American Axle & Manufacturing Holdings, Inc., (ticker symbol AXL), also known as AAM, is a leading supplier of driveline systems, modules, and components for the light vehicle market. The company makes axles, driveshafts, and chassis components for light trucks, sports utility vehicles (SUVs), and passenger cars. The company has a 38% share of the driveshaft market in the U.S. and 11% globally. Driveline systems include components that transfer power from the transmission and deliver it to the drive wheels.
The principal manufacturing facilities of AAM are located in the U.S. (Michigan, New York, and Ohio), Brazil, Mexico, Germany, India, Japan, and the U.K. Its customers include General Motors (GM), from which the company derives around 76% of its business, Ford, and Daimler Chrysler. The U.S. market alone accounts for about 69% of annual revenue. Among the company's diverse products, rear and front axles, as well as driveshafts contribute about 85% to annual sales, while chassis components, forged products, and others generate the remaining 15%.
Purchase from General Motors:
In 1992 General Motors announced that it planned to sell 18 of struggling manufacturing facilities. Then retired executive vice president of Chrysler Richard E. Dauch decided to purchase driveline and forge facilities from General Motors and become a privately owned Tier 1 supplier to General Motors. American Axle & Manufacturing was started on March 1st, 1994 when the current CEO Richard E. Dauch along with a small investment team purchased 5 existing facilities from General Motors Corp. The facilities purchased in 1994 were Detroit Gear & Axle, Detroit Forge, Three Rivers Propshaft, Buffalo Gear & Axle and Tonawanda Forge. Buffalo Gear & Axle and Tonawanda Forge were located in New York, while the other three facilities purchased are located in Michigan. This new company was headquartered in Detroit, MI next to the Detroit Gear & Axle and Detroit Forge facilities.
Since the company's establishment in 1994, American Axle & Manufacturing has invested heavily into technology. Just one year after its inception, AAM opened a state of the art technical center in Rochester Hills, MI. Since the opening of the AAM technical center, American Axle has invested more than 400 million dollars in applied research and development. American Axle has also made over 3 billion dollars in capital expenditures to increase their global reach and provide products to more customers. In 1999 AAM became a publicly traded company on the New York Stock Exchange. American Axle's relentless focus on quality, manufacturing excellence and customer satisfaction has made the company a world leader in driveline and drivetrain systems. American Axle is currently the 12th largest Tier 1 automotive supplier in North America and ranks in the top 40 Tier 1 automotive suppliers globally.
American Axle & Manufacturing currently has over 30 offices and manufacturing facilities across 4 different continents. AAM currently employs over 7,800 people worldwide. With such a wide global reach, American Axle has the ability cost-effectively serve customers anywhere in the world.
American Axle currently operates 7 facilities in Michigan, including their world headquarters on the Hamtramck/Detroit border. They also operate the Detroit Manufacturing Complex (formerly Detroit Gear & Axle), Dietronik, MSP Industries, Oxford Forge, AAM Technical Center and Three Rivers Manufacturing Facility.
AAM operates their AccuGear and Fort Wayne engineering office in Indiana. AccuGear specializes in precision finishing as well as producing differentials.
AAM has scaled back their New York operations, and now currently only operates Cheektowaga manufacturing facility. Highly skilled machining is performed at this facility.
Ohio: Colfor Manufacturing is an AAM subsidiary located in Ohio that specializes in forged products.
Guanajuato Manufacturing Complex located in Silao Guanajuato, Mexico is one of AAM's largest facilities. Rear-axle assemblies, propeller shafts, driveline systems and forging components. Guanajuato Manufacturing Complex has allowed American Axle to offer products at competitive prices to their customers.
American Axle operates two facilities in South America, both are located in Brazil. AAM operates a business and engineering center in São Paulo, Brazil, and a manufacturing facility in Araucária, Brazil. The manufacturing facility in Araucária supports AAM's South American customer base, and brings AAM products and services to the region.
American Axle operates manufacturing facilities in England, Poland and Scotland. Their Scotland and England operations support heavy duty truck axles (up to 26 tons). The Poland manufacturing facility produces differentials and is designed specifically to support AAM's European customer base. AAM also operates an engineering office in Germany.
AAM has several locations in Asia, including locations in China, India, Japan, South Korea and Thailand. AAM's asian operations are headquartered in Shanghai, China, and AAM operates manufacturing facilities in Changshu and Hefei. AAM operates business offices in Japan and South Korea. AAM's newer factories include the Rayong manufacturing facility in Thailand and the Pune manufacturing facility in India. 
