price, people who depend on their vehicles for transportation begin to feel serious pain. The types of vehicles that we supported were mostly pickup trucks and SUVs, noted for power and versatility, not gas economy. GM had enjoyed a long, profitable run producing those types of vehicles but the bloom was off the rose. Overall, North American sales of pickup trucks fell 30 percent in 2006. This was a train wreck in the making.
We limped into 2007 hoping against hope that the worst was behind us and good times were just around the bend. On February 2, we reported a net loss of $188.6 million for the fourth quarter, compared with net income of $4.5 million for that period the year before. Overall we lost $222.5 million in 2006, our first annual loss. Our stock price suffered accordingly.
I remained upbeat, however, telling business reporters we would return to profitability in 2007. I had reason to be optimistic. We were expanding our product portfolio and new business backlog to support the growing all-wheel-drive passenger car and crossover segment of the market. We also launched new products for GM, Chrysler, Ssangyong Motors, Hino, Jatco, Koyo, and Harley-Davidson while expanding our footprint in Europe and Asia. Even though sales of light trucks were still weak and expected to remain so, I projected we would increase total revenues $100 million in 2007 to $3.3 billion.
At the same time, I made it clear to everyone that we had work to do before we would get back on our feet. “We expect 2007 to be a transition year,” I toldCrain’s Detroit Business. “This is a year in which we restructure, resize and recover.” We trimmed three hundred salaried jobs, about 15 percent of the total, to reduce costs. Overall our employment fell from more than eleven thousand to less than ten thousand. We helped a lot of good people move into early retirement or find opportunities elsewhere. I had to bid farewell to many dedicated professionals who had contributed substantially to building the company, but there was no alternative. Both the salaried and hourly associates received generous buyout packages. It was painful for all concerned, but that is the world of manufacturing.
It seemed the worst was behind us; best of all, our reputation for efficiency, innovation, and quality remained undiminished. Mike Weinberg, writing in the May 2007 issue ofTransmission Digest,noted that AAM was one of the few Tier One suppliers that was fiscally healthy and not in bankruptcy. “I have been in auto manufacturing plants around the globe for the past 45 years,” he wrote. “The AAM plants are state-of-the-art and very efficient.” In June, the American Society for Quality gave me its Quality Leader of the Year Award, the only time they had so honored a corporate executive who was not a quality professional. AAM’s income in the second quarter rose to $34 million compared to $20.4 million in the same period the year before. Things were looking up.
But consumer demand remained weak and we still had that worrisome cloud on the horizon—the UAW. For years I had warned the UAW leadership that its inflated wage and benefit levels were compromising our ability to compete. Several times the leadership promised me that they would address that issue in a future contract, but every time negotiations came around, they turned a deaf ear to our concerns. And every time we prepared to dig in our heels, GM leaned on us to settle and promised to help us meet the added costs. It was a deadly cycle that in effect just kicked the can down the road each time, creating an even worse situation for the next round of negotiations.
Our contract with the UAW was due to expire in February 2008. The rough ride of 2006–2007 had convinced me the time had come at last to stand tough and do whatever it took to get our wages and benefits back to a U.S. market–competitive level. We simply could not keep doing what we had been doing, and I hoped the UAW leadership would finally come to grips with that reality.
Unfortunately, we were marginally back in the black in 2007, a fact that emboldened the UAW. While it was true we logged net earnings of $37 million on $3.25 billion of sales, that was a skimpy profit margin that spoke volumes about the vulnerability of our position. The fact that we were losing money on our U.S.-based, UAW-represented operations escaped the UAW leadership’s notice, or at least their understanding. All of our profits were coming from our foreign facilities. We made it clear to the UAW that we meant business this time, that we had to get our labor costs under control, but they were not listening. They were used to dictating terms.
AAM’s UAW members walked off the job on February 26, 2008. Back in 2004, they had walked out in a strike that lasted a day and a half. I believe most of them probably thought this would be another cakewalk. GM would lean on us to settle, as it had in times past, and we would capitulate again. They thought wrong. The day of reckoning had arrived.
They misread the situation badly. The auto market remained weak. GM’s car lots were overflowing with unsold vehicles—a 150-day supply of pickup trucks and more than 100 days’ worth of SUVs. The prospect of an interruption of production was just what the company needed at that juncture to reduce the backlog. “Frankly,” said GM chairman Rick Wagoner, “our inventories are fairly high.” Even more importantly, the AAM plant in Mexico was ramping up production to meet GM’s reduced needs even as our U.S. salaried associates began manning the production lines in place of the striking hourly associates.
The strike was bitter, as they usually are. UAW president Ron Gettelfinger accused us of demanding “extreme sacrifices” from his members. It no doubt appeared that way to the associates on strike because they had become accustomed to inflated wages and overly generous benefits. They quite naturally assumed their situation was normal. This is what can happen when you keep putting off tough decisions for another day.
In reality, AAM was simply insisting on the same provisions the UAW had already granted to our primary competitors in the U.S. We were stuck with a fully loaded labor cost of $73.48 per hour in wages and benefits, nearly three times the rate of our competitors. If we had agreed to the union demands, we would have been on schedule to reach $106 per hour within the span of the new contract! As Sean McAlinden, chief economist at the Center for Automotive Research in Ann Arbor said, AAM was left as the highest cost supplier in North America. The five AAM plants being struck had not been profitable in years. Why the UAW singled us out for this confrontation I do not know, but it was to prove a major miscalculation on their part that did us and them lasting damage.
