A Giant Balancing Act

Dec. 21, 2004
Magna owes much of its success to its ability to keep all of its stakeholders happy.

With red felt-tip pen in hand, Frank Stronach sketches out his corporate philosophy. Drawing a circle on a sheet of graph paper, the chairman of Magna International Inc. slices it up like pieces of pie, illustrating who is fed what profits of the automobile-components supplier. The first slice is for workers, who receive 10% in cash and shares; the next is dished up to managers, who receive a 6% share. "You have to create an environment where employees feel in tangible terms that they own a portion of the company," Stronach explains as he draws his model. Owning a stake in Markham, Ont.-based Magna is no small matter. With nearly 150 factories and research centers sprawled across North America and Europe, the company is one of the automobile industrys largest suppliers. Magna has 36,000 employees, and sales reached $7.7 billion (Canadian) for the latest fiscal year. Profit is divided according to Magnas Corporate Constitution, which the companys founder illustrates with his paper and pen. A 20% slice is set aside for shareholders, 7% goes to research and development, and 2% is pledged to charitable organizations. The largest wedge, totaling 55%, is gobbled up by reinvestment and tax payments. In Stronachs view, "The three driving forces of a company are managers, employees, and capital, and they must be in balance. If one isnt dealt with fairly, then you cant be successful in todays world." And Magna has been very successful in recent years. In 1996 Automotive News ranked Magna as the 20th-largest automotive-parts supplier in the world. Thats quite a comeback. Just six years earlier, spiraling debt threatened to swamp the corporation. In response, Magna implemented a get-tough policy to eradicate debt, and the company now has nearly $1 billion (Canadian) socked away in the bank. Magna has grown and thrived, in large part thanks to Stronachs foresight. Long before systems integration was a buzzword of the North American automobile industry, Stronach was firmly steering Magna in that direction. "Twenty years ago, I recognized that car companies were going to have to go to a modular basis," Stronach recalls. "It doesnt make sense to buy a washer here, a gadget there, and put them together in a high-priced environment." Today Magna designs, engineers, and manufactures a staggering array of parts for vehicles ranging from the Chrysler minivan to the BMW Z3 roadster. Complete interiors and exteriors--including seats, doors, dashboards, and bumpers--are shipped as preassembled modules to North Americas largest automobile manufacturers. Magna now is one of the driving forces behind the introduction of these practices into the European market. Stronach is leading the charge from Magna Europe headquarters in Oberwaltersdorf, Austria. Its a homecoming of sorts for Stronach, who left his native Austria in 1954. World War II was past, but the country was like Berlin--divided into four quarters under the administration of American, British, French, and Russian forces. Jobs were hard to come by as Austria tried to pick up the pieces in the aftermath of the war. As a 22-year-old from the small town of Weiz, Stronach dreamed of "seeing the world" and sent visa applications to the U.S., Canada, Australia, and South Africa. Canada was the first to respond, so with a few hundred dollars in his pocket and a tool-and-die-making apprenticeship under his belt, Stronach headed off to Toronto, where it took him six months to land a job in his trade. By 1957 he was ready for the challenge of self-employment. He rented a small garage, bought a few old machines on credit, and started Multimatic, a tool-and-die shop. A month later he hired his first employee. Within a year, 10 people were on his payroll. Within two years, he had a staff of 20. The turning point came in 1960, when the company landed a contract to produce a sun visor for General Motors Corp. "I believe now we are the most diversified automobile-components producer in the world," Stronach says. Magnas diversification started in earnest in 1969, when Multimatic merged with Magna Electronics, a publicly traded aerospace, defense, and industrial-components manufacturer with annual sales of $10 million. Following the merger, the company boosted its production of stamped and electronics components and changed its name to Magna International. Picking up his red pen, Stronach sketches out the six operating groups that today comprise Magna International: Atoma Interior Systems; Atoma Hardware & Door Systems; Decoma Exterior Systems; Cosma Metallic Body & Chassis Systems; Tesma Powertrain, Fueling & Cooling Systems; and Magna Europe. Around each group is clustered 10 to 30 factories. Each factory is considered an independent profit center, and no one from corporate headquarters breathes down managers necks. However, that independence fueled Magnas financial woes in the late 1980s. By its 30th anniversary in 1987, sales had passed the $1 billion mark. Confident of his success, Stronach went off to pursue a career in politics, leaving day-to-day operations in the hands of other managers. He lost his bid for office and returned his attention to Magna, only to find it