As shown in the graph, 61 percent of AAM sales are generated in the United States and 2 percent in Canada. A total of 91 percent of AAM's global sales is generated in North America. Since there is not much room for growth in the United States and Canada AAM should look to maintain their sales figures in these regions and grow them slightly if possible. Only 9 percent of AAM's sales are generated outside of North America. This is an area where AAM is expecting sales growth. Emerging markets such as China and India have a very high people per car ratio. Automotive suppliers are looking to capitalize on the growth of these economies in order to sell vehicles when people can afford them.
American Axle has had improving financial performance over the past three years. The automotive industry is a cyclical business, and this can be seen with the financial performance of American Axle. 2008 was not a good year for American Axle. Although the company earned over 2 billion dollars in revenue, this was not enough to cover their expenses, and AAM returned a negative profit margin of 58 percent.
There were several factors that led to the very poor financial performance of American Axle in 2008.
The 2008 AAM strike hurt American Axle financially because the company was forced to idle many of their North American facilities. AAM was unable to sell a lot of parts to their customers because of the work stoppage. After the strike AAM estimated that the strike cost them roughly $300 million dollars in sales. American Axle also offered buyouts to over 2000 employees that did not return to work that ranged from 85,000 to 140,000 per employee.
In 2008 the price of gas unexpectedly rose to over $4 dollars per gallon. This substantially reduced the number of light trucks and SUV’s sold by their main customer General Motors. As a result of this the drop in truck sales, GM demanded less products from American Axle.
Before the UAW signed the new labor contract in 2008, AAM was not very flexible to changes in customer demand. Under the new labor agreement, American Axle has become much more flexible to changes in customer demand. On top these problems; in 2008 the financial crisis further deteriorated AAM’s financial performance. All of these factors caused AAM to report an EBITDA of negative $851 million and net income of negative 1.2 billion.
In 2009 their largest customer General Motors declared bankruptcy. After General Motors declared bankruptcy the stock price of American Axle dropped below $1. Despite having their largest customer in bankruptcy and having a stock price of less than $1, American Axle managed to return an EBITDA of -69 million dollars. One would have expected their financial performance to be worse, but American Axle was helped out by the plummeting of gas prices which caused consumers to purchase more light trucks and SUV’s. Despite the poor outlook of 2009, AAM reported a negative EBITDA margin of -4.54%.
During 2009 American Axle was able to restructure their debt out of bankruptcy partially with the help of General Motors. In August 2009, American Axle disclosed that GM would provide them with quicker payment terms and a $100 million dollar cash cushion to help keep the company out of bankruptcy. AAM is the principal supplier for GM rear-wheel drive vehicles and is vital to the production of GM trucks and SUV’s.
In 2010 when economic conditions improved, so did the performance of American Axle. AAM had over 2.2 billion dollars in sales and reported a net income of $115 million dollars. Even after the steep fixed costs associated with manufacturing, American Axle still reported a profit margin of around 5 percent. The 9 percent operating margin is also a good sign of financial strength. Operating margin is the companies operating income divided by revenue. A high operating margin is a good sign for a company because it indicates how much money a company has left over to cover fixed costs and taxes.
Unlike in previous years, American Axle reported a positive return on assets, which indicates management’s efficiency has increased. The only area of concern in AAM’s 2010 finances is their current ratio has been decreasing over the past three years. The current ratio measures the company’s ability to pay short-term obligations. If this figure falls below 1.0 it might be an area of concern for investors because the company might have trouble covering its short-term obligations.
Profitability Despite being the smallest and the newest competitor in the driveline industry, AAM is a top performer in the industry. They have the highest EBITDA margin amongst the competition. EBITDA margin is probably the most important metric when comparing manufacturing companies of different sizes. EBITDA margin takes earnings before interest and taxes and divides this figure by total revenue. Why this is so important in the manufacturing industry is that fixed costs are very high. Depending on how each individual company accounts for depreciation and amortization, net income could vary greatly. Even with considerably lower revenues, American Axle managed to return a higher net income than Dana Holdings and Meritor. American Axle’s most direct competitor, Dana Holdings, was only reported 10 million dollars in net income despite having over 6 billion dollars in revenue. Dana has been restructuring their company since 2006 when the company declared bankruptcy. 2010 was the first year that Dana has made a profit since the company emerged from chapter 11 bankruptcy in early 2008. The only area where American Axle lags behind the competition is they have a very low current ratio.
