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Page 1: Adac reprint

MIBIZ FILE PHOTO: JEFF HAGE

Page 2: Adac reprint

2 ACG-WESTERN MICHIGAN 2012 OUTSTANDING GROWTH AWARD REPRINTED COURTESY OF MIBIZ

Déjà vu all over againADAC invests in growth amid auto industry volatilityBy Joe Boomgaard | [email protected]

GRAND RAPIDS �— Coming out of one of the most tumultuous periods in the history of the automotive industry, ADAC Automotive is aggressively investing in new facilities and tech-nology to position it to diversify into new clients and new industries.

From essentially a break-even year in 2009, the company returned to record profitability in 2010 and experienced sales growth of 13.5 percent in 2011 as the automotive industry regained its legs.

But that growth didn�’t come easy. Just ask Jim Teets, president and CEO at ADAC. In the 19 years he�’s been with the company, he�’s experienced two major periods of industry upheaval that have taken their toll on many suppliers. Yet, despite the challenges, ADAC has come out the other side and is in the process of major investments that will ensure it remains globally competitive.

Since its beginning, ADAC Automotive has been decidedly auto-centric: About 99 percent of its business is currently in the automotive sup-ply chain, primarily as a Tier I supplier. While

ADAC is known for its door handles, it also recently returned to the exterior mirror business after a decade out of that market.

ADAC traces its roots to 1972 with the for-mation of A-Line Plastics, a small Grand Rapids shop that started with three molding machines and six employees. In 1975, the company incorpo-rated as ADAC Plastics Inc. and today does busi-ness as ADAC Automotive.

ADAC is privately owned by the Teets family �— President Jim and Patricia (Lacks) Teets �— and the Hungerford family, including Chairman Ken Hungerford and his son, VP of Vision Systems Peter Hungerford. Richard Lacks Jr. and Kurt Lacks also have minority ownership posi-tions in ADAC.

Investments to hedge against competitionTo ensure that ADAC remains competitive in

the automotive business, the company is investing about $20 million in a new paint facility adjacent to its Keating Avenue plant in Muskegon. About $4.7 million of that investment will go to the building itself, with the remaining $15 million going toward the new high-tech paint systems to

be housed at the facility and the retrofits through-out the company to handle the new processes.

The new process will help the company reduce scrap in the paint process by allowing for better paint coverage and preventing dirt or other con-taminants from entering the process.

�“The bar is being raised,�” Teets said of the competition for painted parts.

The original paint line at ADAC�’s Port City Boulevard plant came online in 1995, while the Keating line started in 2000. Given the age of both lines, Teets said the company decided against retrofitting its systems and opted instead to build the new plant and buy the new equipment.

Teets said the company spent some time and money in looking for the right way forward. It hired some consultants from Detroit to help in that process.

�“We realized that, technology-wise, we were falling behind in the paint processing part of it, and we wanted to try to regain a dominant posi-tion within our products in North America when it comes to paint. That�’s what we hope to do with this new system,�” he said.

Jim Teets, president and CEO, ADAC Automotive. PHOTO: JEFF HAGE

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REPRINTED COURTESY OF MIBIZ ACG-WESTERN MICHIGAN 2012 OUTSTANDING GROWTH AWARD 3

About the Outstanding Growth Awards

The annual Outstanding Growth Award honors a local company that demonstrates sustained growth in sales, pro tability, employment and community involvement.

Past winners include Wolverine World Wide Inc., National Heritage Academies, Rockford Construction Co., Herman Miller, Elan Nutrition, Butterball Farms Inc. and Perrigo.

The 2012 winner is ADAC Automotive.Eligibility requirements include:�• $10 million minimum in annual sales�• Demonstrated growth in sales, pro tability and employment as well as continuing

community involvement. Each year, the Outstanding Growth Award winner is asked to provide a 45-minute

presentation on the challenges faced �— and strategies used �— to build a track record of growth. The presentation is delivered to a sell-out crowd of approximately 400 of the area�’s top executives, business owners and nanciers.

The award itself is actually two awards: a large perpetual trophy the winner gets temporarily and a smaller replica that the winner gets to keep. ACG decided to take the �“Stanley Cup approach�” �— the winning company gets its name imprinted on the large tro-phy and they get to keep it for a year before turning it over to the next winner.

The winner of the Western Michigan chapter�’s Outstanding Growth Award may also be submitted for nomination for the ACG�’s National Outstanding Growth Award, given annu-ally by ACG Global at its prestigious Intergrowth Conference.

Past winners:2004: Wolverine World Wide Inc. 2008: Elan Nutrition2005: National Heritage Academies Inc. 2009: Butterball Farms Inc.2006: Rockford Construction Company 2010: Perrigo2007: Herman Miller Inc. 2011: Service Express Inc.