foundering under heavy debt that had soared beyond $1 billion. The corporation had grown rapidly in the 1980s, relying heavily on bank loans for expansion. Many had been taken out by young managers eager to prove themselves and expand their operations. "There was a flaw in the system," Stronach says. "When you get larger, budgeting is very important." Those limited budget controls, coupled with plummeting automotive sales as the recession took hold, put Magna in a financial bind. Banks started demanding their money back. "Perceptions were worse than things actually were," Stronach says. Nonetheless, the value of Magna stock plunged 95%, bottoming out at less than $2 per share. Net income took a beating, falling from $33.6 million (Canadian) in 1989 to a $224.2 million loss the following year. Magna management adopted a get-tough attitude, laying off employees, closing or selling off factories, and selling corporate jets. Then Magna restructured its loans, exchanging short-term debt for long-term, and converting it to stock warrants. Within three years, the company had paid off its loans and started squirreling cash away in the bank. Financial plans now are strictly adhered to, and going over budget can be grounds for dismissal. Despite the increased scrutiny, managers still have a great deal of autonomy and flexibility. "Thats what I like. You have a lot of responsibility, but you also have a free hand," says Guenther Zehenthofer, assistant general manager of Magna Auteca, an Austrian factory that produces exterior mirrors, power packs, and plastic components. Most of the factories are small, with only a couple of hundred employees. With few layers of managers, the decision-making process is streamlined. Despite each factorys independence, certain ones work hand-in-glove. Auteca, located in Stronachs hometown of Weiz, cranks out 4 million to 5 million units each year. Although about 20% are supplied to Chrysler Corp. operations in nearby Graz and smaller portions are sent to manufacturers such as Audi, BMW, Jaguar, and Rolls-Royce, the bulk of the components are shipped across the Atlantic Ocean to a Magna plant in Grand Rapids, Mich. This kind of cooperation has helped Magna flourish. The corporation has put together "a number of different product lines and entities that in many cases have some synergies. . . . The actions of one group enhance those of another," says analyst Phil Gott of Standard & Poors/DRI in Lexington, Mass., who heads the firms consulting division for the Americas. Magna has been a leader in adapting systems-integration techniques developed by the Japanese automobile industry. "Magna is certainly at the front of the pack," observes Dennis DesRosiers, president of DesRosiers Automotive Consulting in Richmond Hill, Ont. The transition to systems integration and outsourcing in North America has developed relatively slowly because of the strong union presence in the automotive industry. Union leaders have labored to keep production jobs from migrating from factories owned by the Big Three automobile manufacturers to lower-paid nonunion shops. Magnas star has risen as GM--which has trailed some of its competitors, most notably Chrysler and the Japanese--has increased its level of outsourcing. In 1995 and 1996 Magna was recognized by GM, which ranked it tops among 30,000 suppliers worldwide. Cosma, Magnas body-and-chassis-system group, has been rated best in that field by GM for four years in a row. And Magna has received awards from other automakers. Last year, Daimler-Benz AG honored the Presstec plant in Austria for supplying eight million parts without a defect, while Presstec ranked second of 63 suppliers providing components for Chryslers Eurostar division. Magna has a particularly strong relationship with Chrysler, providing about $1,500 worth of parts for each minivan, including seats, bumpers, mirrors, and moldings. Magna now is concentrating on beefing up its presence in the European market. In the last decade, the company has snapped up 34 factories in Europe--purchasing underperforming assets at low prices--and built five more. It has operations in Germany, the UK, Austria, Spain, Belgium, Slovakia, and the Czech Republic, along with Mexico and China. Gobbling up competitors is a growing trend worldwide. "In the automobile-parts industry there is no middle ground," DesRosiers says. "You either eat or [you are] eaten." Last summer Magna broke ground in Austria on a $56 million factory to produce the side panels, fenders, and roofs for Chryslers 1999 model year. Four suppliers bid on the project, and Magna received the go-ahead--in large part because of its existing relationship with the auto manufacturer, says Steve Alcock, purchasing director for Chrysler in Austria. Not everyone agrees with Stronachs strategy. Analyst Gott says the European and North American automobile industries have stagnated. "Hes probably barking up the wrong tree," Gott says. "Where he should be spending his time is in developing markets." But DesRosiers sees unlimited potential for Magna in Europe and North America. The corporation "has the capability of doubling its revenue on a five-year . . . basis," he says. "If they dont do so, I think theyre underperforming."

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