Cash Conversion Cycle American Axle has a negative cash conversion cycle figure. What a negative CCC figure means is that they collect money from their customers before they pay their suppliers. A negative CCC is very rare in the automotive industry because buyer power is so high. The industry average for automotive suppliers is roughly 45 days after the customer receives the supplier’s parts. American Axle’s largest customer, General Motors, only takes about 10 days to pay American Axle. A deal between American Axle and General Motors was reached in August 2009 when GM was in bankruptcy and AAM was near bankruptcy. GM agreed give AAM quicker payment terms and a $100 million dollar cash cushion in exchange for warrants for GM to buy American Axle stock. This arrangement will stay in place through November 2013. 
Market Valuation American Axle has performed well in 2010 and has managed to achieve an return on invested capital (ROIC) of 22.24%. AAM’s ROIC is over twice that of its closest competitor, Dana Holdings. An ROIC of over 20 percent is uncommon for a Tier 1 automotive supplier since competitors are often forced to compete on price. American Axle has an economic value added of about 116. Not only is this an extremely high EVA but also AAM is the only company that reported a positive EVA. The high EVA achieved by American Axle is due to their high ROIC. The areas of concern for AAM are that even though they have a positive EVA now, their weighted average cost of capital is the highest amongst their competitors. If AAM is unable to maintain an usually high ROIC, and it returns to the industry average of around 7 percent AAM’s EVA would become negative. AAM’s WACC is higher than the competition because they have an extremely high beta of almost 4. A high beta increases the company’s cost of equity, which ultimately increases the cost of capital. American Axle can attempt to reduce their beta by diversifying their customer base and by diversifying their product line.
Labor Efficiency American Axle employs roughly 7800 people. On average, each employee generates about $291 thousand dollars annually. Due to the highly competitive nature of the automotive supply industry, it is important for companies to use their human resources as efficiently as possible. As shown in the graph, even after employee lay-offs in 2008 American Axle places only second among their competition. For a manufacturing company, the revenue per employee statistic is important because it indicates not only how efficient the corporate office is, but it provides insight into how efficient their manufacturing processes are. Although American Axle does not have the highest revenue per employee, they have a very high cash flow per employee. When a company is increasing its cash flow without changing the amount of people it employs. This is an indication that productivity of the company is increasing. Overall, American Axle’s employee efficiency is in line with the industry average. 
' Technology:' Over the past several decades, car manufacturers have began to incorporate more technology into their vehicles. This technology movement is not just limited to the interior appoints that customers can clearly see but in every component of the vehicle. Automakers are looking to their suppliers to provide them with products that improve fuel economy, vehicle longevity and vehicle performance. For a driveline component manufacturer such as American Axle, their customers look for them to discover new ways make components more efficient which improves the fuel economy of the vehicle the parts are ultimately installed in. In addition to improving fuel economy, American Axle's customers look to the company for ways to improve on-road and off-road traction and to continually improve the longevity of their products.
Fuel Economy & Government Regulations: The automotive industry has seen increasing government regulation over the past few decades. These regulations are mainly safety and fuel economy related. Automakers are required to follow Corporate Average Fuel Economy (or CAFE) standards. Currently, automakers are required to have a corporate average fuel economy of 39 MPG for passenger cars and 30 MPG for light trucks and SUV’s by model year 2016. Since the vast majority of American Axle’s business is in the light trucks and SUV category, it is imperative that they offer products that are efficient enough to help automakers achieve these figures. For the 2010 model year, light trucks and SUV’s only return an average mile per gallon figure of around 23 MPG. Customers are also less likely to purchase a vehicle that gets poor fuel economy when fuel prices are high.
Offshoring: There has been an increasing trend for domestic automakers to move their production operations outside of the United States due to labor costs. For example, in 2002 Mexican autoworkers made only 16% of what their US counterparts made. In lower income economies, workers have made less than 10% of what their American autoworkers make. This highly publicized force has created a lot of media attention and many automakers and suppliers have been criticized for moving jobs overseas. From a corporate standpoint, a lot of companies feel that offshoring is necessary in order to remain competitive. Now on the window stickers of new cars, there is a percentage figure that shows the prospective buyer of the car what percentage of that car was produced domestically. This gives automakers some incentive to purchase components that are made in the United States and to assemble vehicles domestically.
Emerging Markets: Automakers have made a push to open new factories in countries with emerging middle classes. In markets such as North America, Western Europe and Japan, there are fewer than 3 people per car. In the United States there is almost one car per person. These markets are considered saturated by industry experts and the only way for automakers to achieve significant growth is to invest in emerging markets such as China, India, Brazil, Russia and Eastern Europe. Automakers have opened factories in developing markets in order to gain an early foothold in these emerging economies. What this means for automotive suppliers is they need to have multiple factories around the world in order to be competitive and continue to service their clients. Most Tier 1 suppliers, including American Axle & Manufacturing, are diversified globally.