The company plans to retrofit the Keating plant in 2013 and decommission the Port City paint line in late 2014. The approximately 20,000 square feet of space will be absorbed by the com-pany�’s molding or assembly operations.

�“This whole thing is really a three-year pro-cess, but the real heavy capital investment is this year. We�’re dumping in right around $17 mil-lion of the $20 million in this year. Our cap ex is the highest its ever been in the history of the company,�” he said, noting that in addition, the company has also invested in a new ERP system, which it is implementing in 2012.

Given the large investments in the new facil-ity, Teets said the company has to keep its finan-cials under strict control. He said the company remains confident in industry growth projec-tions of U.S. light vehicle sales around the 14 mil-lion unit range, up from 12.7 million in 2011.

�“Some people in our company said it�’s too bad we didn�’t do (the paint system) a year ago so we could be enjoying the fruits of the rebound. But we really did it the West Michigan conservative way. We couldn�’t do it in �’09, and in �’10 we were still in recovery mode building back up the muscle that we cut out of the organization,�” Teets said.

�“Here we are breaking ground on a new 72,000-square-foot paint system and dumping in $20 million. If somebody said I�’d be doing that back in July of 2009, I�’d say you�’re crazy,�” he said.

Even if the industry were to decline, he said ADAC would benefit from the new line because it is more efficient and can accept larger prod-ucts. Moreover, the planned targeting of new

customers would hopefully be able to offset any industry decline.

�“We can�’t just hang our hat on this new paint system. We obviously have to execute and do a lot of other things well. This new paint facility, we hope, is going to be a door-opener to a lot of additional opportunities over and above what we have today.�”

Push for diversi cationThe new paint facility is a major part of

ADAC�’s push for better product diversity and customer diversity. The investment in the new paint systems will help both the company�’s bread-and-butter door handle business as well as its efforts in mirrors and elsewhere on the vehicle.

The new technology will expand the size range of exterior parts the company can paint, and it helps ADAC improve the quality of its paint coverage on injection molded products to meet or exceed what customers are expecting, Teets said.

In particular, ADAC has its sights set on woo-ing more relationships with more Asian auto-makers. Currently, the company does about 85 percent of its business with the Detroit Three. Ford and Fiat-Chrysler were nearly tied in 2011 as ADAC�’s largest sales volumes.

�“That�’s a very heavy concentration in Ford, Chrysler and GM, but that�’s OK. Right now, they�’re riding the crest up,�” he said.

While the company has �“made some inroads�” with Honda �— which accounts for about 10

percent of ADAC�’s business �— and worked on projects for Nissan, it still needs to work at broad-ening its customer base, including with Toyota, Teets said.

ADAC does some business with the European automakers, mostly through its Vehicle Access Systems Technology (VAST) Alliance. Teets said the alliance, with its global presence, is help-ing ADAC better reach global automakers, and particularly those with operations in North America.

Teets said ideally, ADAC would be able to diversify both in terms of customers and indus-try to avoid some of the dramatic cycles in the automotive industry. Currently about 70 percent of ADAC�’s business is in door handles.

The company has tried to translate its techno-logical molding and painting capabilities to other industries. One success is a contract with American Seating Co. to mold urban bus seats at ADAC�’s Saranac plant. The company is also pursuing busi-ness in the appliance and electronics fields.

�“I�’d love it, within five to six years from now, if we could have between 10 and 15 percent of our total sales be in non-automotive to help buf-fer that rollercoaster you get within automo-tive,�” Teets said. �“It�’s so easy to make a manage-ment by objective statement like that, but how do you do it? If you want to call on a Whirlpool or an Electrolux, what you might be making for them has to fit your core competencies and your process capabilities. Or you have to expand and

Continued on page 4

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4 ACG-WESTERN MICHIGAN 2012 OUTSTANDING GROWTH AWARD REPRINTED COURTESY OF MIBIZ

spend more money and invest in some different technology, different processes.�”

Diversification would help the company to avoid steep dips in sales in favor of more trough-like declines �— which are much easier to manage through, Teets said.

�“We�’re just trying to avoid the deep peaks and the deep valleys that we�’ve experienced in the past,�” said Teets of the diversification plan.

While industry diversification will likely be a slow process, Teets said he�’s optimistic that the company can work faster to achieve customer diversification. Getting ADAC�’s designs into the hands of automakers before they�’re designing new vehicles is key to that success, he said.

Strategic partnershipsOutside of the acquisition in 1999 of Dura

Automotive�’s door handle and trim division, Teets said the company has chosen to grow organically and to strengthen its operation through various partnerships. In the middle of the last decade, ADAC went looking for a global business partner to better reach new markets.

