'It's Not All Bad News'--But it's not all encouraging, says Magna chief

HAMILTON, Ont. - Canadian supplier executives may have wanted a pep talk of sorts from Don Walker, president and chief executive of Magna International Inc., the nation's largest partsmaker.

It could have been, well, a speech about how great it is to be part of the thriving North American auto industry and how things are so good that both suppliers and automakers from the U.S. have been tapping Canada to meet demand.

That's not the speech that Mr. Walker delivered at the recent Automotive Parts Manufacturers' Assn. conference here. Toward the end, he touched on a few of the positives - that suppliers are becoming more important to OEMs and that opportunities abound in emerging markets.

But the tenor of Mr. Walker's speech had a decidedly dark tone. He seemed to sound a wake-up call for suppliers in saying that life as a partsmaker is likely to get harder rather than easier.

"You should ask yourself one question over and over again if you are a manager or own a company: What can happen to kill your company?" Mr. Walker says. "Is it better technology? Somebody with lower cost? Is it a change in the industry? And every day you'd better strive to become the company that can put yourself out of business because if you're not, somebody else will do it for you."

While suppliers are gaining size and leverage through acquisitions, Mr. Walker says he doubts it will translate into OEMs backing off on pricing pressure. "That's not going to happen," he says.

Mr. Walker also voices concern about the future of OEMs. "If Bill Gates decided to enter the automotive industry, what would he do to kill the car companies?

Would he try to design a better car, or would he capture the end consumer and make the car companies subservient to him? It's not that far-fetched."

Global requirements also will become more demanding for Tier 1 suppliers. "I think there was a push for everyone to go global, in my opinion, for no apparent reason a number of years ago," he says. "But now the strategy makes sense as global platforms gain acceptance."

But it's not for everyone. "If you don't have to be global, my recommendation is, don't go global. It's very risky," he says. "Go into some countries, and they don't even have a legal system like ours. You can invest everything in there, then they shut the door and you've lost everything."

Mr. Walker knows something about being global. His company has 162 production facilities and 50,000 employees around the world, with North America its biggest market.

Magna arguably has the most diverse product range in the world, from body and chassis systems, seats and interiors to exteriors, lighting and powertrain systems. It even assembles vehicles through its 1998 acquisition of Austrian-based Steyr-Daimler-Puch, which builds Jeep Grand Cherokee and, now, the Mercedes-Benz M-Class sport/utility vehicle.

Mr. Walker says it's crucial to eliminate waste and be the best in price or technology in a particular product market. "If you're not, you'll eventually be put out of business."

His words of encouragement came sparingly.

"It's not all bad news. You don't have to jump off a cliff," he says. "Whenever there's change, there's risk, but there's also opportunity. In my opinion, the OEMs need us, and they know they need us. They've gone beyond the point of saying, 'We can do without the supply base.' I also think Tier 1s need Tier 2s and Tier 3s, and we need to figure out a better way of working together so we can be efficient."

In response to questions afterward, Mr. Walker says Magna is not active on the acquisition front, and that Magna has not held "detailed discussions" about participating in General Motors Corp.'s Yellowstone modular assembly program.

"We will consider everything," he says when asked if Magna would participate in Yellowstone if the United Auto Workers union insists that related supplier facilities be unionized.

Mr. Walker also says some suppliers are paying too much for acquisitions, to the tune of $1 for each dollar in a company's sales. "You look at how much goodwill goes into those balance sheets, and it scaresme," he says. "I don't think the car companies have an appetite for bailing people out who have overpaid for things. They realize it's going to transfer into the piece price."