Risky Business

In the fall of 2002, the sun was setting fast on New Castle, IN.

One of its largest employers, DaimlerChrysler Corp., was preparing to pull the plug on its 1,200-employee Machining and Forge plant, which made suspension and powertrain components for Chrysler, Jeep and Dodge vehicles.

In this small town of 17,000 east of Indianapolis, nothing is bigger than the Machining and Forge plant, although the Indiana Basketball Hall of Fame Museum attracts more visitors.

New Castle teenagers attend Chrysler High School — so named because the auto maker became indelibly woven into the community fabric after Walter P. Chrysler took over Maxwell-Briscoe Motor Co. in 1923. Founded in 1904, Maxwell-Briscoe assembled cars in New Castle in the same building that Chrysler later named Machining and Forge.

But in 2002, the plant, with its well-paid United Auto Workers labor force, struggled to compete with global suppliers producing the same parts for a fraction of the cost.

Chrysler Group management already had announced certain component operations, including New Castle, would be up for sale as the auto maker honed its focus on the core business of designing, building and selling vehicles.

Enter Metaldyne Corp., a Plymouth, MI, supplier created a year earlier to leverage its expertise in chassis and powertrain componentry. The supplier needed more capacity to handle new business, and Chrysler needed a buyer for New Castle.

A match made in heaven? Hardly.

Metaldyne wanted the New Castle plant, but it couldn't afford the UAW's OEM wage rate. It needed a new collective-bargaining agreement like the one that governs two other Metaldyne supplier plants in the region. On average, New Castle employees would have to accept pay cuts and fringe-benefit reductions in excess of 50%.

So in November 2002, Tim Leuliette, Metaldyne chairman, president and CEO, found himself inside the New Castle plant, standing in front of understandably irate employees, trying to explain the plant's economic realities.

The only reason the angry mob didn't lynch him was because Leuliette was joined by UAW Region 3 Director Terry Thurman, who supported the Metaldyne deal as a viable way to keep the plant running.

“It was a heated discussion,” Leuliette recalls. “But we stood there on the podium and answered every question. In the end, many of the employees didn't like the answers they got, but we didn't shy away from giving them the answers and explaining why these were the answers. The plant was going to die and go away, and then nobody would win.”

Impact Can Be Monumental

Manufacturing facilities change hands every day in the U.S., often without a hiccup in production. When a U.S. Big Three auto maker sells a component plant to a supplier, however, the impact on the industry at large can be monumental — and the labor implications downright messy.

General Motors Corp. and Ford Motor Co. already have bailed out of their components businesses — with the exception of engines and transmissions — by spinning off their parts operations in the late 1990s as Delphi Corp. and Visteon Corp., respectively. Besides Delphi, GM sold its lighting business as Guide Corp. and its axle business to form American Axle & Mfg. Inc. — a sale that has transformed a group of five woefully outdated plants into a Wall Street darling.

DaimlerChrysler Corp. has been following GM and Ford's lead in recent years by opting out of the component business.

Since 2002, DC has sold the New Castle plant to Metaldyne; the Dayton, OH, Thermal Products plant (climate-control modules) to Behr America Inc.; and, most recently, the Huntsville, AL, electronics complex to Siemens VDO Automotive — a deal that took two years to close, yet still presents great promise for the supplier.

The recent sale of OEM component plants to suppliers is not restricted to North America. In 2001, Getrag Getriebe- und Zahnradfabrik took over 50% of Ford's manual transmission business in Europe and now operates all of Ford's manual-transmission plants in the region. Earlier this year Getrag and joint-venture partner Dana Corp. acquired a 60% stake in Volvo Car Corp.'s all-wheel-drive assembly operations in Köping, Sweden (see WAW — Feb. '04, p.16).

In Japan, Mazda Motor Corp. sold its Microtechno piston plant in Hiroshima to German supplier Kolbenschmidt Pierburg AG in February 2003.

Kolbenschmidt Pierburg purchased the facility after two years of negotiations with Mazda and after the supplier had worked with Mazda and Ford on the pistons for today's inline 4-cyl. “world engine,” which comes in displacements of 1.8L, 2L and 2.3L.