In Mexico, for example, ADAC formed a joint venture with Milwaukee-based STRATTEC Security Corp. to use one of its facilities for non-painted, low-value-added products for OEMs in Mexico or in the southern states. The move forms ADAC�’s low-cost country strategy for the North American market.

In 2006, ADAC joined with STRATTEC and German company Witte Automotive to form the Vehicle Access Systems Technology (VAST) Alliance. VAST operates as a single-source global supplier with plants in the United States, Mexico, Germany, Czech Republic, China and Brazil.

In just 10 years, the alliance has allowed ADAC to do business on a global scale, although ADAC had operations in the UK in the early 2000s. Today, through the VAST alliance, the company has three operations in China and sales and engineering offices in Tokyo, Japan and in Seoul, South Korea. It also has a joint venture with a company in São Paolo, Brazil. ADAC and VAST are in talks with partners in India for a potential manufacturing footprint there to meet demands of Volkswagen, Ford and GM.

�“Where we�’re at today just blows my mind,�” Teets said.

But he added that being an effective supplier in the modern automotive industry necessitates that companies like ADAC serve OEMs on a global scale.

�“We are trying to call on Hyundai-Kia in South Korea and in North America. We really have to be talking to them in stereo,�” he said. �“We joined with (VAST) to protect the home market. If you can�’t quote globally, you can�’t defend and protect jobs at home.�”

The supply chain also must keep innovating

with people smarter than you are. You need to be engaged and involved at a very high level, other-wise you shouldn�’t be in the position you�’re in.�”

Auto boom and bustTeets found himself tested just weeks after

being named president of the company in 2001. It would be the first of two great periods of chal-lenge for him and ADAC.

He took the helm in mid-2001 when the auto-motive industry was already showing signs of weakness. The company was set to announce his promotion in mid-September, and then 9/11 hit. The country came to a stop and the economy veered into recession. People stopped buying cars, and ADAC�’s profitability dropped as cus-tomers�’ orders stalled.

Within his first six months on the job, he had to make the tough decision to make layoffs. �“We had never done a right-sizing up to that point (in 2001),�” Teets said.

To combat the slowdown, ADAC reorganized into business units �— one for door components and another for automotive trim �— and com-pleted the shuffle in 2002. Midway through the last decade, company sales were in the $150 mil-lion to $160 million range, and management had its eyes set on the $200 million milestone. The company built up capacity in equipment, facili-ties and human resources to continue growing up to that mark. But in retrospect, Teets said the company capacitized too much and ran at �“fairly high debt levels,�” all of which hurt profitability.

�“We really did think we were heading toward the promised land of $200 million in sales,�” he said.

But ADAC never got there. The industry started to slide once again in the tail end of 2007 and throughout the next two years. The company took

ADAC AUTOMOTIVE Continued from page 3

and adding value for customers. In ADAC�’s case, that�’s meant offering more technological solu-tions, particularly with door handles, which increasingly feature high-tech touch-sensitive parts. A drive to strengthen its technological capabilities led to ADAC in 2011 making a strate-gic with a local tough-sensing technology com-pany that Teets declined to name. ADAC spends about $15 million per year on electronics.

ExecutionAll the new investments in facilities and

equipment, coupled with changing dynamics of the automotive industry have forced Teets and his colleagues to be masters of process and execution. As well, the company is bumping into some capacity constraints within its West Michigan operations. Any misstep now could really impact the company, he said.

�“Our mantra for �’12 is control our capacity, conversion of sales over budget to the bottom line, and execution,�” Teets said. �“Obviously, execution is really the capstone to the two prior things. If you don�’t execute, you don�’t convert your excess sales to the bottom line and your capacity is going to get out of control, too. We�’ve got a lot of balls in the air. I try to tell all of our people here: Let�’s concentrate on what�’s in front of us. We�’re multitasking and we need everyone to multitask �… the best they can.�”

Through it all, Teets said he�’s learned to sur-round himself with smart people and to trust his gut instinct.

�“I�’ve been with the company for 19 years, but I learn something new every week,�” he said. �“To say that you stop learning is the time that you should retire. �… I learned that if you want to be an intelligent CEO, you have to surround yourself

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REPRINTED COURTESY OF MIBIZ ACG-WESTERN MICHIGAN 2012 OUTSTANDING GROWTH AWARD 5

The West Michigan Chapter of the Association for Corporate Growth held its ninth annual Outstanding Growth Award reception on March 13 at Frederik Meijer Gardens. The sold-out event with about 400 executives from around the region featured networking over hors d�’oeuvres followed by the presentation of the presti-gious ACG Cup to a team of students from Western Michigan University. Grand Valley State University�’s team finished second. The main draw was the hour-long presentation by ADAC Automotive CEO Jim Teets about his company�’s growth since the dark days of 2009. Teets detailed the auto supplier�’s growth strategy and recent investment in a new paint facility and equipment in Muskegon, which is expected to help the company diversify its customer and product base.

a �“significant loss�” in 2008, resulting in a complete internal restructuring. In 2009 within the span of a month, two of ADAC�’s largest customers, General Motors and Chrysler, filed for bankruptcy. The company�’s future was less than certain.