About 3,650 AAM associates were to remain on the picket lines for eighty-seven days—the eighth longest strike in the history of the UAW. During that time, GM was required to cut back production or shutter as many as eighteen plants, but gradually most of them quietly resumed production again—to the UAW’s consternation. The union leaders expressed dismay at that, wondering where the parts were coming from. For example, the GM assembly plant in Fort Wayne, Indiana, resumed building trucks in April. A spokeswoman for the plant declined to say where the parts were coming from. The fact that AAM had a major operation in Mexico was hardly news, but apparently the UAW brass missed the memo.
The UAW began calling wildcat strikes at GM plants here and there in an effort to prod GM into leaning on AAM to settle, as it had done several times in the past. But GM vice chairman Bob Lutz told a reporter the strike had not hurt GM because of its bloated inventory of full-size pickup trucks and SUVs for which AAM produced axles. “If the market is red hot for pickups and SUVs, and with every day of the strike you are missing production volumes, then it becomes painful,” he said. “But when you have lots of retail inventory for the dealers to sell down, then it puts you in a strategically better position to withstand a strike.”
All the while, our main customer GM continued to bleed cash because of declining sales. It reported a first quarter loss of $3.3 billion, attributing about $800 million of the loss to the AAM strike, but most of it to plummeting sales of pickup trucks and SUVs.
The end of the strike, when it finally came, was painful for everyone. It consisted largely of buyouts, in which we basically paid hourly associates to take early retirement if they were eligible, or to simply leave, and buy-downs, in which we provided associates with cash settlements to cushion the transition to a lower wage scale. All 3,650 hourly workers were offered buyouts that averaged about $140,000 each. This was even more expensive than buyouts for employees of original equipment manufacturers (OEMs) like GM and Chrysler.
The UAW appeared determined to hurt AAM financially. It was literally squeezing the blood out of AAM. Overall, we reduced our U.S. hourly workforce by about 2,100, while 1,600 associates took the buy-downs. The strike cost AAM about $130 million in lost profits and $370 million in sales. That did not include the $400–$450 million we paid out to associates as part of the settlement. At the last moment, GM stepped in and provided $213 million to help pay the associates to leave or accept lower wages, a move that assisted us to reach a settlement with the UAW. All three institutions had been severely injured by this unnecessary strike.
Obviously, all of this took a toll on the company. AAM posted a loss of $644 million in the second quarter, far and away our biggest loss up until then. I told a reporter from theDetroit Free Pressit was “the most challenging and difficult quarter” in the company’s history. We had to borrow a lot of money to cover all of these charges, but we figured we had to do it to get rid of the labor legacy costs that were making us uncompetitive. Once we had the labor costs under control, and were able to take advantage of reduced operating costs, I foresaw a steady comeback.
Still, our worst days lay ahead. I have heard it said that the Good Lord never puts more on our shoulders than we can carry, but I am here to tell you sometimes He apparently wants to see just how much you can bear. While we were going toe-to-toe with the UAW, laying off associates and borrowing huge sums of money to get free of the inflated UAW labor costs, the economy continued to deteriorate. The seasonally adjusted annual rate (SAAR) of sales for passenger vehicles went into free fall from 16.5 million in 2006 to 16.1 million in 2007 and to 13.1 million in 2008. It is probably just as well we did not know then what the 2009 total would be—only 10 million. It was to be a precipitous and rapid fall.
By autumn, the bad news was echoing throughout the auto industry. AAM had long since cut away the fat and we were now gnawing at the bone. Word was out that we were cutting back production at our Cheektowaga machining plant and planning to close our Tonawanda forge, both in New York. In September, Congress approved a $25 billion low-interest loan package for the automotive industry, and the industry was asking for another $25 billion that would bring the total to $50 billion. I told theDetroit Free Pressthat Congress would probably come through with the loans, but that the auto industry needed to offer realistic plans to change the way it operates. “I cannot fathom, in my lifetime, America letting its proud auto industry that put the world on wheels go the way of the horse and buggy,” I said.
On November 30, we shut down our Detroit forge, reducing use of our facilities on Holbrook Avenue by one million square feet. “We have taken what I call the hard, necessary decisions that give us structural, transformational changes,” I said. “I think that is what Washington is looking for, strong, balanced, transforming changes and reformation.” At the same time, we were expanding operations and adding associates at our facility in Three Rivers, Michigan, where the UAW local members had chosen to go their own way from the international union, agreeing to a competitive wage and benefit package. In reality, all we needed at that point in the story was a rebound in sales of motor vehicles.
To no one’s surprise, AAM stock was on a steady downward trajectory. In November, I bought 430,000 shares to demonstrate my confidence in the company. It did not stem the decline. By December 29, AAM shares were down to $2.18, reflecting a decline of 88 percent during the year. And that was three days after our two main customers, GM and Chrysler, got $17.4 billion from Uncle Sam, funded from the $787 billion approved by Congress to save the financial industry. A year before, at the end of 2007, AAM shares had been selling for $18.62.