“This Mazda business was a very good strategic step forward for us,” Gerd Kleinert, chairman of the executive board of Kolbenschmidt Pierburg AG, tells Ward's.

“We are the second-biggest piston supplier, so why should we not look for opportunities for more business?” Kleinert says. “Second, it's our first footprint in Japan, and it's a good business. It was profitable since the first day, and there was basically no integration process required.”

The plant will continue supplying Mazda with pistons and now has new business with Fuji Heavy Industries Ltd. (Subaru) and the commercial-vehicle operations of Hyundai Motor Co. Ltd. “And we are talking with other car manufacturers as well,” Kleinert says.

The Mazda piston facility came with a bonus: engineering. In Japan, having engineering re-sources close to the customer can mean the difference between winning and losing a contract.

When Kolbenschmidt Pierburg acquired the 31-year-old Hiroshima plant, it was half empty. With the arrival of new business, the plant is filling up. “I guarantee you by the end of this year (the plant will be) full,” Kleinert says. Headcount at the non-union plant is up, from 107 at the time of the purchase to 149 today.

UAW Is A Challenge

Purchasing a Japanese manufacturing facility is one thing — taking over a U.S. plant represented by the UAW is another.

In 1998, when Ford offered ZF Friedrichshafen AG a controlling 51% stake in the auto maker's Batavia, OH, transmission plant, the German supplier jumped at the chance, convinced the joint venture would lead to more high-volume business with Ford and, potentially, other U.S. auto makers (see WAW — March '04, p.32).

The fact that Ford and ZF would team up to build advanced new continuously variable transmissions was icing on the cake. Problem is, when the ZF management team took over in early 1999, they quickly ran afoul of the UAW's plant leadership and the relationship never had a chance, sources say.

The employees perceived that working for a supplier was tantamount to a demotion, and they weren't wild about working for a German company. “The workers had an attitude,” says a source close to the plant. “They felt their jobs were protected no matter what.”

Meanwhile, ZF engineers were diligently laboring away on the CVT that Batavia was to produce, at the rate of 1 million per year by 2005, according to early pronouncements.

What happened next at Batavia is open to debate. Either Ford dragged its feet in deciding which of its vehicles would receive the first CVT, or ZF struggled to design a CVT robust enough to handle the torque output of the larger-displacement engines needed in North America. Consumer disinterest in the technology and the Batavia labor backdrop didn't help.

Production was set for 2001 but was stalled until fall 2003. This past February, as the plant finally was ramping up volume production, Ford pulled the plug entirely on the ZF Batavia LLC joint venture and resumed 100% ownership of the plant.

Publicly, Ford praises ZF's hard work in tooling the facility for CVT output, and the auto maker and supplier will keep developing future CVTs through their ZF Transmission Technologies LLC joint venture.

Still, the cost to ZF has been tremendous, having run the plant for more than four years without producing a single CVT. Between 2001 and 2003, ZF's North American investment totaled about $700 million, and much of that capital went to Batavia.

Joint ventures between suppliers and their OEM customers — as illustrated by ZF Batavia — can be explosive. “Joint ventures are like marriages,” Julio Caspari, president of ZF Group North American Operations, tells Ward's. “As long as both sides benefit, it's OK to be in a JV. The moment someone has less advantage, then it's time to get away.”

The irony at Batavia is that ZF has experience with unionized labor. In the U.S., the supplier has three UAW facilities, in Paris, IL; and Tuscaloosa, AL. The third UAW plant, to manufacture axles, opened late last year in Chicago at a new supplier park — created by Ford.

The structure of the ZF-Ford JV contributed significantly to its demise. When the JV took effect, in early 1999, ZF assumed total control of the plant and installed new management.

Chrysler Eased Metaldyne Transition

When Metaldyne took over New Castle and Behr took over Dayton Thermal Products, Chrysler remained onsite at the facilities (for one year at New Castle, two years at Dayton) to maintain labor stability and facilitate a smooth transition.

Leuliette says Chrysler's presence minimized the supplier's risk at New Castle. The supplier and OEM came to terms in late 2002, when Metaldyne purchased a 60% stake in the plant. Both companies would run the plant as a JV for one year, beginning in January 2003.

