Heinz Junker is chief executive of Mahle GmbH, one of the world's leading engine component suppliers. Mahle, which produces 100 million pistons a year and had sales of DM4billion (euro 2.02 billion) in 1999, is one of the three big German suppliers (with Bosch and ZF) still controlled by their family foundations. In 1998, Mahle became one of the first European suppliers to make a major investment in a Japanese company when it bought 34 percent of piston maker Izumi. Edmund Chew interviewed Junker in Stuttgart at the end of March.
How are demands from carmakers changing?
Customers are increasingly requesting module and systems supply. In the past, we supplied the piston, Goetze supplied the piston ring and somebody else the piston pin. The con-rod was an in-house product and it was all assembled in our customers' plants. But now they are increasingly requesting a complete power cylinder, or power cell.
How are you adapting to this change?
We have prepared for these changes through acquisitions and by building up capacity for new products, so we are in a position to make and supply a complete power cell.
We can also research and engineer a complete power cell system or power cylinder system, which is a lot more complicated than developing a piston.
We are working on these programs in preparation for 3-4 years in the future. Really high volume programs that involve the production of four, five, or six hundred thousand engines per year, will come along in three to five years' time.
What share of the market do power cell or cylinder modules have now?
If you take a complete power cell which goes from the crown of the piston down to the crankshaft with con-rod and bearings, it is minimal - probably only 2 or 3 percent. But four or five years from now, I would guess it will be between 10 or 20 percent of the total.
Engines are traditionally seen as being a core competence of vehicle manufacturers. Have you noticed a change of attitude?
Yes. If you take for example one of our customers, who built a new engine plant a couple of years ago. It is a nice plant, but was very capital intensive. Today, the whole manufactured added value which is created in this plant is less than the fuel injection system which they get from somebody like Bosch. So they are asking themselves, what are we doing here? Is it really a core competence, to machine a con-rod, or machine a cylinder head?
The engine certainly makes a difference for companies like BMW or Porsche, where they want to differentiate themselves from a mass-producer.
How do you as a first-tier supplier then deal with your core competencies? Do you think your level of added value will shrink or grow?
For our traditional products it will not change, because if you take a piston or a camshaft, the first step is the casting or the forging operation for the high-performance piston. There is so much technology involved which has a major impact on the final product that we would never give this away.
Do you have to change the way you work with the second-tiers?
This is certainly what we would have to do if we decide to outsource major parts of the sub-modules to second-tier suppliers. We would have to create closer relationships, which could be a minority shareholding in those companies or could be exclusive supply agreements. I would not like to just to share information, which we spend lots of money to develop, and just give it away to somebody else.
What other trends in Europe are affecting your engine business?
In Europe, we are still seeing an increase in demand for diesel engines.
Also the expansion of direct injection gasoline engines has a major impact on our products. It is a major task for the engineers to get a direct injection engine running as smoothly as a normal gasoline engine.
The other trend we see is variable valve timing, where we are also involved because we make valvetrain components and systems.
Have the mergers and consolidations among vehicle makers had a major impact on your business?
We had a very interesting experience when Daimler-Benz and Chrysler got together. We are a major supplier to Chrysler in the USA, so they started to compare our prices here in Germany for Mercedes-Benz engines, and the prices of our products for Chrysler. Yes, there are differences but not if you compare more or less the same piston with the same piston. Mercedes-Benz engines are completely different to Chrysler engines: for example, they use aluminum engine blocks. You cannot run a simple aluminum piston in an aluminum engine block, you would have a problem after five miles. You have to design the piston completely differently, you have to have a sophisticated coating on the piston. Chrysler's engine blocks are in greycast iron. It is much simpler to run an aluminum piston in greycast iron.
There is absolutely no question that mega-mergers create price pressure. But, in the end, if they request a certain product and certain specifications, they understand that it costs this much and they cannot compare it to a different product which has a different specification and which runs in a different environment.
You are very active in Japan. What is happening there?
When they still had the old Keiretsu system, the automaker did the design and the supplier produced it at the right cost. But it is changing. The old Keiretsu system is not working as it was ten years ago. A company like Nissan has to do something about its shareholding in certain supplier companies for financial reasons. But also the Hondas and the Toyotas of this world have found out that if they do not use the engineering resources and the knowledge of the typical European supply base, they could fall behind. They no longer have the resources to do everything in-house. Development times are shrinking. What took ten years today takes four years.
How is the Izumi business going?
The Izumi business is hard to compare with the overall Japanese auto business because Izumi is impacted by the dramatic downturn of the truck market. The total market in Japan has probably suffered by five or seven percentage points during the last two or three years, but the truck market went down 40 percent. We are running at 50 percent of the peak demand level ten years ago.
Are you getting much business from new customers in Japan?
We have business with Toyota, whom we do not supply out of Izumi, we supply out of Germany. We are discussing potential business with some of the others.
We are supplying Mitsubishi for their GDI engines and we supply Mazda. But the major capacity installed in Izumi in Japan is for truck.
You have big demands on your capital. Are you constrained by the fact that you are owned by a foundation?
We are not limited any more than anybody else, except for the big publicly traded companies - but these days even they are not in a better position than us because they cannot get any money from the capital markets. If you have a look at how ourselves, Bosch and ZF have developed over the years, I think we have managed our growth quite well, without requiring too much money from the outside.
Do you have advantages over the publicly-owned companies?
Our planning is more long-term, and a little bit more relaxed. If I tell our foundation this year I need DM100 million more for strategic purposes, they respect that and they can live with that. On the other hand, if the stock market is doing well, those guys have the advantage of issuing new shares and getting more capital in. But there are other instruments, which are available to us to get this money.
Do the vehicle manufacturers help pay for the added demands they make on you?
If you have a development contract for a bigger module, then our customers do normally respect the fact that you have to spend lots up front on engineering, so to some extent they contribute.
They also contribute to some parts of our testing facilities because if we supply a total system, which is basically all the internals of the base engine, it is a different testing requirement compared to just a piston. Therefore, they do not have to do all their engine testing for the base engine because we cover that. After negotiations, of course, they are prepared to contribute to these kinds of costs.