Playing it Safe's the Most Perilous Route

To most suppliers the perils of NOT being global seem worse than coping with any downturn.

Rande S. Somma, president of interior trim, marketing and business development for interiors giant Johnson Controls Inc., agrees that the automakers' push for global production is making its way further down the supply chain. That's why JCI is asking its Tier 2 suppliers to locate in new markets and "share the risk."

He says suppliers have to expect economic downturns as part of their strategy of locating in new markets.

"You need to go in with your eyes wide open," Mr. Somma says.

He views Asia-Pacific not as a land of peril for suppliers but one of opportunity. Still, suppliers have little choice but to trust the automakers when they say a market offers great growth potential.

"We have to trust the integrity of their research," Mr. Somma says.

Others, however, take a cautious view of globalization. They point to the potential overcapacity problem that results when so many suppliers, eager to meet their customers' needs, build plants in new markets.

Last August, at the University of Michigan automotive conference in Traverse City, MI, TRW Inc. President Peter S. Hellman argued persuasively that suppliers should globalize for efficiency, rather than for growth.

The biggest mistake suppliers make, Mr. Hellman says, is building plants to meet OEMs' peak demand. Instead, they should build plants to meet a "base load," which Mr. Hellman suggests would be about 80% of peak production. If an OEM needs more parts, global sourcing could deliver them.

Also in his speech, Mr. Hellman proposed a study with the U of M's Office for the Study of Automotive Transportation to analyze global capacity, identify the largest excesses and suggest ways to effectively spread the risk. The project is ongoing.

One recent study estimates the average global auto plant will run at 69.8% to 74.8% utilization for the next four years, down from as high as 75.2% in 1994.

Ford Motor Co. estimates that worldwide automotive capacity utilization had reached 90% in 1985 but dropped to 75% in 1997.

Often, the best way to go global is to pick a pa2rtner to share in the expense, especially if you're smaller.

Sound Alliance, for instance, is a new joint venture between Essex Specialty Products Inc. of Auburn Hills, MI, and Cascade Engineering Inc. of Grand Rapids, MI, to make injection-molded sound-deadening components such as engine covers and dash insulators.

The venture is pushing hard for business in Europe, a strategy that has General Manager Fred P. Keller and his family spending half their time in Zurich, Switzerland, and half in Grand Rapids.

For Mr. Keller, the greatest perils of globalization are psychological. "It's the assumption that people around the globe think like you do," he says.

The concept of teamwork, for instance, is unique to America and Japan and is hard to grasp in other parts of the world. "The rest of the world is more hierarchical. You need a different interpretation so you're not threatening that hierarchy."

And it helps if arriving executives do everything possible to dispel the "ugly American" stereotype. "Before you even arrive, you're perceived as an American who is aggressive and insensitive," he says. "If we don't counter it right away, we will have difficulties in the relationship."

Mr. Keller says it's not clear to him that suppliers actually have to follow their customers around the world.

"The concept of pulling you to new areas hasn't materialized as people thought it would. The OEMs like to buy local, and they pull U.S. suppliers with them only if they really need you."

Another danger lies in hiring employees in a new region where people are not familiar with your company name.

When mirror maker Donnelly Corp. acquired a controlling interest in European-based Donnelly Hohe in 1995, it got three plants in Germany and one each in Spain and Portugal. It also got a few headaches, including pricing pressure from European customers and higher-than-expected operating costs.

The troubles contributed to a pre-tax loss of $7.8 million for the European operations in 1997, compared to a $3.7 million loss in 1996. As part of a restructuring, Donnelly Hohe eliminated more than 100 positions at its German operations.

James Wujkowski, manager of professional recruitment for Donnelly, was on his way in mid-April to Germany hoping to fill some management positions in human resources, marketing and communications. Even with a 20% unemployment rate in the former East Germany, filling the jobs has not been easy.

"It's hard to find competent talent and bilingual-competent talent," Mr. Wujkowski says. Donnelly, of course, isn't the only U.S. supplier expanding European operations and looking for multi-lingual executives.

Other barriers also have been difficult to overcome. For instance, placing a classified ad in a local newspaper in Germany takes at least two weeks, instead of a matter of days in the U.S.

And writing the ad is a challenge because there is no German translation for "bachelor's degree." In addition, Germans are less eager to move long distances for a new job, and most employers there require six months' notice, rather than two weeks.

Mr. Wujkowski says an understanding of local customs and language is invaluable in new markets.

"There were some small things that I ran into that I didn't think would be an issue, like how do you pay for a loaf of bread or how you introduce yourself in a room," he says. "I wish I spent more time or had more time to be more sensitive to the culture and the language."

In Thailand, hiring people hasn't been difficult for Dana Corp.

"Right now there are a lot of people looking for work with the economic condition the way it is," says Asia/Pacific President Chuck Heine. "It's easier to find good people in Thailand now than when the economy was strong a year ago."

Dana has been operating since 1957 in the rapidly growing automotive market of South America. Today, with 57 operations in four South American countries, Dana stands to play a key role as vehicle production is expected to climb from 2.6 million last year to 3.5 million in 2000. In Brazil, the company is building the first-ever rolling chassis for the Dodge Dakota.

Cedomir J. Eterovic, president of Dana South America, boasts that the company has never lost money on the continent. At times, it was a struggle, especially with local content requirements and a reluctance to embrace big foreign companies.

To address the content issue, Dana paired up with local partners. "We always had good opportunities with mixed companies, and even though there was little desire for multinationals, they needed the technology for their new models and for an updated industry," he says. "That gave us a good opportunity."

Then there are battles with high inflation and currency devaluation. "Our customers were changing prices on us on a daily basis in the early '80s in Brazil and Argentina to compensate for devaluation," says Mr. Eterovic.

With South America recovering from recent economic jitters, he sees a bright future in the region. "These countries have become open economies, and they are working to take the past away," he says. "Governments are now more democratic - there are no dictatorships, and it looks like it will stay that way for a while. That has brought stability and growth."

Despite current troubles in Korea and Thailand, analysts agree Asia-Pacific still is a region holding great promise for those able to stick it out. They say the recovery will probably take two years or more.

In the meantime, opportunities abound for investors willing to pump badly needed cash into foundering Asian-Pacific companies.

"There are bargains out there, but not knowing when the currency situation will turn around makes it hard to form a financial plan," says KMPG Consulting's Brian Ambrose. "You may not want to take that risk."

Charles F. Jerabek agrees there are more opportunities than perils for suppliers going global, even in the face of market unrest overseas. "Let's call it a glitch. We're not cutting back on our investments or growth opportunities over there," says Mr. Jerabek, executive vice president of global automotive lighting for Osram Sylvania.

"If anything, we can get better deals now. We haven't culminated any at this time, but we've been working on some. We've got commitments to expand our lighting manufacturing to be even more global than we are today."

Marc Santucci, president of Elm International, a market research firm, says many suppliers are on the prowl for good deals in Korea. "It's not right for everyone," he says. "But if I was a U.S. partsmaker, I would be looking real hard at it."

He's less optimistic, however, on the prospects in China, where suppliers and automakers are jockeying for position in an emerging market of more than a billion people. He questions whether the Chinese government will allow foreign companies to make money there.

"They want foreigners to come in and bring them up to speed on technology, and then it's time for you to leave," Mr. Santucci says. "They change things constantly, making the cost of doing business different from what it was yesterday. Until I see a little more consistency, I don't think it should be high on your priority list unless you're there for export only."