Based on the outcome of the UAW's national agreement, in September 2003, Chrysler and Metaldyne set out to close the sale. In January 2004, Metaldyne acquired the remaining 40%. All told, Metaldyne paid $235 million for the New Castle plant. In exchange, Chrysler purchased $100 million worth of Metaldyne stock.

“The issue was not to upset the apple cart and to transition to new ownership,” Leuliette says. “It allowed us to move in and learn the business before we spend the money — it wasn't just a cold-turkey transaction. That was one of the better attributes of the deal.”

Sounds simple, but the labor situation at New Castle was delicate — and remains so.

In late 2002, New Castle employed 1,200 people, and the number dropped to 1,000 by January 2004. Today, the plant employs 800, including 600 new hires. When Metaldyne advertised 500 job openings, 5,000 applicants converged on New Castle in search of work.

Where did all the other Chrysler employees go? They moved on to other Chrysler facilities, retired or accepted buyouts. It was a difficult decision to leave the plant, however, as Chrysler paid a $10,000 bonus for each year of service at the plant to employees willing to stay at New Castle — thanks to Leuliette's shrewd negotiating skills.

In all, 200 employees elected to stay — many of them lower in seniority — and accept, on average, less than half the pay and fringe benefits. The same single-tier wage structure, ratified in December by UAW employees at the plant, is used at Metaldyne's Fremont, IN, plant, 60 miles (97 km) away.

Leuliette admits “we have issues” at New Castle, and “this transition was tough to negotiate with the UAW.” But ultimately, the Metaldyne purchase of New Castle so far has added 600 new members to the UAW, helping offset a precipitous nationwide slide in the union's ranks.

At the time of the purchase, the New Castle plant was in a state of disrepair — parts of it were dingy and downright dreadful. Its owner, Chrysler, needed the plant solely to produce engine and suspension components. “They were extremely non-competitive, I assure you,” Leuliette says.

New Castle now is a plant with a future, owned by a supplier willing to spend money on new equipment and a facelift and eager to fill it with jobs for new customers. “We have to sell that factory floor to every OEM in the world,” Leuliette says.

Metaldyne already has a contract for New Castle to produce front spindle assemblies for a future Ford truck, and the plant has two other new programs as well, including one with an Asian OEM. New Castle also has a multi-year agreement to continue supplying Chrysler.

“We needed a win-win for all three parties for this deal to work — the UAW, Metaldyne and Chrysler,” says Leuliette, adding that building a new plant in the South was an option but one that would exacerbate the problem of overcapacity. “I'm 150% pleased with what we've accomplished. As an investor, I'm tickled to death.”

American Axle's Success

Richard Dauch knows what it's like to get a plant — five in fact — that have suffered from neglect.

The former Chrysler manufacturing chief led an investment team in 1994 that purchased five axle, forging and driveshaft plants in New York and Michigan from GM for $300 million, to form American Axle & Mfg. Inc. Each plant was losing money. Like at New Castle, GM had a singular purpose for the plants and — to put it bluntly — didn't much care what they looked like.

One industry veteran describes the Detroit Gear & Axle plant, before the purchase, as “the worst plant I'd ever been in — dirty, dark, low ceilings and dangerous.” The workers and management clearly hated each other. Performance was laughable, and quality miserable.

“GM was constrained for production by the assets at these facilities,” Dauch says. “It was not uncommon for a plant to miss shipments weekly. GM plants used to shut down because of no axle delivery. No axle, no truck. No truck, no GM. That's how serious it was.”

Today, like an evangelist, Dauch preaches the good word of rebirth and reconciliation, as he has led the transformation of the plants into one of the precious few auto-sector companies that Wall Street actually likes because it has kept GM business while rounding up new customers.

AAM has posted profits for 10 straight years, has expanded to 18 manufacturing sites globally and has grown exponentially its engineering capabilities. And it has kept labor peace at its U.S. facilities by adding 1,000 new UAW jobs.

True, AAM suffered a 1-day UAW strike in February, but the dispute was settled when workers ratified a new 4-year contract that includes a 2-tier wage structure. Current employees will keep their higher pay (about $44 per hour in wages and benefits) while new hires will start at less than half that rate.

