ADJUST or be left behind.
That was the message in “Global Suppliers' Strategies to Compete on Logistics, Cost, Size, and Market Uniqueness,” which featured Eaton Corporation's Ken Davis, Hendrickson's Gary Gerstenslager, and Williams Controls' Pat Cavanagh.
Davis, president of the Eaton Vehicle Group, said that in the last decade, rest of the world (ROW) commercial vehicle production rose, as a percentage of total global build, from under 50% to over 70%.
“Emerging markets have outgrown traditional, mature markets,” he said. “Eaton has refocused and reorganized our operations to better address the needs of the most rapidly expanding regions and markets. Eaton has shifted its activity into those emerging markets, with more than 50% of Eaton's sales as a company and Vehicle Group now from outside the US. Global expansion has resulted in more than half of our employees being located outside of North America.
“We're trying to focus on how we take the footprint we have and combine it to better utilize efficiencies out of all those facilities and support customers in every region of the world.
“Our philosophy is to build in countries for countries. We have focused on putting manufacturing capabilities and design capabilities in the region for that region. Not that 100% of what we make will stay in that country, but it will be about 80% domestic consumption and 20% export. We try to economize so we can flex across multiple regions and plants. When we have excess in one region, it's an opportunity for capacity utilization in another.”
Eaton's strategy is to focus 80% of its regional capacity on local customer needs and use 20% for “global flex.” Its equity and capital options include wholly owned foreign enterprises (WOFE), joint ventures where appropriate, and acquisitions where and when they make sense.
Its “Think Globally, Act Locally” philosophy includes regionalized operations authority, with a president in each major region who has operating autonomy. Each operation has its own regionalized sales teams, regionalized supply chain, and regionalized product development and design.
“Customers tell us they want to do business with us locally by receiving products from local plants, processing local design changes, and negotiating local contracts. So our regional presence has that authority across the board.”
He said Eaton has positioned its vehicle business for growth in South America almost exclusively through acquisition. It acquired Clark MD transmission business in 1997 and Pigozzi Ag transmission business in 2005. That allowed for successful expansion of business in agricultural transmissions, passenger car transmissions, and clutches.
“We've grown from those original acquisitions and have a very strong position in South America,” he said.
In Europe, Eaton acquired FPS MD transmission business in Tzcew, Poland, in 1998, and continued to build on its designs and manufacturing capabilities. In 2005, it co-located supercharger production in Tzcew.
In India in 2008, Eaton formed a WOFE, Ranjangaon transmission plant, and expanded the Pune Professional Services Center.
In Japan, it established a distribution center for export of transmissions, along with the Nittan Valve joint venture. Eaton has a 49% equity stake in Nittan Global Technology and owns 30% of Nittan Valve, with JVs in Japan, US, Korea, Poland, China, and Taiwan.
In China, Eaton became a heavy-duty transmission licensee in the mid-1980s to 2000, then formed these automotive JVs: SEECO, valves, 1998; Senstar, fluid conveyance, 2004. Eaton also formed JVs for medium- and heavy-duty transmissions in 2003, dissolved both JVs in 2008, and a year later formed a WOFE in Wuxi for medium- and light-duty transmissions and clutches.
“We're expanding our operations from there,” Davis said. “We're very strong in the bus markets with hybrid electric bus transmissions in China and we're working on growing that.”
He listed these challenges toward global growth:
Overcoming the NAFTA internal mindset. “This is not a market that will never accept low-cost China products. It will come, and it will come over time. We have to get our mindset around, ‘How do we compete with that threat?’ Clearly, it's around designing products that will be good enough but not necessarily the best as we go head-to-head with new competition.”
Regionalized leadership. “So we have more presence and autonomy there.”
Truly understanding the regions you want to play in — becoming a part of them.
Truly understanding the vertical markets you want to play in — becoming a part of them.
Getting a business foothold in a region or market — getting those first wins. “We have to make a commitment to the region and have that dependability.”
Understanding and leveraging key regional aftermarket channels. “It's very important that we understand the differences and how we can make the best use of local channels so we optimize the services and support we provide, not only to the distribution chain but to the end user.”
Gerstenslager, the CEO of Hendrickson, said truck manufacturers are a little bit more global than trailer manufacturers.
“We've really focused on product innovation,” he said. “As trucks have evolved, we've had to evolve our suspensions.”
He said Hendrickson has 23 facilities throughout the world, with the most recent one finished last June in China.
“We do things a little differently,” he said. “We used to tend to not have good market penetration. Part of that was because we're not a large company and can't have developmental labs in all areas of the world. So we have trailer suspension designs in Canton, Ohio, and truck suspensions and axle designs in Woodridge, Illinois. They pull all data from regional applications and we start designing platforms.”
He said that Hendrickson's development and validation procedures were put into place in the last 15 years and have benefitted from heavy investment in the last 10 years.