On February 26th 2008 approximately 3600 AAM employees represented by the United Auto Workers Union went on strike to protest a proposed wage and benefit cut by the companies management. The wage cut proposal would have reduced the hourly compensation of workers from 28 dollars per hour to 14 dollars per hour. The strike caused American Axle & Manufacturing to cease production at its Detroit, Three Rivers and New York facilities for thirteen weeks. The strike also forced General Motors to cease production of light duty trucks and SUVs during that time period because they lacked the necessary parts to build the vehicles. Over the thirteen weeks GM was unable to produce about 230,000 vehicles after it was forced to idle plants in Ohio and Michigan. 29 other GM facilities were forced to slow production as a result of the strike. Less than half of the U.A.W. strikers returned to work after the strike ended after American Axle eliminated about 2,000 workers. Workers who left were offered buyouts ranging from $85,000 to $140,000 dollars depending on how long they had ben with the company. American Axle estimated that it expected to save approximately $300 million dollars per year under this new labor agreement. The average all in labor rate (Including health insurance and other compensatory factors) was estimated by American Axle at $73.48 dollars per hour had been cut down to $30 to $45 dollars per hour per worker. American Axle estimated that it lost approximately $370 million dollars in sales as a result of the strike, however the company gained much needed flexibility and cost reductions in its new labor contract. 
Barriers to Entry: - Moderate to High Barriers to entry are moderate to high. Capital requirements for entering this industry are relatively high. Original Equipment Manufacturers such as GM, Ford and Toyota are unlikely to do business with a company that does not have a proven track record of quality and consistency. It is important for the OEM to know that not only are the products they are installing in their cars quality products but that the company is not going to go bankrupt. As seen in the 2008 strike at American Axle, if production at a supplier ceases, the OEM can no longer produce vehicles. The competition in this industry, with the exception of American Axle, has been in business for nearly a century and it would be difficult for a new competitor to break into the driveline industry.
Supplier Power: - Moderate Although companies in the automotive supplier industry create their own products to be installed into vehicles, they do themselves have suppliers. There are the companies that supply them with their raw materials. These raw materials are sometimes delivered to the automotive supply companies in specified dimensions. Switching costs between suppliers of raw materials would be relatively low. There are other suppliers that axle manufacturers rely on that make a very specific part to their specifications that goes into the finished product. Generally there are very few companies that offer that type of service, so their power is very high. Therefore, overall the supplier power is moderate. There is virtually no threat of forward integration since the companies that supply Tier 1 automotive suppliers are usually much smaller then them.
Threat of Rivalry: – High There are very few companies in the driveline business and they are all very large. Until growth in emerging markets takes off the only way for these competitors to achieve any growth is to take market share from each other. As previously stated in the article no significant growth is expected in the North American market. Switching costs for original equipment manufacturers are moderate. OEMs generally have long-term contracts for a supplier to supply parts for a particular vehicle platform as long as it is in production. Breaking these contracts can be expensive for the OEM, and thus increasing switching costs. In the automotive supplier industry as a whole, there are a large number of competitors that compete fiercely with each other.
Buyer Power: – Moderate to High In the driveline component supplier industry, there are very few sellers from which buyers (OEM) have to choose from. As previously stated, switching costs for the buyer are moderate due to the long-term contracts suppliers have with the original equipment manufacturer. Auto suppliers try to differentiate themselves based on price, quality reputation and company stability, but as long as those three criteria are met there would be little product differentiation. Historically, buyers face little threat of forward integration. Although some auto suppliers have become quite large, they are still nowhere near the size of the original equipment manufacturer (Ford, GM, Toyota). An exception is Magna International (MGA) 's failed bid of General Motors (GM)'s European operations, and its stated plan to seek for other opportunities to integrate forward.
Although the automotive suppliers are dependent on the OEM as a source of revenue, the auto supplier does have the ability to stop supplying the OEM with parts, which would cause the OEM to cease production. In the case of American Axle buyer power is particularly high since sales to General Motors accounted for approximately 75% of AAM’s net sales. If AAM were to lose General Motors as a customer this could bankrupt the company. American Axle is continually trying to reduce buyer power by diversifying its customer base.
Threat from Substitutes: - Low There is really no immediate threat from substitutes. Original Equipment Manufactures such as Ford and GM already have long term contracts in place that allow a single supplier to provide parts for a vehicle platform. In the case of American Axle, they face threats from substitute products in their aftermarket division. Parts made by the aftermarket division can be obtained by retail consumers. Many of these parts are offered by the aftermarket division can be obtained from competitors. Switching costs for the retail consumer are very low and substitutes are priced competitively. The aftermarket division is only a small segment of American Axle and has little effect on the overall performance of the company.