I was quoted in theDetroit Free Press,calling 2008 “the year from hell,” which it surely was. We lost about $1 billion in special charges, paying for attrition plans and plant closures. All told, we shed about three thousand associates through buyouts and buy-downs. We suspended our quarterly dividend of 2¢ per share. Our senior executives agreed to take a 10 percent wage cut and waive annual bonuses for 2008 and 2009. Even the board of directors accepted reduced compensation.
The bad news just kept coming. In March, we were informed by the New York Stock Exchange that we had fallen below the continued listing standard based on market capitalization and stockholders’ equity, which cannot be less than $75 million over a thirty-day period. Stock analysts said AAM was “on the bubble.” On March 10, AAM stock closed at 29¢ per share, which was both embarrassing and devastating. The price popped back up within a few days, but remained depressed compared to historical levels.
On May 1, 2009, Chrysler declared bankruptcy. One month later, General Motors followed suit. For many of us, that came as a shock even though we were expecting it. Over 101 years, GM had built 450 million cars and trucks. It had 463 subsidiaries and employed 235,000 people worldwide, 91,000 in the United States, to whom it paid $476 million in salaries and benefits each month. GM spent $50 billion a year buying parts and services. Now it was kaput. All those stockholders were left holding worthless pieces of paper. For many Americans, perhaps most of us, GM had always been seen as a rock-solid pillar of the nation’s economy. For GM to go bankrupt was simply unimaginable, but there it was lying on the road like a dead skunk. The news took my breath away.
We thought we had adequate financing and contingency plans to get us through the downturn, but when GM and Chrysler announced they would stop producing vehicles, it threw all of our plans out the window. GM and Chrysler are our two biggest customers. Together they were responsible for most of our cash flow. Together they owed us more than $300 million for parts we had already made and delivered, money that we desperately needed to stay in business. We went from $500 million revenues in the first quarter to $246 million in the second quarter. We could not survive that situation for long without assistance. We needed the money owed to us, not IOUs.
All eyes were on Washington, D.C. Would it intervene on behalf of GM and Chrysler? The answer had implications far beyond those companies. “Unless the industry gets help, hundreds of suppliers will disappear in the next four months,” said Neil De Koker, chief executive of the Original Equipment Suppliers Association (OESA), quoted inBarrons.“Some firms will fail within 60 days, and at least 500 more are at risk of failure later this year.”
One of those suppliers deemed most at risk was AAM. Republic Steel stopped shipping steel to us because of concern about our financial viability. We cannot make axles and drive trains without steel. The bad news just kept roaring through my office door. One of my key management axioms is TMT, TME—tell me the truth and tell me early. I have always figured that good news can wait, but I need to know where the problems are right now. But I was reaching the point I really longed to hear some good news.
“Only three Michigan companies on my nostalgic chart remain unscathed, for now, by bankruptcy or predation,” wrote Daniel Howes inThe Detroit News,“Ford Motor Company, Compuware Corporation and American Axle & Manufacturing, the most likely of the survivors to take its own turn in the ditch depending on the outcome of GM’s blast through bankruptcy.”
We had bills coming due, payments and interest on the loans we had taken out to pay former associates, and there was a serious question as to whether we would be able to make them. In early August, we reported a net loss of $289 million in the second quarter. The business media were filled with predictions of our imminent demise. Not if I could help it. I made it clear to everyone who asked that we were determined to avoid bankruptcy. “It is AAM’s primary objective to complete our restructuring outside of a bankruptcy process,” I said. “Bankruptcy is far too extreme and disruptive for AAM and our shareholders.”
By midsummer, Congress had enacted a major bailout package for GM and Chrysler, but the legislation did not include direct assistance to auto suppliers like AAM. We obtained first one waiver and then another from lenders on our loan covenants, but by September we were running out of time. Our only real hope was that GM, now out of bankruptcy, would make a major payment on the money it owed us. By law, GM did not have to pay us. Going through bankruptcy had essentially freed it from debt obligations. On the other hand, if GM wanted to resume production and become profitable again, it needed axles and drivetrains. At that point, GM would have had an extraordinarily difficult time finding any other company to provide the validated parts it had to have to resume operations.
Everything I understood about the situation—everything I had been led to believe—told me that GM would come up with the money. I had gone to Washington, D.C., with the GM senior staff to negotiate with the government for assistance. I knew the players and I was in the loop, but I also knew GM was now owned mainly by the government, which is more responsive to politics than real world economic forces. I also knew that 17 percent of GM, through courtesy of the government, was now owned by our nemesis, the UAW, which would not be sympathetic to our plight.
Our chief financial officer, Michael Simonte, came to see me and closed the door. Mike is a financial wizard. He helped me steer AAM through many difficult times over the years. He knows the ropes and is unflinchingly loyal to the company. He is also direct and to the point. He told me that we were five days away from bankruptcy.
Dr. Samuel Johnson famously said that the prospect of a hangman’s noose in a fortnight will concentrate a man’s mind wonderfully. A fortnight is two weeks. We were down to five days.