And while the trend continues throughout the industry to outsource components from low-cost regions around the world, AAM re-sourced some axle production from Mexico to Three Rivers, MI, two years ago. And this year, AAM is re-sourcing driveshafts from China to the U.S. “Tell me one other supplier who can say they've done the same thing,” Dauch demands.

Dauch has invested heavily in the future of downtown Detroit by creating AAM, by reinvigorating two inner-city plants and by constructing a new headquarters building — visible along I-75 at Holbrook Avenue — that opened in December.

“We've done this all with an inner-city union workforce,” he says. “This once was a high-anxiety workforce, and now it is proud and committed, younger, better educated and more diverse.”

Siemens VDO Tackles Huntsville

In Huntsville, the labor implications were paramount as Siemens VDO Automotive negotiated its purchase of the electronics manufacturing complex from DaimlerChrysler (see WAW — March '04, p.31).

DC and the supplier began talks in fall 2002 and came to terms in May 2003. But Siemens VDO stayed out of the plant as the delicate UAW contract talks proceeded with the Big Three. The union, of course, was reluctant to see yet another OEM component plant fall into the hands of a supplier that would drastically cut pay rates.

After the contract was settled in September, Siemens VDO finally could begin its own negotiations with the UAW for a new labor agreement for Huntsville. Typical of other supplier contracts, Huntsville is phasing in a 2-tier wage structure, with existing employees keeping their higher wages and new hires coming in considerably lower.

The ink is barely dry from the April 1 closing, so Siemens VDO declines to say how many of the 2,000 Huntsville employees are staying on. But a significant number are accepting buyouts or retirement packages or seeking employment at other Chrysler facilities.

John Sanderson, president and CEO of Siemens VDO-North America, says the labor situation at Huntsville is good. “The employees are truly happy that a company such as ours with its commitment to electronics was the eventual purchaser.” The plant makes audio systems, body electronics, instrument clusters and powertrain controllers.

Without a supplier to purchase the plant, Sanderson says it would shut down, because electronic components can be re-sourced easily from other regions of the world.

“Between DaimlerChrysler, Siemens VDO and the UAW, everyone knew what was at stake here,” Sanderson says. “Only healthy companies provide employment. When there was a serious disagreement, I brought it back to what was best for the Huntsville plant.”

Today, Siemens VDO has big plans for the complex, as it propels the supplier into market leadership in several segments of automotive electronics. Some 100 engineers, including 80 from Auburn Hills, MI, and 20 from Europe, will move to Huntsville to bolster its technical capabilities.

Huntsville has two plants, and Siemens VDO will close one (measuring 232,000 sq. ft. [21,576 sq. m]) and consolidate all operations into the larger facility (measuring 849,000 sq. ft. [78,872 sq. m]).

Siemens VDO has ambitious plans for employee training because of the cultural change from working for an auto maker to working for a supplier.

“No matter who acquires a plant, there's cultural clash,” Sanderson says. “There's a difference in cultures even if both companies are German or if both are American. When Siemens and VDO came together, there were cultural differences, and both are German. It takes time to get over it.”

The strategy is to convince workers that Huntsville's future is brighter if it can serve multiple customers as part of a worldwide network of Siemens VDO electronics plants.

“Now, Huntsville becomes more than just a cost-center,” Sanderson says. “It becomes a full force of design and development and engineering.” About 90% of the plant's management is unchanged from the time of DaimlerChrysler's ownership.

When auto makers have component plants to unload, they compile a short list of suppliers as potential buyers. Can those suppliers say “no thanks” without jeopardizing relationships with those customers? Supplier executives say “yes,” although some admit they are strongly urged to consider the purchase.

“Was there pressure for us to do the deal? No,” says Sanderson. “It had to make sense to us. If you take on bad business, it doesn't go away. In the end, it just becomes a source of friction.”

Metaldyne's Leuliette agrees. “I don't feel obliged to make a dumb economic decision just because my customer wants it,” he says. “This is a significant undertaking for any supplier. I'm investing $300 million in DaimlerChrysler (through purchase of the New Castle plant). I don't know of another stronger commitment a supplier can make.”