Wilbur Ross

If Wilbur L. Ross comes to town, you know your company — and likely the market it serves — has hit rock bottom.

An expert at navigating the complexity of U.S. bankruptcy law, the CEO and chairman of W.L. Ross & Co. LLC has made a career study of why some businesses fail as others prosper. The Harvard MBA has helped restructure more than $200 billion worth of corporate liabilities in various sectors, including steel, coal, textiles and financial services.

Ross' latest endeavor is to right what is wrong with the U.S. automotive supply industry. His eventual interest and investment in parts makers should surprise no one. With supplier bankruptcies piling up as rapidly as quarterly losses, some observers wonder what took him so long.

Ross estimates his new International Auto Components Group (IACG) so far has invested about $500 million of private equity in restructuring suppliers. Actually, his pockets are much deeper.

“We're not capital constrained,” Ross says when asked how much IACG plans to spend on suppliers. “I don't want to say the sky's the limit, but we're prepared to put several billion dollars into this, if need be.”

To critics, Ross is a corporate raider angling for a quick buck. But in a lengthy interview with Ward's, Ross comes across as compassionate about preserving the middle class and seems more interested in saving the world than owning it.

His personal net worth of $1 billion earns the 68-year-old New York leveraged-buyout master a place on Forbes' 2005 list of the 400 wealthiest Americans.

On the immediate horizon is his plan to consolidate troubled interiors suppliers. Last fall, Ross' company formed a joint venture with Lear Corp. to assume control of plants Lear no longer wants.

The venture is purchasing the European facilities of bankrupt supplier Collins & Aikman Corp. and in April acquired C&A's controlling stake in its Brazilian operations.

Ross eventually sees profits for a company that combines castaway Lear and C&A assets in both Europe and the U.S., although they have contributed little to the balance sheets of their parent companies over the years.

Ross entered the automotive fray in 1997 by purchasing two troubled Japanese suppliers. One company was Nikko Electric, a bankrupt manufacturer of alternators and electric motors. The other was Ohizumi Mfg. Co., a producer of automobile air conditioning components. W.L. Ross retains ownership of the companies.

At the recent Ward's Auto Interiors Show in Detroit, Ross got a pat on the back from Robert Lutz, vice chairman-global product development for General Motors Corp. A member of the audience asked Lutz for his opinion of Ross' attempt to consolidate interior suppliers.

“To the extent that Mr. Ross is able to re-create viable business units out of individual companies that otherwise would no longer be viable under today's competitive situations,” Lutz says, “I would have to say it certainly is a noble effort.”

Ross has expressed interest in the facilities of Delphi Corp. and Visteon Corp. as they downsize. He says he is “very interested in everything that's out there,” but that “we are nervous about deals that rely on a subsidy as opposed to things that have a proper cost structure.”

He declines to say much about talks with Delphi or Visteon because of confidentiality agreements. “I think Delphi has announced they don't want to be in the plastic interior (components) business. That leads one to one obvious track,” Ross says.

After completing the Asian deals in 1999, Ross' automotive activities simmered. He watched the parts sector, and he could see the storm approaching automotive shores.

The most troubling sign, he says, was the extreme level of debt for a number of U.S. suppliers that had acquired their way to critical mass, paying too much in the process.

“We started scratching our heads and thinking, ‘Well, this is a disaster waiting to happen,’” Ross says. “We started like we usually do — systematically studying the industry for a couple years.”

For a guy relatively new to automotive, Ross' assessment of the U.S. parts industry and its recent collapse is brutal in its frankness, simple in its economics and chilling in its accuracy.

He has a ready answer when asked why “profitless prosperity,” a term devised to describe U.S. supplier economics, today seems to be a nostalgic memory.

“I think a lot of it is self-inflicted by the suppliers, by their own behavior,” Ross says. As he examined the books for a number of suppliers, he found many had signed contracts knowing they would lose money.

He understands why a supplier might consider such a contract, thinking it could achieve an “unusually good margin” for another component. “But that unusually good margin never came around,” he says.

Ross hones in on three missteps by parts producers. He says suppliers have not been introspective enough about their product mix and are too reluctant to exit unprofitable sectors. Plus, too many have relied too heavily on too few customers. And they were too willing to take on more debt when cash flow was a problem.

“Essentially, other than Magna (International Inc.) and JCI (Johnson Controls Inc.) — and the same thing for a while at Dana (Corp., now in bankruptcy) — essentially the whole industry was a junk bond issue,” he says.