Copyright © 2012 by Richard E. Dauch
Foreword copyright © 2012 by John Engler
The Wheels Come Off
Adversity has the same effect on a man that severe training has on a pugilist: it reduces him to his fighting weight.
—Josh Billings
It was late summer 2009 when I reached the rock bottom of my professional career in a highly visible and dramatic crisis that threatened economic doom for my company, American Axle & Manufacturing (AAM), along with the trusty crew that had helped me create the company and steer it for sixteen years through the choppy waters that always beset the auto industry.3 I stood at my office window on the seventh floor of our headquarters on Holbrook Avenue in Detroit, overlooking our lineup of clean, modern factories—now mostly empty and inactive—that we had worked so hard to rebuild. I recalled the grotesque array of rust-bucket manufacturing plants surrounded by drug dens, vacant boarded up houses, and rubbish-strewn parking lots that greeted us when we took over from GM on March 1, 1994. I swelled with pride to think of the countless hours of hard work, thoughtful planning, and creative innovation we brought to bear to transform that industrial wasteland into a world-class, competitive, global company. We had made a name for ourselves of which we were all justly proud. Now, because of forces beyond our control, it was all teetering on the brink of destruction.
InThe Perfect Stormby Sebastian Junger, a fishing boat named theAndrea Gailis caught up in violent weather when a hurricane coming up from the south encounters two powerful weather fronts coming from the northwest and the northeast, producing gale winds and massive seas that spell doom for that boat and everyone on it. TheAndrea Gail’s crew was composed of veteran seamen who knew what they were doing. They brought many years of experience and knowledge to their work. They were tough and resourceful. But sometimes knowledge and experience and toughness are not enough. Sometimes the impersonal forces of nature will overwhelm the most resilient people. That storm was like nothing those fellows had ever seen, and it swallowed them.
I and my team, like the crew on that fishing boat, were seasoned veterans, in our case with four decades in the auto industry. We knew we were in a difficult business and took nothing for granted. We foresaw every known contingency based on our years of experience dealing with all manner of challenges and crises that attend our industry—changing product lines, labor disruptions, economic downturns, intensifying and sometimes unfair foreign competition. We had seen it all, or thought we had. We knew what we were doing, and we were tough, but nothing in our experience prepared us adequately for what we were facing this time. We were caught up in a perfect storm of converging economic forces that threw the entire U.S. auto industry into its worst tailspin since the Great Depression and left many once-great companies in bankruptcy. The question was, would American Axle & Manufacturing be one of them?
We had the first hints of trouble to come in 2005 when our profits fell for the first time ever. Our net income in the fourth quarter fell to $4.5 million, down from $31.3 million in the same period the year before. Our full year income for 2005 dropped to $56 million from $159.5 million in 2004. Times were hard, but we were still making profits, which is more than I could say for the competition. In fact, by early 2006, several Tier One auto suppliers, many of them our major competitors, had already gone into bankruptcy—among them Delphi, Dana, Collins & Aikman, Federal-Mogul, Meridian, and Tower Automotive.
We were better prepared for lean times than the competition. Robert Sherefkin, writing inCrain’s Detroit Businessin March 2006, attributed the plight of Dana to competition from us, quoting a Dana manager who said we put a lot of pressure on their margins. “AAM is still vulnerable,” he wrote, “profits fell last year, but it has weathered the storm better than most, and certainly better than Dana.”
The storm was only beginning. General Motors, our biggest customer, was reporting declining sales and planning severe employee cutbacks. Of course, this was nothing new. For as long as I had been in the auto industry—including tours at GM, VWoA and Chrysler—we had endured boom and bust cycles. The major auto companies and their suppliers would lose money during a recession, then recover when the economy bounced back. But this time the bounce back was to be a long time coming. The overall economy was beginning a nose dive that we now realize was the leading edge of the longest and deepest recession since the Great Depression—but we did not realize it at the time.
The proximate cause was the housing bubble that finally burst, as bubbles always do eventually. Over a period of several years, housing prices had risen at a dizzying pace, making consumers feel much wealthier than they actually were. All of that paper wealth had helped boost sales of cars, trucks and SUVs—our bread and butter vehicles—but that wealth, and the consumer confidence it generated, disappeared almost overnight. Within a couple years, housing fell through the floor. Home foreclosures became commonplace. Millions of home owners found themselves “under water,” meaning they owed more on their homes than they were worth. People in that situation are unlikely to buy a new car, pickup truck, or SUV. Vehicle sales were beginning a slide that would only get steeper with each passing month and year.
The handwriting was on the wall, but few of us could read it. I was quoted in theDetroit Free Presson March 26, 2006, predicting that, “Everybody will start coming out of this thing in the second half of 2007.” I was basing that on past experience with previous recessions. I had no way of knowing that this recession would be in another class altogether.
Any recession by itself is bad enough, but even worse was the timing of this one—when the Big Three auto companies were more vulnerable than ever before because they had lost their competitive edge. Tier One auto suppliers like American Axle & Manufacturing were equally vulnerable because we were very dependent on the Big Three—in our case on GM and Chrysler—to purchase our products. That is a basic law of life in Detroit: When the Big Three catch a cold, Tier One suppliers like AAM get pneumonia.