Aided by the federal government, the two automakers emerged from bankruptcy and carried on, reaching profitability in 2011. The smooth bankruptcy process helped save ADAC and others in the supply chain from an even more tenuous situation.

�“President Obama had his hand all over (the bankruptcies), and obviously, we being an auto-motive supplier, are greatly indebted. Because, if they never came out of it �…�” Teets trailed off, pausing a moment. �“They would have come out of it somehow, someway. The United States gov-ernment wasn�’t going to allow two major auto-makers to go under and never come back out.�”

While the auto industry bailout directly helped the OEMs, it also kept afloat many in the automotive supply chain as a result. To this day, industry analysts repeatedly say they�’re sur-prised more suppliers didn�’t go out of business.

Teets, his board of directors and the manage-ment team made tough choices to keep the com-pany going. He said to ADAC�’s credit, the company was �“a little bit ahead of the curve�” in realizing the gravity of what was happening in the industry. During 2008 and 2009, ADAC let go 50 salaried employees and another 125 to 150 hourly people.

Following the lead of some of the other West Michigan-based office furniture companies, the executive team implemented across-the-board pay cuts of 10 percent for executives, 7 percent for the director group and 5 percent for all other salaried workers.

But on the heels of GM filing for bankruptcy

on June 1, 2009, ADAC realized it needed to scale back even further and instituted a four-day workweek �— for workers, another 20 percent cut on top of the previous cuts.

�“The summer of �’09 was not a pleasant time to be in this industry,�” Teets said. �“There were some pretty serious stress levels.�”

In mid-July, the company decision-makers reviewed the six-month financials through June and the outlook for the rest of 2009 and realized it would lose �“several million dollars�” for the year. Teets said a loss of that size would have likely resulted in the company being thrown into some serious discussions with Fifth Third Bank, as ADAC would have tripped some loan covenants.

�“It would have been a very, very difficult time for us,�” Teets said, noting that �“thoughts crossed my mind�” that the company might be forced into some sort of reorganization. �“We did everything we could. We streamlined opera-tions. We did everything humanly possible.�”

Slowly, ADAC�’s position started to improve, a situation bolstered by the federal �“Cash For Clunkers�” program that helped spur new vehi-cle purchases. For 2009, the company ended the year marginally profitable.

�“I�’ve never been so happy to break even in my life,�” Teets said.

Light at the end of the tunnelThe company�’s tough choices seemed to

work. Sales rebounded to $163 million in 2010 and $185 million in 2011, and the company is pro-jecting $187 million in sales for 2012. Improving auto sales caused the company to revise its projec-tions upward to $193 million for this year.

In the middle of all the uncertainty, Teets said 2010 was a record year for profitability as a

percentage of sales, but that was more an aberra-tion attributed to the company being so lean in its headcount and operations.

�“We had gone from taking fat out of the orga-nization �… to taking muscle out of it �… to cutting into the bone,�” he said. �“We really were lean.�”

As the U.S. light vehicle sales reached 12.7 million units in 2011, ADAC experienced a slight decline in profitability as a percentage of sales, a trend which it projects to continue through 2014 as a result of paying for the Muskegon expansion, Teets said. Profitability should improve by 2014 and 2015, when the paint system is up and running.

Like many manufacturers, ADAC slowly added workers back in 2010 and 2011, and cur-rently employs more than 1,100 people, includ-ing about 140 temporary workers. The company prefers to keep about 10 percent of its workforce as temporary workers to buffer for any major programs for customers.

�“We�’ve got to be very careful to avoid the creep in headcount,�” Teets said.

With gains in productivity, the company has to produce on average 20 percent more pieces today to reach the same sales figures it did just five years ago, he added.

�“Your productivity and lean equation needs to be stronger than ever. The North American auto-motive market is back, so our OEM customers are �… getting back to asking for 2- to 3-percent givebacks per year,�” Teets said. �“If you don�’t have the lean methods inherent to your company, the continuous improvement, the Toyota lean manufacturing sys-tem �— you�’re going to be out of business again.

�“That creep will occur �— and (the company could experience) loss of profitability. It�’s something that we talk about and strive for every week, every month here: What are we doing better?�”