Strengths: American Axle has a very strong track record of producing quality parts. In 2010 AAM reported only 4 discrepant parts per million as measured by their largest customer. American Axle has never had any major recalls or product liability issues. As a result of weathering an 87 day strike in 2008, AAM was able to convert former fixed legacy labor costs into a flexible and variable cost structure. This gives them a significant competitive advantage over other automotive suppliers in the domestic labor market. After demonstrating operational excellence in 2010 American Axle's Three Rivers Manufacturing Facility was named as one of the 10 best plants in North America by Industry Week.  American Axle also benefits from being diversified globally and being able to reach out to companies producing cars in emerging markets. American Axle operates offices and manufacturing facilities on four continents and helps reduce the cost of engineering services and driveline components to its customers.
Weaknesses: American Axle & Manufacturing's business is exposed to the cyclical nature of the automotive industry. Worldwide automotive production is linked to the economic performance of the North American market and the worldwide automotive market. Factors such as credit availability, interest rates and fuel prices directly affect sales of cars and trucks. Although American Axle strives to produce the highest quality products possible, they are still exposed to warranty claims, product recalls, and product liability litigation. In 2009, American Axle entered into an agreement with General Motors that expanded warranty cost sharing starting in 2011. A large product recall would adversely affect the financial performance of the company, and has the possibility of being significantly larger than estimated.
Opportunities: There are several opportunities globally for American Axle to capitalize on. In the North American market, American Axle can grow its business by outcompeting other Tier 1 suppliers, and capturing their market shares. Another promising opportunity for American Axle is the opportunity for international expansion. Companies have invested significant amounts of capital in emerging markets, and as middle classes grow in these markets consumers are expected to buy more cars. American Axle can also increase sales to existing automotive companies outside of the United States. There are opportunities with new foreign automotive companies that do not yet have a supplier for driveline components.
Threats: Some threats that face American Axle & Manufacturing are they are somewhat reliant on sales to their two largest customers, General Motors and Chrysler. American Axle is the principal supplier of driveline components to GM Rear Wheel Drive vehicles in North America, particularly light trucks and SUV's. Sales to General Motors comprised approximately 75 percent of total net sales for AAM in 2010. A reduction in the sales to General Motors or a reduction in the number of light trucks and SUV's sold by General Motors could adversely impact the financial performance of the company. AAM is also the primary supplier of driveline components for heavy duty Dodge Ram trucks. Sales to Chrysler, the parent company of Dodge, accounted for approximately 9 percent of net sales in 2010. Market share losses of the Dodge Ram pick-up truck could also weaken AAM's financial performance.
American Axle faces competition from other Tier 1 automotive suppliers as well as OEM in-house manufacturing. The main competitors for American Axle Dana Holding Corporation, Manga International Inc., and Meritor, with Dana being their most direct competitor.
Dana Holding Corp (DAN) Dana is an Ohio based Tier 1 automotive supplier that supplies driveline components for light trucks, SUV's and heavy trucks. Light trucks and SUV's comprise the majority of Dana sales. Dana entered chapter 11 bankruptcy proceedings in 2006 and emerged form chapter 11 in early 2008. Dana is a global company that operates in 26 different countries. Dana has a larger customer base than American Axle, with their top ten customers accounting for only 53% of their sales. Ford is their largest customer and accounted for 19 percent of their total sales. Other major Original Equipment Manufacturers (OEM) that Dana supplies to are Nissan, GM and Hyundai. Like American Axle, Dana is a company that focuses on innovation and invests in technological innovation. Dana employs roughly 22,500 employees worldwide. 
BorgWarner (BWA) BorgWarner operates in 2 groups: An engine group that develops turbochargers and other air management systems to optimize fuel efficiency and a driveline division which has several products in its lineup including torque management products. The torque management products include transfer cases and components for all wheel drive vehicles. Borg Warner competes with American Axle in the transfer case and differential markets. Borg Warner employs roughly 12,500 people worldwide and their driveline division has been in business for roughly 100 years. 
Meritor, Inc. Meritor employs roughly 11,000 people in 29 different countries. Meritor supplies Original Equipment Manufacturers with driveline and braking products. Meritor is headquartered in Troy, MI and their principal products are axles, undercarriages and braking systems. Meritor's largest customer accounted for 62% of sales. Meritor also has some government contracts to produce independent rear axles for high mobility military vehicles.