A fundamental problem for GM and most Tier One suppliers like us, which left us acutely vulnerable to a steep economic downturn, was high labor costs resulting from inflated wage scales and extravagant benefits promoted and defended by the International Union, United Automobile, Aerospace and Agricultural Implement Workers of America (UAW). This situation had evolved over a period of several decades when the Big Three claimed the lion’s share of the U.S. market, and fell into a habit of caving to the UAW every time contracts came up for renegotiation. The companies figured they could just pass along the increased labor costs to consumers, and for a long time they were able to do just that. But foreign competition was undermining their market dominance and exposing the danger of uncompetitive wages and benefits. In a world of intense global competition, no industry can afford to price itself out of the market the way the U.S. auto industry had done. Our chickens were at last coming home to roost.
At the time, a typical employee of the Big Three enjoyed a fully loaded wage and benefit package equal to about $75 per hour. I know that because most of our AAM associates enjoyed the same level of compensation as employees of Chrysler, Ford, and General Motors. Granted, we were not saddled with the same level of “legacy” costs as the Big Three—mainly pensions and medical care for legions of retirees—because we had launched relatively recently in 1994. Yet by the time our major Tier One competitors emerged from bankruptcy with dramatically reduced labor cost burdens, our competitive position was adversely affected. They were competing against Japanese automakers operating in the nonunion southern states that paid less in wages and benefits and carried fewer legacy costs. We were competing with other Tier One suppliers whose workers earned less than half what we were still paying. It is hard to compete and make a profit in that situation. Impossible, in fact.
Another major bone of contention, and one I spoke out about often, was the so-called “jobs bank,” a program in which laid-off hourly UAW workers were paid nearly full wages and benefits while their employers tried to find them new jobs. At the time, we had 1,100 workers in the jobs bank—receiving full pay for sitting around doing nothing.The Detroit Newssummed it up in an editorial on May 23, 2006: “Anyone with a lick of common sense knows that paying people not to work is bad for business. So called jobs banks at the Big Three and their suppliers with United Auto Workers contracts cost hundreds of millions of dollars a year to maintain with zero return for the companies.” The editorial said correctly that the auto companies were spending between $100,000 and $130,000 a year for wages and benefits for each employee sitting idly in a jobs bank, up to $2 billion in 2006 for employees, “many of whom have been reporting to the job to read, watch movies and do crossword puzzles for years.”
It was that kind of economic insanity that had been pushing the U.S. auto industry toward the brink for years, and when the big recession set in, it was to prove the straw that helped break the camel’s back.
But hindsight is always perfect. At the time, we assumed we were in for another typical economic downturn such as we had endured often before. We laid off workers in response to declining demand and we implemented a round of severe cost cutting. (I should stress here that cutting costs did not include research and development, which at AAM enjoys general immunity from the vagaries of market fluctuations. One of the biggest mistakes many companies make in times of stress is to consume their seed corn. Not in our darkest days did I ever lose faith in the future of our company, and we did not shortchange R&D.)
By late 2006, we were facing a difficult decision regarding our gear, axle, and likage plant in Buffalo, New York. In the early years of AAM, we recognized the Buffalo workforce as first rate and pumped substantial resources into that plant, even building a new multimillion-dollar paint facility there. But that workforce and its union were resistant to labor cost reductions, which meant that despite their efficiency, by 2006 we were losing money every day that plant operated. By then, five hundred of the plant’s associates were on layoff and seven hundred were still on the job. GM was in the process of canceling the Buffalo plant’s main product line, which had included axles for the Chevrolet Colorado, GMC Canyon, Chevrolet Trailblazer, and GMC Envoy. Sales of all of them were declining. The question on the table was whether AAM would make the substantial investments necessary to gear up the Buffalo plant to make products for GM’s revamped Chevrolet Camaro, a contract we had in hand.
Because of the uncompetitive wage and benefit structure in Buffalo, it came down to a question of whether we wanted to make money or lose money. When the Buffalo UAW local union refused to agree to cost reduction changes, we decided to send the new business to our plant in Guanajuato, Mexico, and shut down the Buffalo facility. It was a tough decision we did not make lightly, but it was a matter of survival. Life presents us with difficult choices.
As if to underscore the point, we reported a $62.9 million loss for the third quarter of 2006, the first quarterly loss in the history of the company. We ended up spending about $250 million in compensation to the associates in Buffalo and other AAM plants who lost their jobs because of the downturn and shifts in production. At the time, we were spending about $75 million a year to pay 1,400 idled workers in the jobs bank, a cost which we were determined to reduce, but to do it we had to transition many of them out of the company. We used buyouts that ranged up to $100,000 per for associates with ten years or more of service. After twelve years of uninterrupted success, all of a sudden we were hemorrhaging cash. Not surprisingly, we began to see warnings in the business media that AAM was living on borrowed time. One New York analyst said we were an “ax-cident waiting to happen.” We chief executives hate to read that kind of thing about our companies.
