Surviving The Storm

Dec. 21, 2004
Embracing change helps manufacturers weather economic downturns.

Many manufacturers are faced with sinking bottom lines because of the weak economy. Recent surveys from the National Assn. of Manufacturers and the National Assn. of Purchasing Management, for example, show that purchasing, new orders, and productivity across most manufacturing industries continue to drop. Yet despite the slow economy some companies are sailing unscathed through rough economic seas. Why are these manufacturers able to thrive even in a downturn? Richard Gabrys, Detroit-based director of global manufacturing for management consulting firm Deloitte & Touche, believes that high-performing companies, in both good and bad times, have learned to steadfastly evaluate their businesses and restructure to meet the demands of their markets. "It's a constant process like continuous improvement," says Gabrys. "Those companies that learn to change will survive, others that don't change won't survive." Companies such as Volkswagen AG, Goodrich Corp. (formerly BF Goodrich Co.), General Electric Co., AK Steel Corp., and Flextronics International Ltd. are prime examples of manufacturers that have learned to adapt and grow. Cost Containment. The strategy of Volkswagen AG, Wolfsburg, Germany, illustrates how even when business is good a company still needs to focus on restructuring its manufacturing operations to keep cutting costs. For the first time in its history, the German automaker delivered more than 5 million vehicles worldwide last year. VW's pretax profits increased 37.5%, and its net earnings rocketed 144.2%. Moreover, even with the weak economy plaguing the U.S. and Europe, VW has seen double-digit growth of car sales in central and eastern Europe, South America, South Africa, and Asia, including Japan, during the first quarter of 2001. By the end of the first quarter its share of the world market had edged up to 11.9% from 11.5%. At VW's international investor conference earlier this year, the company revealed a new module strategy that is designed to extend the use of common parts across three or four vehicle classes. VW Chairman Ferdinand Pich said the module's anticipated savings would come from lower capital investment, reduced parts diversity, lower development costs, and the ability to purchase high volumes of parts at lower prices. "Some may ask why [VW is] looking at cost containment when things are looking good at the top line," observes Gabrys. "It gets back to this need of restructuring daily. Why waste a dollar if you don't have to? And [VW's] mind-set and products demonstrate [those] results . . . in terms of innovation and the way they are hitting the market." Transformation Strategy. On June 1 Charlotte-based BF Goodrich Co. changed its name to Goodrich Corp. The company says its new identity caps the transformation of the 130-year-old global firm from a tire manufacturer to a leading aerospace and industrial company. After Goodrich divested its tire and rubber business in the mid-1980s, its aerospace unit grew tenfold to $4 billion during the 1990s. "The transformation was driven by the need to create a new base for the company from an old commodity business to a business with much better balance, stronger profitability, and the ability to successfully work through economic cycles as we're doing right now," says David L. Burner, Goodrich's chairman and CEO. "Change is an essential part of our success," he adds. "We find that we are not as pressured as other [companies] are in changing environments because we are so accustomed to them." Goodrich continues to reap the rewards of that transformation strategy even during today's sluggish economy. According to Goodrich's first-quarter financials, its aerospace segment posted double-digit sales and operating-income growth. The company also landed a major contract with European commercial-aircraft manufacturer Airbus Industrie that could be worth $2 billion to $3 billion over the next 20 years. Goodrich will manufacture the main and wing landing gear for the new A380 Airbus aircraft. New Markets. Middletown, Ohio-based AK Steel Corp. provides another example of how a company's willingness to change will buoy it in rough waters. "We are not totally immune to all of the downturn," admits Chairman and CEO Richard M. Wardrop Jr. "But overall, we are positioned better than any other steel producer domestically, if not the world." Since 1994, AK Steel has successfully developed new markets in carbon steel, stainless steel, and specialty electrical steels, as well as standard pipe and tubular steels. Even though AK Steel saw sales decline 14% in the first quarter mainly because of price deterioration and the overall tough steel market conditions, the company still managed to post an operating profit of $12.2 million. Wardrop is not overly worried about the reported projections of lower car sales this year, because the company is the largest supplier of steel products to all of the major foreign automakers. And, he notes, they all have increased production in their North American factories. "When they expand, we expand," Wardrop says. "I will tell you we will lead the industry again in 2001. I say that with great confidence. Now, will it be a record-breaking year? Probably not. It looks like it's going to be a reasonably tough half. But having said that, tough for us is a lot tougher for everybody else." Digital Focus. Despite the soft economy, Fairfield, Conn.-based General Electric Co. delivered first-quarter 2001 operating earnings that jumped 16%, while industrial revenues grew 11%. A key to the 123-year-old company's recent success is its adoption of e-commerce and Web-based technologies. In 2000 the company sold $8 billion in goods and services online, which includes new business and business that previously was not Web-based. This year that number is expected to soar to $20 billion. "Digitization is, in fact, a game changer for GE," John F. Welch Jr., GE's chairman and CEO, told shareholders at the company's annual meeting in Atlanta. "And with the competition cutting back because of the economy, this is the time for GE to widen the digital gap, to further improve our competitive position. We will do that by increasing our spending on information technology by 10% to 15% this year despite the weak economy." OEM Opportunities. The electronic-manufacturing-services industry (also known as contract manufacturing), which makes electronic and wireless products for original equipment manufacturers, was affected by the downturn when OEMs projected slower growth. But contract manufacturers are expected to be one of the first industries to rise from the economic slump. "Unquestionably, we believe end-market demand [for electronic and wireless products] has turned materially more negative, with the most common management comments indicating the breadth and depth of the downturn is virtually unprecedented in the last 10 to 20 years," says J. Keith Dunne, a senior research analyst for the New York investment banking firm, Robertson Stephens Inc. "The only other comment we hear with greater frequency is that an increasing number of OEMs are actively interested in increasing outsourcing activities." Earlier this year OEMs such as Motorola Inc., L.M. Ericsson Telephone Co., and Marconi PLC signed multibillion-dollar deals with major contract manufacturers such as Flextronics International Ltd., Celestica Inc., and Jabil Circuit Inc. Although the fiber-optics/photonics industry has slowed considerably from last year's record growth rates, contract manufacturers such as Flextronics are breaking into this segment because of long-term opportunities. "Five years from now you'll have fiber-optical cable plugging into your TV and computer. This is an irreversible technological trend,'' says Ron Keith, San Jose-based vice president and general manager of the Flextronics Photonics division, Westford, Mass. "So if it trends down for a quarter or a quarter and a half, it is not particularly meaningful in terms of our long-term plans."

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