DETROIT - Richard E. Dauch is taking a page from General Motors' playbook from 70 years ago.
The CEO of American Axle & Manufacturing Inc. of Detroit is buying companies that will allow him to forge more parts for his axles and drive lines.
Vertical integration has long been out of favor. Even General Motors, which once produced most of its components, is still spinning off business units.
But Dauch is counting on vertical integration to help American Axle quadruple sales in five years to $10 billion. That strategy appears to explain why the Blackstone Group - a New York investment firm with a controlling interest in American Axle - is consolidating the steel industry.
A PLAYER IN STEEL
Since 1996, Blackstone has acquired the assets of several steelmakers and has become a player in steel-bar production.
Blackstone and American Axle are counting on the continuing popularity of light trucks and of sport-utilities, which contain 80 percent more steel bar than the average car.
American Axle is GM's principal supplier of axles, propeller shafts, chassis components and forged components - products it is bent on selling worldwide.
Analysts may debate the strategy of consolidating the $2 billion auto forging industry, but Dauch's goal is clear: 'We are a consolidator. ... The goal is to be a strategic supplier.'
He recently built an axle plant in Mexico to supply GM. A global reach, he said, requires American Axle to get much larger.
The company grew last month after acquiring two forging companies, Colfor Manufacturing Inc. of Malvern, Ohio; and MSP Industries Corp. of Oxford, Mich.
Dauch paid $223 million and added $182 million in sales to American Axle, which reported 1998 revenue of $2 billion. Another acquisition could come this year, he said.
Dauch also has invested in new equipment at the company's forge in Tonawanda, N.Y., and still is investing in his Detroit Forge Plant.
That makes American Axle one of the two largest players in North America's automotive forging business, with about one-third of the $2 billion annual market. The other major player is MascoTech Inc. of Taylor, Mich., with worldwide forging sales last year of more than $700 million.
RIPE FOR CONSOLIDATION
Don Farley, marketing director for the Forging Industry of America in Cleveland, said the industry is ripe for consolidation. It is a mature industry with many small players. 'The industry enjoyed a record year in 1998, but things are beginning to slow up,' he said.
But Dauch said his forging-industry strategy also is motivated by the need to increase American Axle's content per vehicle and improve profit margins.
Investment banker Clifton Roesler said such motivations are moving the pendulum back toward vertical integration for some companies. By producing raw materials as well as finished products, 'companies such as American Axle are saying they can do a better job than their suppliers,' he said.
Also, said Roesler, managing director of W.Y. Campbell & Co. of Detroit, automakers are demanding Tier 1 suppliers take responsibility for the entire supply chain.
For Dauch, the chain begins with steel forgings. Last month, American Axle's corporate parent agreed to acquire the USS/Kobe steel-bar mill in Lorain, Ohio, a joint venture between USX-U.S. Steel Group and Japan's Kobe Steel Ltd.
To manage its steel holdings, Blackstone has formed an umbrella company called Republic Technologies International Inc. of Akron, Ohio. It controls Republic Engineered Steels Inc., a Massillon, Ohio-based bar maker purchased last September, and Bar Technologies Inc., which consists of former Bethlehem Steel Corp. assets in New York and Pennsylvania.