I should add yet another aspect of the economic storm that engulfed us in that dark time: soaring energy prices. Our country has suffered for a long time from lack of a sensible energy policy and in 2006 the price of gas at the pump began to rise rapidly, eventually cresting above $4 a gallon for most grades. At that price, people who depend on their vehicles for transportation begin to feel serious pain. The types of vehicles that we supported were mostly pickup trucks and SUVs, noted for power and versatility, not gas economy. GM had enjoyed a long, profitable run producing those types of vehicles but the bloom was off the rose. Overall, North American sales of pickup trucks fell 30 percent in 2006. This was a train wreck in the making.
We limped into 2007 hoping against hope that the worst was behind us and good times were just around the bend. On February 2, we reported a net loss of $188.6 million for the fourth quarter, compared with net income of $4.5 million for that period the year before. Overall we lost $222.5 million in 2006, our first annual loss. Our stock price suffered accordingly.
I remained upbeat, however, telling business reporters we would return to profitability in 2007. I had reason to be optimistic. We were expanding our product portfolio and new business backlog to support the growing all-wheel-drive passenger car and crossover segment of the market. We also launched new products for GM, Chrysler, Ssangyong Motors, Hino, Jatco, Koyo, and Harley-Davidson while expanding our footprint in Europe and Asia. Even though sales of light trucks were still weak and expected to remain so, I projected we would increase total revenues $100 million in 2007 to $3.3 billion.
At the same time, I made it clear to everyone that we had work to do before we would get back on our feet. “We expect 2007 to be a transition year,” I toldCrain’s Detroit Business. “This is a year in which we restructure, resize and recover.” We trimmed three hundred salaried jobs, about 15 percent of the total, to reduce costs. Overall our employment fell from more than eleven thousand to less than ten thousand. We helped a lot of good people move into early retirement or find opportunities elsewhere. I had to bid farewell to many dedicated professionals who had contributed substantially to building the company, but there was no alternative. Both the salaried and hourly associates received generous buyout packages. It was painful for all concerned, but that is the world of manufacturing.
It seemed the worst was behind us; best of all, our reputation for efficiency, innovation, and quality remained undiminished. Mike Weinberg, writing in the May 2007 issue ofTransmission Digest,noted that AAM was one of the few Tier One suppliers that was fiscally healthy and not in bankruptcy. “I have been in auto manufacturing plants around the globe for the past 45 years,” he wrote. “The AAM plants are state-of-the-art and very efficient.” In June, the American Society for Quality gave me its Quality Leader of the Year Award, the only time they had so honored a corporate executive who was not a quality professional. AAM’s income in the second quarter rose to $34 million compared to $20.4 million in the same period the year before. Things were looking up.
But consumer demand remained weak and we still had that worrisome cloud on the horizon—the UAW. For years I had warned the UAW leadership that its inflated wage and benefit levels were compromising our ability to compete. Several times the leadership promised me that they would address that issue in a future contract, but every time negotiations came around, they turned a deaf ear to our concerns. And every time we prepared to dig in our heels, GM leaned on us to settle and promised to help us meet the added costs. It was a deadly cycle that in effect just kicked the can down the road each time, creating an even worse situation for the next round of negotiations.
Our contract with the UAW was due to expire in February 2008. The rough ride of 2006–2007 had convinced me the time had come at last to stand tough and do whatever it took to get our wages and benefits back to a U.S. market–competitive level. We simply could not keep doing what we had been doing, and I hoped the UAW leadership would finally come to grips with that reality.
Unfortunately, we were marginally back in the black in 2007, a fact that emboldened the UAW. While it was true we logged net earnings of $37 million on $3.25 billion of sales, that was a skimpy profit margin that spoke volumes about the vulnerability of our position. The fact that we were losing money on our U.S.-based, UAW-represented operations escaped the UAW leadership’s notice, or at least their understanding. All of our profits were coming from our foreign facilities. We made it clear to the UAW that we meant business this time, that we had to get our labor costs under control, but they were not listening. They were used to dictating terms.
AAM’s UAW members walked off the job on February 26, 2008. Back in 2004, they had walked out in a strike that lasted a day and a half. I believe most of them probably thought this would be another cakewalk. GM would lean on us to settle, as it had in times past, and we would capitulate again. They thought wrong. The day of reckoning had arrived.
They misread the situation badly. The auto market remained weak. GM’s car lots were overflowing with unsold vehicles—a 150-day supply of pickup trucks and more than 100 days’ worth of SUVs. The prospect of an interruption of production was just what the company needed at that juncture to reduce the backlog. “Frankly,” said GM chairman Rick Wagoner, “our inventories are fairly high.” Even more importantly, the AAM plant in Mexico was ramping up production to meet GM’s reduced needs even as our U.S. salaried associates began manning the production lines in place of the striking hourly associates.
The strike was bitter, as they usually are. UAW president Ron Gettelfinger accused us of demanding “extreme sacrifices” from his members. It no doubt appeared that way to the associates on strike because they had become accustomed to inflated wages and overly generous benefits. They quite naturally assumed their situation was normal. This is what can happen when you keep putting off tough decisions for another day.
In reality, AAM was simply insisting on the same provisions the UAW had already granted to our primary competitors in the U.S. We were stuck with a fully loaded labor cost of $73.48 per hour in wages and benefits, nearly three times the rate of our competitors. If we had agreed to the union demands, we would have been on schedule to reach $106 per hour within the span of the new contract! As Sean McAlinden, chief economist at the Center for Automotive Research in Ann Arbor said, AAM was left as the highest cost supplier in North America. The five AAM plants being struck had not been profitable in years. Why the UAW singled us out for this confrontation I do not know, but it was to prove a major miscalculation on their part that did us and them lasting damage.
