Defending Its Turf Freudenberg-NOK faces challenges in engine sealing

In the great outdoors, hikers are reminded that stepping between a bear and her cubs is a life-threatening endeavor. The mother is sure to defend her young by any means necessary, whether a threat is implied or not.

Such is the scenario unfolding between two automotive suppliers, Freudenberg-NOK General Partnership, which has pioneered the concept of single-source engine sealing, and Federal-Mogul Corp., a rapidly growing supplier eager to enter this emerging market.

Joseph Day, president and CEO of Freudenberg-NOK, has to be a little nervous as he watches rival Federal-Mogul more than triple its sales this year by making seven acquisitions. Two of those (T&N plc and Fel-Pro Inc.) give Federal-Mogul the seals and gaskets necessary for full engine sealing. The latest company to be swallowed by Federal-Mogul were Cooper Automotive, for $1.9 billion in cash, and Tri-Way Machine Ltd., a maker of machining systems, and its subsidary, JIS Machining Ltd., a machiner of powertrain components. With the purchase, Federal-Mogul can now supply piston/connecting rod assemblies.

Dana Corp. also is moving in the same direction of fully sealing engines, and Dana's aggressive growth in recent years has been well documented.

So is it any wonder that Mr. Day feels the need to make a little noise by calling a press conference to remind automotive journalists that Freudenberg-NOK was the first supplier to fully seal an engine (a Daimler-Benz 1.8L diesel in 1994)?

His competitors are growing by leaps and bounds while Freudenberg-NOK plugs away, taking the slow-growth approach from within. While Federal-Mogul has its "Big Hairy Audacious Goal" to reach $10 billion in sales by 2002, Freudenberg-NOK declares in its new marketing campaign that it's "Getting Better - Not Just Bigger."

Mr. Day says his company will resist this rush to acquire related suppliers partly because recessions are particularly unkind to heavily leveraged companies.

He says some suppliers are so obsessed with getting bigger and appeasing investors that they have lost sight of customers' needs. While Mr. Day does not refer to Federal-Mogul by name in his prepared remarks, it's likely there would have been no press conference if not for Federal-Mogul moves in the engine-sealing market.

When asked later to comment on Federal-Mogul, Mr. Day gives Federal-Mogul President and CEO Richard Snell a back-handed compliment. "I think the Federal-Mogul people have done a brilliant job of articulating their strategy to be a broader-based engine-sealing supplier," he says. "We're quite flattered by the fact that they want to grow up to be like us."

Mr. Day actually says he welcomes the competition. "It's awfully lonely being out there in front with no one else to help sell the concept." Freudenberg-NO K's first global sealing program will be introduced for an engine for the 2000 model year in four countries.

Mr. Day sounds convincing when he discusses the pitfalls of mergers and acquisitions, but the truth is his company was the result of a linkup between German (Freu-denberg) and Japanese (NOK) interests. That makes it difficult for the partnership to make additional acquisitions.

"Accordingly, he (Mr. Day) doesn't have the opportunity to expand globally and may not have the opportunity to expand at all via acquisition, given his structure," Mr. Snell counters to his competitor. "He's done a remarkable job given the restraints he's had, which are different from mine."

Mr. Snell says he is puzzled by Mr. Day's comments about the risks of acquisitions. "Based on our cash flow and our current coverage of debt," he says, "we could go on forever."

He adds that it's unfair for anyone to bad mouth consolidation within the supply chain because automakers have been driving the trend. "I didn't invent it. We didn't come close to inventing it," he says. "But it's very appreciated by the customers."