Dynasty in the Making?

Dick Dauch turns 65 in July, an age when most folks contemplate retirement and the arrival of Social Security checks.

But if he's ready to pack it in, the onetime “boy wonder,” who was only 30 when he was chosen to manage one of General Motors Corp.'s largest plants, shows no signs of letting up.

Dauch is co-founder, chairman and CEO of Detroit-based American Axle & Mfg. Inc., which, during its 13 years of existence, has become a multinational Tier 1 supplier of axles and drivetrain components that generated nearly $3.2 billion in 2006 sales.

Feeling the pressure of slowing deliveries of light trucks and SUVs — its primary markets — and the cost of shedding 1,500 hourly jobs, AAM recorded a $222.5 million loss last year vs. profits of $56 million in 2005.

Still, AAM stands out as a financial stalwart compared with a long list of major North American suppliers that are either bankrupt or out of business as their major customers — Detroit's Big Three — wallow in red ink and continue to lose market share. Its backlog of new business through 2012 stands at $1.1 billion.

Dauch acknowledges AAM is interested in acquiring pieces of other suppliers that are either bankrupt or ailing, and also may eye additional joint ventures.

He declines to name any targets, although a direct axle competitor, Dana Corp., has been in bankruptcy since March 2006 and has been selling assets. “There are certainly opportunities out there, but there are also a lot of (legal) restrictions,” Dauch says.

Quite possibly the 2006 loss may prove to be only a blip on AAM's balance sheet. Profits rebounded in this year's first quarter to $15.4 million, up 79% from a year earlier, and its stock price climbed 47%. In mid May, AAM shares hit $28.66, nearly matching its 2-year high and well above its 2006 best of $21.01.

Dauch has retired before, in 1992 at age 48 from Chrysler Corp., where he had risen to executive vice president for worldwide manufacturing, making his mark in its early 1980s turnaround.

He also was a key player in launching Chrysler's first minivan in 1983 and in the 1987 acquisition of American Motors Corp., and with it the cherished Jeep brand.

Tall, trim and muscular, the one-time Purdue University fullback and linebacker joined GM in 1964 and rose quickly to top plant management jobs. In 1976, he was recruited by Volkswagen AG as vice president of manufacturing for its then-new Pennsylvania transplant facility. He was only 33.

In 1980, his friend Roger Penske told him Chrysler Chairman Lee Iacocca was looking for a manufacturing vice president. Dauch landed the job and eventually moved up to executive vice president.

Dauch's AAM employment contract now runs through Dec. 31, 2009, with 1-year extensions after that if he chooses to go on. Last year, his total compensation was $9.3 million, ranking him 12th among Michigan CEOs and just behind his best customer, GM Chairman and CEO Rick Wagoner's $10.2 million.

Some 76% of AAM's revenues are derived from GM, chiefly for components in its new GMT900 fullsize pickups and SUVs. Last year, AAM reported $1,242 in content in its customers' vehicles, up from $1,205 a year earlier, Dauch says.

With today's communications, Dauch runs the company even when he's traveling to AAM's plants in Michigan, Ohio and New York or to its distant outposts in Brazil, Mexico, Europe and Asia.

“I've got great people,” he says. “If I drop dead tomorrow, so what? The company goes along. But I think I can still make a personal contribution for a few more years.”

Obvious candidates to succeed him and thus create a “Dauch Dynasty” are his sons, Rick, 46, and David, 43.

Rick is executive vice president of worldwide manufacturing. He's not among the company's five highest paid officers but earned $417,000 in 2006. David is executive vice president of commercial and strategic development and ranks among AAM's top five executives, with total 2006 compensation of $594,977.

Will his sons get a shot at the top? Dauch says only that many people will be considered. But he adds, “they are two outstanding leaders. They have more of their mother's genes than their dad's.”

Both report to President and COO Yogendra Rahangdale. “I've never had my sons work directly for their father,” Dauch says. “I don't think that's healthy for the company or for the family relationship or for their individual growth.”

Dauch's management team and his wife Sandra Jean control about 20% of AAM's 55 million outstanding shares, or 10.1 million, as of Dec.31. In current trading, that's worth a comfortable $292 million.

As their fortune has grown, the Dauchs have become generous philanthropists, awarding “$30 million to $40 million” so far, he says, through their family foundation to a variety of entities, such as Purdue and the Ashland University for the Dauch College of Business and Economics in Ohio.

“I don't need the money,” he says, “and my kids don't need the money.”

Dauch has a commanding presence whose sometimes salty speech is filled with analogies to his farming and football days. He prides himself as a hands-on executive more at home on the plant floor shaking hands than in his spacious, memento-filled office at AAM's impressive new headquarters in Detroit's inner city.

It's only a short walk to where the AAM saga began: the old GM Detroit Gear & Axle 5-factory complex, which he and two other investors purchased in 1994 when GM was in financial trouble.

Dauch had managed those facilities early in his career and knew them well. He also knew they were a mess, with aging equipment and processes, poor-to-nonexistent maintenance and an inflexible union labor force with high absenteeism.

Dauch dealt a hard bargain. “I told GM that I wasn't interested in buying old plants with too-expensive labor unless you allow me to buy the design, the engineering — the intellectual properties,” he says.

At the outset, 99% of AAM's revenues came from GM. That's heading toward 50% within five years, he says. The Chrysler Group is AAM's second largest customer, but the list now includes a dozen auto makers worldwide and 100 customers overall.

Dauch moved quickly to reshape the old facilities, injecting new equipment and processes and worker-training programs and painting everything in sight.

AAM added a production research and development facility at the site and a new corporate technical center in nearby Rochester Hills. Quality surged. Since 1994, AAM has invested $3 billion in capital outlays and another $400 million in R&D.

Dauch's original partners eased out beginning in 1997, when he launched a drive to turn AAM into a global supplier through new offices and plants, acquisitions and joint ventures.

The private-equity firm Blackstone Group helped bankroll the company from 1997 to 2003, when it, too, exited. “By 2003, I was through with financial backers,” Dauch says. AAM went public on Jan. 29, 1999.

Dauch visualizes a bright future for AAM and the auto industry, although growth will come mainly outside the U.S.

To position itself for that growth, AAM now boasts rapidly expanding global operations. A new plant in Changsu, China, opened in late 2006 and has won a new contract with Chery Automobile Co. Ltd. to produce rear-drive modules for an '09 cross/utility vehicle. Another new plant in Olawa, Poland, will open soon.

AAM faces a significant hurdle in negotiating a new contract with the United Auto Workers union; the current pact expires Feb. 25, 2008. Throughout his career, Dauch has worked closely with the UAW on some very sticky matters.

Arguing that AAM's UAW wages and benefits were too high to compete with non-union competitors, Dauch negotiated lower UAW wages in a 2-tier package for new production hires in 2006 ($27 an hour in wages and benefits, compared with $66 for existing employees).

Dauch says he wants to keep jobs in the U.S., while remaining profitable. The alternative, as many suppliers have learned, is to head toward bankruptcy.

Somehow, that scenario doesn't fit with Dauch's can-do, hard-charging persona.