About 3,650 AAM associates were to remain on the picket lines for eighty-seven days—the eighth longest strike in the history of the UAW. During that time, GM was required to cut back production or shutter as many as eighteen plants, but gradually most of them quietly resumed production again—to the UAW’s consternation. The union leaders expressed dismay at that, wondering where the parts were coming from. For example, the GM assembly plant in Fort Wayne, Indiana, resumed building trucks in April. A spokeswoman for the plant declined to say where the parts were coming from. The fact that AAM had a major operation in Mexico was hardly news, but apparently the UAW brass missed the memo.
The UAW began calling wildcat strikes at GM plants here and there in an effort to prod GM into leaning on AAM to settle, as it had done several times in the past. But GM vice chairman Bob Lutz told a reporter the strike had not hurt GM because of its bloated inventory of full-size pickup trucks and SUVs for which AAM produced axles. “If the market is red hot for pickups and SUVs, and with every day of the strike you are missing production volumes, then it becomes painful,” he said. “But when you have lots of retail inventory for the dealers to sell down, then it puts you in a strategically better position to withstand a strike.”
All the while, our main customer GM continued to bleed cash because of declining sales. It reported a first quarter loss of $3.3 billion, attributing about $800 million of the loss to the AAM strike, but most of it to plummeting sales of pickup trucks and SUVs.
The end of the strike, when it finally came, was painful for everyone. It consisted largely of buyouts, in which we basically paid hourly associates to take early retirement if they were eligible, or to simply leave, and buy-downs, in which we provided associates with cash settlements to cushion the transition to a lower wage scale. All 3,650 hourly workers were offered buyouts that averaged about $140,000 each. This was even more expensive than buyouts for employees of original equipment manufacturers (OEMs) like GM and Chrysler.
The UAW appeared determined to hurt AAM financially. It was literally squeezing the blood out of AAM. Overall, we reduced our U.S. hourly workforce by about 2,100, while 1,600 associates took the buy-downs. The strike cost AAM about $130 million in lost profits and $370 million in sales. That did not include the $400–$450 million we paid out to associates as part of the settlement. At the last moment, GM stepped in and provided $213 million to help pay the associates to leave or accept lower wages, a move that assisted us to reach a settlement with the UAW. All three institutions had been severely injured by this unnecessary strike.
Obviously, all of this took a toll on the company. AAM posted a loss of $644 million in the second quarter, far and away our biggest loss up until then. I told a reporter from theDetroit Free Pressit was “the most challenging and difficult quarter” in the company’s history. We had to borrow a lot of money to cover all of these charges, but we figured we had to do it to get rid of the labor legacy costs that were making us uncompetitive. Once we had the labor costs under control, and were able to take advantage of reduced operating costs, I foresaw a steady comeback.
Still, our worst days lay ahead. I have heard it said that the Good Lord never puts more on our shoulders than we can carry, but I am here to tell you sometimes He apparently wants to see just how much you can bear. While we were going toe-to-toe with the UAW, laying off associates and borrowing huge sums of money to get free of the inflated UAW labor costs, the economy continued to deteriorate. The seasonally adjusted annual rate (SAAR) of sales for passenger vehicles went into free fall from 16.5 million in 2006 to 16.1 million in 2007 and to 13.1 million in 2008. It is probably just as well we did not know then what the 2009 total would be—only 10 million. It was to be a precipitous and rapid fall.
By autumn, the bad news was echoing throughout the auto industry. AAM had long since cut away the fat and we were now gnawing at the bone. Word was out that we were cutting back production at our Cheektowaga machining plant and planning to close our Tonawanda forge, both in New York. In September, Congress approved a $25 billion low-interest loan package for the automotive industry, and the industry was asking for another $25 billion that would bring the total to $50 billion. I told theDetroit Free Pressthat Congress would probably come through with the loans, but that the auto industry needed to offer realistic plans to change the way it operates. “I cannot fathom, in my lifetime, America letting its proud auto industry that put the world on wheels go the way of the horse and buggy,” I said.
On November 30, we shut down our Detroit forge, reducing use of our facilities on Holbrook Avenue by one million square feet. “We have taken what I call the hard, necessary decisions that give us structural, transformational changes,” I said. “I think that is what Washington is looking for, strong, balanced, transforming changes and reformation.” At the same time, we were expanding operations and adding associates at our facility in Three Rivers, Michigan, where the UAW local members had chosen to go their own way from the international union, agreeing to a competitive wage and benefit package. In reality, all we needed at that point in the story was a rebound in sales of motor vehicles.
To no one’s surprise, AAM stock was on a steady downward trajectory. In November, I bought 430,000 shares to demonstrate my confidence in the company. It did not stem the decline. By December 29, AAM shares were down to $2.18, reflecting a decline of 88 percent during the year. And that was three days after our two main customers, GM and Chrysler, got $17.4 billion from Uncle Sam, funded from the $787 billion approved by Congress to save the financial industry. A year before, at the end of 2007, AAM shares had been selling for $18.62.
