MERGER MANIA in the supplier world is a concern to Joseph Day - and small wonder. As CEO of Freudenberg-NOK, the North American partnership between Germany's Freudenberg & Co. and Japan's NOK Corp., Day has promoted his company's ability to design a complete engine sealing system.
That is no small boast in a fragmented market segment like engine parts. However, a wave of mergers has created at least one formidable challenger: Federal-Mogul Corp.
Day says he admires the acquisition strategy of Federal-Mogul chairman Dick Snell, who tripled his company's sales in two years. However, suppliers who borrow heavily to make acquisitions could suffer in the next downturn, Day warns.
Instead, Freudenberg-NOK has focused on internal sales growth and relentless cost-cutting. The company has developed a kaizen program that has been studied, admired and copied by rivals.
Day spoke last month with Automotive News Europe's David Versical and David Sedgwick at Freudenberg-NOK's headquarters in Plymouth, Michigan, USA.
You are worried about the risks in all these mergers and acquisitions. When will the world see the fallout from that?
God help us if we have a recession. Think about the debt service that exists on a number of balance sheets. When they see a 10 percent or 15 percent revenue drop, there will be hell to pay because the margins that are generated from the incremental revenue are really what's funding the debt service.
If that margin doesn't exist, I think we'll see a collapse of some stock prices. We'll see some crises on the balance sheets. And that will ultimately manifest itself in the predictability and stability of the supply product because fixing businesses that are highly leveraged in times of economic turmoil can only come through the elimination of discretionary program funding.
What are those things? Investments for the ramp-up of new technology, costs for the innovation of new technology, service levels with regard to engineering and so on, the carrying of inventory to service just-in-time (delivery) requirements at the customer level.
Why hasn't there been more of an outcry among suppliers about the potential pitfalls in acquisitions?
What are you going to do? Are you going to stand up to one of the companies that's doing the work and say, 'Oh my god, I'm frightened to death?' It could be life-threatening.
They've decided to execute that strategy. They've got to run with it. And the first suggestion that, 'Oh gee, it isn't going as well as it might ...'
It would be bloody on Wall Street.
It would be awful.
Are there major regional differences when it comes to powertrain seals? Are the European automakers doing anything different from US automakers?
There's a significant difference in the Japanese market, compared with the North American and European markets. The North American and European markets are quite similar. The difference with Japan, up until now, is the desire to source primarily on price.
I'm not suggesting that's bad, it just happens. The Japanese have picked vendors and stayed with those vendors for 20, 30 or 40 years. And over that time, they have fixed every small cause of failure, eliminated the risk that it can re-occur. They've just evolved and evolved and evolved to the point where the error rates are 100 times less than you would find with the Big 3.
The Europeans and the Americans are moving in that direction. They are going to become more vendor-dedicated.
And they are going to say to those vendors, 'Listen, it's your job. Figure out how to take 90 percent of our warranty cost out of this system. And we'll stick with you if you do that.'
Which of them is going to go first?
I think that Ford will go first.
And did you think that before the DaimlerChrysler merger?
We've watched the purchasing strategies sort of ebb and flow. We think there are segments of Ford's purchasing strategy rapidly approaching the thinking of the Japanese. We think that is a wonderful decision. I'm not saying they're executing it, but I see the trend.
You say segments. Which segments other than engine parts?
I think interiors will go faster because they're closer to it. You make the decision and - bang! In the powertrain arena it's going to take longer because there are so many more vendors.
There's great fragmentation and they have to sort out that fragmentation. We don't have to do that in the interiors side.
I would assume that similar things can occur in brake systems, steering systems, the corners on the car - suspension systems and so on.