“We don't feel that it's sensible to put a lot of financial leverage on a business that already has commodity price risk, already is capital intensive and already is quite cyclical. I think that was the kind of coup de gras that really precipitated the big wave (of bankruptcies). It certainly is what precipitated Collins & Aikman's bankruptcy, which was the burden of debt.”

Ross has a plan to post a profit with the C&A and Lear facilities, but he admits success is not guaranteed.

He purchased the C&A facilities 100% with equity, meaning the deal is completely debt-free. Lear also has pledged to commit its European facilities to IACG in exchange for shares in the new entity, which should have annual sales of about $1.2 billion.

In addition, Ross sees potential for IACG to consolidate C&A and Lear facilities. In Europe, there is almost no product overlap between the two. Where C&A was strong in Europe — in carpet and interior-trim plastic — Lear was weak, focusing more heavily on instrument panels. “And each one of them had a different mix of customers,” he says.

Ross' next step is to secure Lear's assets in Europe. He says IACG and Lear have “pretty much completed our mutual due diligence. I would think some time this summer it should be likely to happen.”

Establishing a similar entity in the U.S. will take more time, largely because of C&A's bankruptcy.

“Most of the auto bankruptcies have gone very slowly,” he says. “I think, partly, everyone's waiting to see what comes out of the Delphi case,” which entails bankruptcy, restructuring and labor buyouts negotiated between Delphi, the United Auto Workers and General Motors Corp.

President Mark Hogan of Magna International Inc., an interiors giant, says in order to find success with pieces of Lear and C&A, Ross must not view the deal as a “financial exercise.”

“In my opinion, his success in that particular part of the business will rely heavily on his ability to attract and retain managerial talent, because you can't paint an array of manufacturing facilities he's getting with one brush,” Hogan says recently.

Ross' vision of a flourishing parts producer is one that does a few things very well and resists the temptation to offer “full-service” capability. Lear answered that call from Detroit in the late 1990s and, in the process, deployed vast resources and acquired a number of smaller suppliers.

“It was one thing when they (suppliers) were being charged to do that, but it hasn't been true for, what, six or seven years,” Ross says. As the full-service strategy withered, he says suppliers, likewise, should have ditched it quickly. That's easy for Ross to say but harder to enact when hundreds of jobs are on the line.

“That's letting the bureaucracy take over — the kind of momentum theory of management,” Ross says. He sees only the economic side of the equation. “In today's competitive world, you can't lug dead wood. I think the auto suppliers of the future will be big individual companies, and much more focused.”

Part of the problem for suppliers is a severe disconnect over product pricing, he says. Plant management tells the home office how much a product must sell for to be profitable, yet the home office cuts the price anyway, under the argument that the competition is doing the same.

“Can you imagine how much resentment that produces in the factory?” he says. “They're saying, ‘These damn fools — how can we make any money?’”

Stir in the volatile pricing of raw materials, and suppliers frequently are force-fed a lethal brew. Ross says he cannot understand why any supplier would choose not to participate in auto maker-administered steel-resale programs, which allow parts makers to purchase the raw material long-term from OEMs at stable prices.

A number of suppliers, however, have opted to go it alone, thinking they could play the market just as well by themselves.

“Raw material costs are generally half the total cost for an auto supplier,” Ross says. “To speculate on half your cost and agree to automatic price reductions is nuts. You can get crushed because your margins aren't that great to begin with.”

Although U.S. suppliers are struggling today, it could be considerably worse, he says. Vehicle sales, for instance, are strong, approaching 17 million units annually. “It's very rare that you find an industry where the physical demand is very close to an all-time high,” he says, “and yet companies are going bankrupt left and right.”

Ross shudders when he contemplates the supplier industry if sales were to drop to 15 million units. “The sky would fall,” he says.

His biggest worry is that IACG is starting its supplier consolidation strategy a bit too early. The purchase price for suppliers would be considerably lower in a 15 million-unit sales year than it is today.

“That's the thing I worry about the most; that maybe we're still on the downward slope.” He also worries about the industry outlook because in 2005, consumers spent more than they earned in aggregate. “It's the first time since the Depression,” he says.

Such heavy economic matters, however, do not dampen Ross' breezy sense of humor. He refers to Oxford Automotive, a U.S. auto supplier that went through bankruptcy twice. “We call a repeat Chapter 11 a Chapter 22,” he says with a smile.

During the second round, the U.S. assets were liquidated, wiping Oxford Automotive from the landscape. Ross stepped in to acquire the European facilities in April 2005.

This spring, Ross merged the European Oxford assets with Wagon plc, a publicly traded U.K. supplier. Ross is the largest shareholder in Wagon, with about 20%. The new entity reports annual sales of about €1.2 billion ($1.5 billion).

