american drive. Copyright © 2012 by Richard E. Dauch.

Foreword copyright © 2012 by

John Engler. All rights reserved. Printed in the United States of America. For information, ad-
dress St. Martin’s Press, 175 Fifth Avenue, New York, N.Y. 10010.

www.stmartins.com

Book design by Steven Seighman

ISBN 978-1-250- 01082-7 (hardcover)

ISBN 978-1-250-01083-4 (e-book)

First Edition: September 2012

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 1
T h e W h eel s C o m e 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.* 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 count-
less hours of hard work, thoughtful planning, and creative innovation we
brought to bear to transform that industrial wasteland into a world- class, com-
petitive, 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.
In The Perfect Storm by Sebastian Junger, a fishing boat named the Andrea

* AAM is a Tier One auto supplier, which means we are one of the larger companies pro-
viding parts to the major automakers— in our case axles, gears, differentials, drive-
shafts, and other components.
 A M E R IC A N D R IV E

Gail is 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. The Andrea 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 im-
personal 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 cri-
ses that attend our industry— changing product lines, labor disruptions, eco-
nomic 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 eco-
nomic 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 Shere-
fkin, writing in Crain’s Detroit Business in 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

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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 reces-
sion, 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 reces-
sion 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 the Detroit Free Press on 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 re-
cession 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 be-
fore 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 pur-
chase 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 de-
fended by the International Union, United Automobile, Aerospace and Agri-
cultural 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

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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 Chrys-
ler, 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 le-
gions of retirees— because we had launched relatively recently in 1994. Yet by
the time our major Tier One competitors emerged from bankruptcy with dra-
matically 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 News summed 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 dol-
lars 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 an-
other 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 se-
vere cost cutting. (I should stress here that cutting costs did not include research

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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 Can-
yon, Chevrolet Trailblazer, and GMC Envoy. Sales of all of them were declin-
ing. 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 hemor-
rhaging 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

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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 told
Crain’s Detroit Business. “This is a year in which we restructure, resize and re-
cover.” 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 retire-
ment 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 gen-
erous 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 of Transmission 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 Ameri-

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can 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 profes-
sional. 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 com-
pete. Several times the leadership promised me that they would address that is-
sue 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 em-
boldened 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 facili-
ties. 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

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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 accus-
tomed to inflated wages and overly generous benefits. They quite naturally as-
sumed 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 with-
stand a strike.”

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 AMERICAN  DRIVE

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