As engines downsize, Freudenberg seeks new markets
AUTOMOTIVE NEWS: Are you hiring engineers? Production workers? BRAD NORTON: All of the above. We can't get enough engineers. Last year, we offered bounties for engineers. You can get $2,000 for recommending an engineer that we subsequently hire and retain.
The migration to smaller engines with fewer cylinders may be a boon for fuel-conscious motorists, but it has created a dilemma for traditional suppliers of engine components.
Rather than accept a low-growth future, Freudenberg-NOK, a major producer of engine and transmission seals, has introduced seals and other products used in fuel systems, suspensions, axles, steering and drivetrains.
The Plymouth, Mich., supplier, a partnership between Freudenberg of Germany and NOK of Japan, generated sales of just under $1 billion last year.
Brad Norton, 50, Freudenberg-NOK's new president, discussed his company's prospects in an April 3 interview with News Editor Charles Child and Special Correspondent David Sedgwick.
Q: Virtually every automaker is downsizing powertrains. How has Freudenberg, a major producer of engine seals, coped with the market shift?
A: A pickup or SUV typically has more dollar content than a smaller vehicle. Two or three years ago, we had to make a significant investment to get ready for that changing mix of vehicles.
So you expanded your product lineup because automakers were going to sell more small cars and fewer big trucks?
Exactly. We knew if we didn't do something different -- by getting into parts for fuel systems, suspensions, axles and drivetrains -- it would have meant a horrible decline in sales for us. Our sales will increase because we're getting into other products.
How are your traditional product lines doing?
We are getting more share in transmissions. Engine seals are still our largest segment, and we continue to get more business [in that segment].
How are you meeting increased demand for parts in North America? Are you building plants? Adding assembly lines?
We are looking at our facility in New Hampshire. It is bursting at the seams.
What do you make there?
We make a variety of seals there. We also felt the need to take some work back inside there, specifically metal stamping. The treatment of metal before you apply different materials to it is a key [process] for us.
Are you going to expand that plant?
We don't want to add brick and mortar until we kaizen our New Hampshire facility. But I still think we are going to have to expand.
Are you going to build any plants elsewhere?
You don't always have to build a new factory yourself. You can partner with other companies, too. We have partner production facilities. As long as they follow our operating systems, they can actually be more efficient than we are. So those shouldn't be ruled out either.
Given your line of products, it seems that raw material prices would be crucial. Which raw materials caused the biggest price headaches for you?
Last year, we saw significant price increases for PTFE [a material for engine components]. We did our best to contain it, but you can't contain those kinds of increases.
What did you do?
We went to [our customers] for price increases to recover what we've endured. But it's after the fact, so your cash flow gets hit. We didn't recover all those costs.
Have you had big price fluctuations with other raw materials?
We went through a scare in 2007 when metal prices went crazy. [Our raw material purchases] were fragmented. We had very little pricing leverage, and many of the suppliers we relied on became quasi-insolvent. In 2005 we had 75 metal-stamping suppliers. Now we're down to 20 good ones. We also brought some stamping work inside.
So you brought a lot of your metal-stamping work in-house. Did you buy more machinery?
Yes. We brought metal stamping in-house in New Hampshire. We also did this in Cleveland, Ga., just outside Atlanta. So we've done it in multiple places to get secure supplies of a critical component. We had to make sure we had control of our own destiny.
Can you give me an example of stamping work you brought back in-house?
Axle seals. We do a lot of that stamping in-house. For many of our crankshaft and crankcase seals, we do more and more metal inside. For us, it's critical to control the tolerances.
Are you finished in-sourcing components?
We're not trying to streamline our supply base any further. We've already been through that. Our challenge is to make sure we have a good relationship with the suppliers that we have.
Is Freudenberg-NOK moving any production from Japan to North America because of the strong yen?
Engine and transmission seals -- it's definitely coming. It will be a sizable addition to our portfolio.
Does NOK have a sense of urgency about moving production to North America?
It doesn't have to be this year, but it will be in the next three to five years. That's what they're working on. They're figuring out: What do we want to move, and when do we want to move it?
You can reach Charles Child at email@example.com.