"When things are in trouble... that's the greatest time for opportunity"

John C. Kennedy '79, at Alumni Week

In his CBA Alumni Week keynote address, Autocam CEO John C. Kennedy '79, presented both successes and failures of his company while offering some commentary on the recession in general, the troubles of the Big Three, and how he has dealt with adversity over the years.

See Kennedy's talk online.

He is convinced that the auto industry is not broken. The current crisis is not all bad automotive decisions, he says, though the Big Three do have their issues. "They did a very bad job of PR, more than anything." He adds that the automakers should have implemented fuel savings technology, but notes that 50 percent of the market is still trucks. "Clearly, consumer mentality must be changed" if "greener" cars are to become more popular.

"The position the Big Three are in is not because of bad decisions they made, but because of the economic crisis that is like nothing I have ever seen before." Kennedy points out that the depth of the drop in automotive sales — from around 17 million units to around 8 million units — was worse than that of the Great Depression.

The root cause of the downturn is the subprime mortgage crisis, for which he blames Senator Christopher Dodd (D-Connecticut) and U.S. Representative Barney Frank (D-Massachusetts). The solution is both more and less regulation. Kennedy favors both requiring a 20 percent down payment for mortgages obtained through Fannie Mae and Freddie Mac and eliminating the market share provision of the Community Reinvestment Act (CRA), which has led to people who don't have adequate down payments or credit scores getting mortgages and resulted, he says, in a 30-40 percent default rate.

The CRA, says Kennedy, was never an effective way to eliminate unfair practices like redlining. Another solution Kennedy advocates would be offering tax credits for buying a house or a car, as China has done; he notes that car sales in that nation are up 25 percent.

That said, Kennedy also believes that the recession is a permanent contraction and that the automotive industry as a whole needs to adapt to these radically different circumstances: "We have to play the hand we're dealt — the car industry is at 50 percent of the sales of immediate past years and we have to find a way to make it work."

To do this, Kennedy recommends diversification, a strategy that has worked very well for Autocam. "The things you do in good times affect how your business does in bad times. For example, we diversified. While we are impacted by the recession, we are not impacted as much as other companies, because we've done a relatively good job of diversifying. When I bought the business in 1988, we had all of our sales to one customer, Delphi. That might have been a problem. And they were all fuel injectors that went to the General Motors Corporation. And so we clearly had to diversify, and it didn't take a rocket scientist to figure that out."

Autocam now has other customers — companies such as Bosch, Denso, Continental, Caterpillar, Visteon, ThyssenKrupp and TRW — and divisions, including a flourishing medical parts division which supplies Arthrex, DePuy, Stryker, Philips, Alcon and Medtronic. Autocam has also expanded overseas, with past or current operations in Brazil, France, China and Poland. In total, the Kentwood-based company has 14 facilities based on four continents. So while global sales are down 20 percent, Kennedy says, "we're doing a little better than most."

Kennedy encourages global expansion: "If you are not viewing the world as flat, you're done." Autocam has been successful in China, where the company has both a joint venture and a wholly-owned foreign enterprise (WOFE), and in Poland.

Adds Kennedy, "'Global' no longer means just China. Regional manufacturing is the only way to remain profitable when fuel costs are high." He notes that "actually, on higher volume, North America is cheaper than China because of utility costs and shipping costs." Among other factors, Kennedy advises that if direct and indirect labor costs are greater than 15 percent, "find a lower cost country and move there."

Kennedy also detailed some of Autocam's less successful moves. In 2000, he sold a majority interest of the company to a private equity firm. He says, "I'm not making a negative comment about private equity firms, but they have a different business model than how I think you need to operate. We have a ton of leverage on the books, and our future is really dependent on how we renegotiate that debt."

In addition, Autocam has not met with success in France and will soon sell off its holdings there. Kennedy holds that the French guarantee of "cradle to grave" employment creates a sense of entitlement and provides no incentive to compete, and affirms that the threat of strikes by labor unions is real, all of which makes it difficult to implement Autocam's continuous improvement program.

Still, despite these setbacks and the current economic situation, Kennedy is optimistic about the future: "If greener engines catch on, there's high potential for increase in market for machined parts." He is also positive about the present: "I've done the best in my life when things are in trouble, because that is the greatest time for opportunity. You have to seize the opportunity and wade through the chaos, but this is the best time to generate wealth."