I was quoted in theDetroit Free Press,calling 2008 “the year from hell,” which it surely was. We lost about $1 billion in special charges, paying for attrition plans and plant closures. All told, we shed about three thousand associates through buyouts and buy-downs. We suspended our quarterly dividend of 2¢ per share. Our senior executives agreed to take a 10 percent wage cut and waive annual bonuses for 2008 and 2009. Even the board of directors accepted reduced compensation.
The bad news just kept coming. In March, we were informed by the New York Stock Exchange that we had fallen below the continued listing standard based on market capitalization and stockholders’ equity, which cannot be less than $75 million over a thirty-day period. Stock analysts said AAM was “on the bubble.” On March 10, AAM stock closed at 29¢ per share, which was both embarrassing and devastating. The price popped back up within a few days, but remained depressed compared to historical levels.
On May 1, 2009, Chrysler declared bankruptcy. One month later, General Motors followed suit. For many of us, that came as a shock even though we were expecting it. Over 101 years, GM had built 450 million cars and trucks. It had 463 subsidiaries and employed 235,000 people worldwide, 91,000 in the United States, to whom it paid $476 million in salaries and benefits each month. GM spent $50 billion a year buying parts and services. Now it was kaput. All those stockholders were left holding worthless pieces of paper. For many Americans, perhaps most of us, GM had always been seen as a rock-solid pillar of the nation’s economy. For GM to go bankrupt was simply unimaginable, but there it was lying on the road like a dead skunk. The news took my breath away.
We thought we had adequate financing and contingency plans to get us through the downturn, but when GM and Chrysler announced they would stop producing vehicles, it threw all of our plans out the window. GM and Chrysler are our two biggest customers. Together they were responsible for most of our cash flow. Together they owed us more than $300 million for parts we had already made and delivered, money that we desperately needed to stay in business. We went from $500 million revenues in the first quarter to $246 million in the second quarter. We could not survive that situation for long without assistance. We needed the money owed to us, not IOUs.
All eyes were on Washington, D.C. Would it intervene on behalf of GM and Chrysler? The answer had implications far beyond those companies. “Unless the industry gets help, hundreds of suppliers will disappear in the next four months,” said Neil De Koker, chief executive of the Original Equipment Suppliers Association (OESA), quoted inBarrons.“Some firms will fail within 60 days, and at least 500 more are at risk of failure later this year.”
One of those suppliers deemed most at risk was AAM. Republic Steel stopped shipping steel to us because of concern about our financial viability. We cannot make axles and drive trains without steel. The bad news just kept roaring through my office door. One of my key management axioms is TMT, TME—tell me the truth and tell me early. I have always figured that good news can wait, but I need to know where the problems are right now. But I was reaching the point I really longed to hear some good news.
“Only three Michigan companies on my nostalgic chart remain unscathed, for now, by bankruptcy or predation,” wrote Daniel Howes inThe Detroit News,“Ford Motor Company, Compuware Corporation and American Axle & Manufacturing, the most likely of the survivors to take its own turn in the ditch depending on the outcome of GM’s blast through bankruptcy.”
We had bills coming due, payments and interest on the loans we had taken out to pay former associates, and there was a serious question as to whether we would be able to make them. In early August, we reported a net loss of $289 million in the second quarter. The business media were filled with predictions of our imminent demise. Not if I could help it. I made it clear to everyone who asked that we were determined to avoid bankruptcy. “It is AAM’s primary objective to complete our restructuring outside of a bankruptcy process,” I said. “Bankruptcy is far too extreme and disruptive for AAM and our shareholders.”
By midsummer, Congress had enacted a major bailout package for GM and Chrysler, but the legislation did not include direct assistance to auto suppliers like AAM. We obtained first one waiver and then another from lenders on our loan covenants, but by September we were running out of time. Our only real hope was that GM, now out of bankruptcy, would make a major payment on the money it owed us. By law, GM did not have to pay us. Going through bankruptcy had essentially freed it from debt obligations. On the other hand, if GM wanted to resume production and become profitable again, it needed axles and drivetrains. At that point, GM would have had an extraordinarily difficult time finding any other company to provide the validated parts it had to have to resume operations.
Everything I understood about the situation—everything I had been led to believe—told me that GM would come up with the money. I had gone to Washington, D.C., with the GM senior staff to negotiate with the government for assistance. I knew the players and I was in the loop, but I also knew GM was now owned mainly by the government, which is more responsive to politics than real world economic forces. I also knew that 17 percent of GM, through courtesy of the government, was now owned by our nemesis, the UAW, which would not be sympathetic to our plight.
Our chief financial officer, Michael Simonte, came to see me and closed the door. Mike is a financial wizard. He helped me steer AAM through many difficult times over the years. He knows the ropes and is unflinchingly loyal to the company. He is also direct and to the point. He told me that we were five days away from bankruptcy.
Dr. Samuel Johnson famously said that the prospect of a hangman’s noose in a fortnight will concentrate a man’s mind wonderfully. A fortnight is two weeks. We were down to five days.
Copyright © 2012 by Richard E. Dauch
Foreword copyright © 2012 by John Engler
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