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Auto Supplier Beats Detroit's Odds
American Axle Profits With Help From the UAW -- But Key Talks Loom
May 10, 2007; Page A10
The Wall Street Journal

American Axle & Manufacturing Holdings Inc. has shown some of the bigger Detroit manufacturers how to get the most from a unionized work force, regaining profitability even as other traditional Midwestern auto-parts makers have skidded into bankruptcy. But the company's strategy faces a critical test next year.

Born in 1994 when an investor group bought unwanted factories from General Motors Corp., American Axle has worked with the United Auto Workers union over the years to improve productivity and the quality of its axles and drivelines, essential parts connecting a vehicle's transmission and wheels. Last year it reached a buyout and early-retirement agreement with the union that was accepted by 1,500 workers.

Relying on GM

The cutbacks, combined with earlier efficiency gains and a new launch from major customer GM, have propelled American Axle back in the black after posting its first annual lost last year. First-quarter net income was up 79% from the same period last year to $15.4 million, and American Axle's stock is up 47% since the start of the year. This despite the fact that 76% of its sales last year came from GM, which has cut back North American production in an effort to stanch big losses.


Stock Gain: American Axle's shares have climbed after quarterly results and a positive forecast cheered investors.

Cost Cuts: The parts maker has eked savings out of its unionized labor force as peers have struggled, with several filing for bankruptcy.

Road Ahead: American Axle faces labor talks next year and continued dependence on big customer GM.

The quick payback from last year's actions has whetted investor appetite for more labor savings in 2008, when the company is scheduled to negotiate a new master contract with the UAW covering about 4,700 hourly employees.

Even beyond the uncertainties surrounding the talks, keeping on track could be tricky. American Axle is the sole supplier of axles for GM's large pickup trucks and sport-utility vehicles, which remains a high-volume, wide-margin program despite a drop in popularity. Meanwhile, other parts makers, such as Dana Corp., that are reorganizing under bankruptcy-court protection could emerge as tougher, lower-cost competitors.

"They started in the 1990s with manufacturing facilities that needed a radical, dramatic change and that hadn't had modern manufacturing techniques and equipment," said Lehman Brothers analyst Brian Johnson. "Now, having done that, I think the challenge is getting to a new all-in cost that's on the level with competitors like Dana."

Mr. Johnson says Dana's labor rate already is lower than American Axle's and could be even lower when it emerges Chapter 11, in part because it is seeking to reduce labor costs.

American Axle could look for labor cost savings either through the master agreement next year or through agreements with local unions at individual plants before then. American Axle employees covered by the master contract currently receive an "all-in" hourly rate including wages and benefits of $60 to $65 an hour, which is high in the supply industry. New hires earn a lower rate that the company won't disclose.

American Axle Chairman and Chief Executive Richard E. Dauch said the company, which has a $1.45 billion market capitalization, and the union have a good history of reaching deals. And he is confident heading into the talks. But he already has demonstrated he is willing to feed more business to new and growing operations outside the U.S. Overall, it says, American Axle has a $1.1 billion backlog of new business through 2012 -- business Mr. Dauch can award based at least in part on how much UAW locals cooperate.

'Very Disappointed'

The UAW has been stung by losing the Chevrolet Camaro axle program to American Axle's Mexico plant. One concession the company may seek is changing the supplemental unemployment benefit it pays to idled workers, who keep much of their salary and benefits even if they aren't working.

UAW Vice President James Settles Jr., who leads the union's talks with American Axle, said he's "very, very disappointed" that the company will build Camaro axles in Mexico. GM will build the Camaro in Oshawa, Ontario, and American Axle has a plant in Buffalo, N.Y., with idle capacity.

Still, Mr. Settles characterizes the union's relationship with the company as "decent" and said he's keeping an open mind heading into the 2008 talks. He said the union understands the business realities while at the same time wants to preserve U.S. jobs.

"Every company always talks about taking work abroad. It's something you have to go through," he said. Mr. Dauch "is a businessman. At the end of the day we have to work out some kind of agreement that will satisfy both parties."

Mr. Dauch said the company had to quickly transform its practices and thinking since it was founded. "The facts are, these original assets couldn't make a plugged nickel," he said. "And the facts were that quality was abysmal, the delivery was spotty, the technology was aging and the work force was of high anxiety. Not a pretty picture."

Losing Market Share

Mr. Dauch, who was manufacturing chief of Chrysler Corp. during the auto maker's 1980s recovery, said he met "eyeball to eyeball" with workers in each plant and worked hard to change what he called the industry's "entitlement mentality." Management drove productivity and quality improvements but at the same time spent heavily on new equipment, training and education for workers.

Mr. Dauch said he is comfortable working with the UAW, and "nobody's looking for a suicide mission here." Still, the company is dealing with a union smarting from a roiling domestic supply industry as U.S. auto makers continue to lose market share and suppliers cut jobs.

American Axle is idling capacity that makes parts for GM's midsize SUVs. Those vehicles have lost ground to what are known as crossover vehicles, which are also roomy but more fuel-efficient because they are built on car chassis.

Mr. Settles said the union has worked with American Axle to make it more profitable as it deals with industry changes. He cited the lower-tier wage for new hires and the early-retirement and buyout program that allowed the company to reduce its costs to laid-off workers.

He said the union also is working on job-classification changes to further improve efficiency.

Some union workers in Buffalo are frustrated because they've "done what they've been asked to do" and yet their future is in jeopardy, said George Jemiolo, shop chairman of UAW Local 424 in Buffalo.

He gives the company credit for investing in equipment and workers. He said the union is willing to make changes, "but let's make some reason out of it."

Write to Terry Kosdrosky at terry.kosdrosky@dowjones.com

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