“We take real-world data from the track or highway and digitize that and use it to design products and validate products before they are back out on the test track,” he said. “We do that in a comprehensive and compressed time frame. We wanted to squeeze that time frame dramatically, and we've achieved that in a couple of instances.
“We have road signatures and duty cycles by region, and we interface that in models and look at structures and test that in the lab. That's the foundation we use for product generation and product technology. It's brought things together that are done in regions back to one hub. We look at differences in North America and other regions: Can we reverse that and move the market in a direction that's better for user value?”
In China, Hendrickson employs traditional mechanical solutions in a suspension evolution required to satisfy growing market needs. The evolution began with extensive market research; advanced design, testing, and validation practices; a focus on the customer; and targeting a new benchmark in suspension performance.
Hendrickson last year entered a strategic cooperation agreement with Sinotruk (Hong Kong) Ltd, an affiliate of China National Heavy Duty Truck Company (CNHTC), China's largest heavy-duty truck producer. Under this agreement, Hendrickson designs, develops, and manufactures suspension systems for heavy-duty trucks built by CNHTC or its affiliates.
Hendrickson established a production facility in Jinan, Shandong Province, China. The facility will initially manufacture and supply suspension systems necessary to support CNHTC. Operation began in the second quarter of 2010, with full production capability reached in the fourth quarter of 2010.
Hendrickson Truck Suspension Systems developed a new suspension, HUV, specifically for CHNTC and the Chinese transportation industry. HUV is a heavy-duty rubber suspension designed to provide durability and weight savings for increased payload. Through its design, the system offers premium ride quality in both empty and loaded conditions, with increasing stability as payload increases. Typically, a six-rod design suspension has been used in the Chinese market.
The HUV system was engineered with lightweight, durable components to achieve a weight savings of 430 kilograms versus competitive six-rod suspensions.
“We could have taken our older products and moved them into that arena,” Gerstenslager said. “But they're really focused on next-generation technology.”
Starting small, thinking big
Cavanagh, president/CEO, said Williams Controls Inc is a Portland-based company with annual sales of $60 million. The company, which designed some of the first electronic throttle pedals to support engines in heavy trucks and buses, grew as more stringent emissions standards required more sophisticated electronics.
Williams has a sales office in Detroit, and plants in Munich, Germany, Pune, India, and Suzhou, China, designing many of the proprietary pedals for global truck OEMs.
“While doing this is not without risk and has its challenges, we feel that with the right approach, many small manufacturers like us can be a success,” he said.
“Our international activities, like many small manufacturing companies, consisted of three to four international distributors and a US salesperson who traveled once a quarter and spent one week making sales calls. With government regulations that were moving China and India markets toward more stringent emissions standards, we ultimately needed to do something different. It wasn't going to be practical for a US salesperson to travel once a quarter and allow us to get part of that market. We believed then that these markets were potentially large for us. We risked being locked out of the design cycle if we didn't move fast.”
In 2004 as the new CEO, Cavanagh rolled out an expansion strategy to a “skeptical” board of directors: thorough research and understanding of the market to clarify and define opportunities; establish a global presence in the market; and establish consistent and transparent processes with US operations, especially in the areas of quality and manufacturing.
“They worried about the risk, cost, and likelihood of success, intellectual-property issues, and management's capabilities to carry it out,” he said. “They didn't say it out loud, but I think they questioned the sanity of the new CEO who had big plans for a very small company. I looked at it differently. If we didn't do it, we were risking long-term damage to the company.
“We commissioned a market survey to thoroughly understand the competitive landscape. It confirmed that the development process was ongoing for our types of products to meet emissions standards, and local competition had limited capability. Competition in China is fierce, and most OEMs had three suppliers for components: the first supplier had 65%, and the second 25%. This way, it allows OEMs, when cash flow is tight, to play all three against each other.”
In January 2005, the company decided to form a WOFE.
“We designed products specifically for the China market,” he said. “We had two products: lighter, lower cost, smaller, and easier to assemble. In India, we found an operating climate we hadn't seen before. We made changes, substituting more materials, better materials, and stainless-steel materials, all just for that environment. We had a situation where people were taking products apart and adjusting them.
“In China, we started out small with 15,000 square feet. Today we have 90,000 square feet in that market. For both China and India, geographic location was important — close to customers, close to reliable suppliers, and at a place where we had access to English-speaking managerial and technical talent. Typically those are concentrated in Chinese university cities.
“The decision to open a plant in China was not without a lot of internal factors, but I just did not see how we were going to be able to ship products to customers in China and India from the US. It was just not feasible with tariffs, duties, shipping, and labor costs.”
Today, the China plant supplies customers in Japan, Korea, Australia, Russia, and China, and has 40% of the company's total production.
In India, Williams established a legal entity in 2007, but operated with an independent sales representative until last spring, when it opened a plant in Pune. The facility primarily supports Indian customers, but is also developing an engineering segment to support the rest of the company's business globally.
“We expect to increase our presence quickly as the market develops, as we did in China,” he said.