The Wagon business, focusing on structural components, would stand apart from the C&A and Lear assets.

The third piece of Ross' automotive supplier strategy focuses on safety, bolstered by the November 2005 acquisition of 77% of Safety Components International, based in South Carolina. The company produces airbag fabrics and airbag cushions and has plants in Eastern Europe, South Africa, Mexico and China (a joint venture).

The deal gave Ross a crash course in auto safety, emphasizing passive devices such as airbags and seatbelts, as well as active electronic devices designed to prevent or minimize damage from collisions.

“Safety is pretty good business,” says Ross, who appears dazzled by technology advancements. He mentions a Japanese company that employs satellites from the U.S., Europe and Russia for a global-positioning system for tractors.

“They can put a Caterpillar tractor blade, without an operator, within 1 cm (0.4 ins.) of where you want it, any place on this planet,” Ross says. “If you can do that, surely you can have a car figure out how to avoid smacking into another car.”

But, ultimately, Ross' primary interest is monetary. He has grave concerns about the future of the American middle class.

“I think the auto industry and steel industry are all microcosms of a much bigger problem, and I think labor is only one of the cost problems,” Ross says. “Our whole tax structure is set up wrong for international trading. Every other country has a value-added tax that gets imposed on imports and on domestically manufactured goods and then rebated on exports. We don't have that. That puts our manufacturing at a disadvantage.”

White-collar workers don't fare much better. Ross notes the U.S. graduates 60,000 engineers a year, compared with 100,000 annually in Europe, 120,000 in Japan, 200,000 in China and 240,000 in India.

“The theory that a lot of the politicians have espoused that it doesn't matter if Rust Belt America goes down in flames because technology will bail us out — will our 60,000 engineers really be so much better than the 240,000 in India plus the 200,000 in China, plus the 120,000 in Japan?” Ross asks.

As product quality improves in developing markets such as China and India, combined with low-cost regional labor, struggles within the U.S. will intensify, he says.

“I think it's a national disgrace that (all) the people in Washington are doing is China-bashing,” Ross says. “They're not trying to figure out what they can do to help American industry. If something doesn't happen, we're not going to have a middle class in another generation. Or if we do, it will be a much lower middle than where we are right now.”

Ross says it is too early to say how U.S. labor unions fit into his strategy to consolidate suppliers. For the most part, labor unions hold Ross in contempt, pointing to his methodical clustering of troubled companies, consolidating them and selling for a massive gain while thousands of workers lose pension and health-care benefits.

That's how he created International Steel Group from the assets of Bethlehem Steel, LTV, Acme Steel Co. and Weirton Steel in 2002 and 2003.

In April 2005, Ross sold International Steel Group to Mittal Steel Co. for $4.5 billion — half in cash and half in stock. Ross has not sold any of the stock and remains on the board of Mittal, which is the largest steel supplier to the U.S. auto industry.

Ross often is linked with Delphi CEO Robert “Steve” Miller, another bankruptcy specialist. They tend to arrive about the same time as industries traverse dire straits. Miller was in charge at Bethlehem when Ross acquired it. Labor leaders tend to consider the two as the corporate axis of evil.

“We've had historically good relationships with labor,” Ross contends. “Our focus tends to be much more on work rules and job descriptions than on pay. I think it's much harder to cut a guy's actual pay, because people have mortgages, car payments, a standard of living. We didn't cut anyone's pay in steel, coal or textile.”

He disagrees with Miller's demands for drastic pay cuts for hourly workers at Delphi. “If you forced a guy to take low pay, how do you get him to be productive if he's all angry?” Ross says. “Miller parachutes in, he parachutes out. So he's not going to have to live with that workforce after the deal is done. But if we're going to be a longer-term owner, we have to live with the workforce.”

Although the auto-parts sector may appear bleak, Ross says he found steel in a far more desperate condition in 2002.

However, Ross describes negotiations with steel workers as “very friendly” and says the deal reduced from 32 to five the number of job classifications.

The clincher was a “blue-collar incentive plan” that paid bonuses to workers whose shifts achieved certain production targets. As a result, the number of man-hours it took to make a ton of steel plummeted from 2.5 to 0.9, Ross says.

“I think we paid last year $250 million in productivity bonuses to blue-collar workers” at International Steel Group.

Ross seems gifted at making the best of a bad situation. He brushes aside critics who consider him a corporate vulture.

“I think if you were to pick the right bird, it would be the phoenix,” Ross says. “The vulture just eats the dead flesh off the bone. That's not what we do. We don't buy things to liquidate them. The phoenix is that bird that recreates itself from its own ashes.”