The auto industry knows Borg-Warner Automotive Inc. as a key supplier of transmissions and four-wheel-drive systems. But Chairman John Fiedler wants it known as an industry leader in engine-management systems.
To do that, Fiedler has taken on new products, new markets, acquisitions and an aggressive five-year growth plan that would double the company's size.
The plan had a rough start when Fiedler launched it last year. But Wall Street and Fiedler himself appear confident that he can pull it off. Analysts expect Chicago-based Borg-Warner to ride the industry push for improved fuel economy, air quality and safety to get where it is going.
Fiedler's plan got a lift last month with the purchase of Kuhlman Corp. of Savannah, Ga., for $750 million. The deal gives Borg-Warner a stronger position in automotive fans and fan drives. It also gives Borg-Warner $150 million of additional turbocharger business this year - doubling its share of that market to 27 percent worldwide.
The added turbocharger business will boost the supplier's position in the European passenger-vehicle market. Turbodiesel engine penetration is growing quickly in Europe, notes Darren Kimball, an analyst with Merrill Lynch & Co. in New York.
But turbochargers are just the first stage in a line of Borg-Warner engine systems that now generate 50 percent of company sales. With the growing demand for engine systems that improve safety and slash fuel consumption and emissions, Borg-Warner should meet its goal to double in size to $4 billion in sales by 2003, Fiedler said.
'We don't have to be a $15 billion company,' said Fiedler, a 60-year-old relative of the late Boston Pops Orchestra conductor Arthur Fiedler. 'We want to be a highly focused, highly engineered company. And you only have to be $4 billion to do that.'
To get there, Fiedler is reshaping Borg-Warner to address the 'green theme' in Europe. Increasingly stringent emission standards there have prompted automakers to bet on a refined diesel technology known as direct-injected turbodiesels. The technology is quieter, cleaner, more fuel efficient and more powerful.
Direct-injection turbochargers cost $130 to $220 each and could be standard equipment on most direct-injection engines. Such engines could more than double in Europe to 5 million units within a few years, according to analysts.
'Engine management is driving the industry,' said Fiedler. 'You've got to have good fuel economy and you've got to have good emissions.'
The move toward diesels opens the door for Borg-Warner's turbochargers, which boost the engine's power. Borg-Warner is the second-largest turbocharger producer in Europe.
The turbocharger business also fits with another aspect of the company's five-year plan: supplying higher engineering content and reaping the higher profit margins that go with it. In order to handle the increased torque and engine wear, turbocharging requires a conversion to engine timing chains from traditional belts. Borg-Warner has more than 50 percent of the world's market for chains and chain systems, supplying the full-sized Chrysler Corp. cars and the 4.7-liter V-8 engine for the new Jeep Grand Cherokee.
Fiedler also is counting on a growing presence in Europe to spur sales of Borg-Warner air pumps, exhaust gas recycling valves, fans and cooling systems and air-management systems to increase sales and earnings. Analyst Kimball estimates that Borg-Warner diesels and other systems will represent a $600 million annual business within two years.
Kuhlman was the crucial piece in Fiedler's engine systems plan. Kuhlman's automotive business, known as Schwitzer, accounted for about a third of the company's $765 million in sales last year. About 30 percent of Kuhlman's business was electrical and will be divested to pay down debt to about 50 percent of capital.
The acquisition also gave Borg-Warner a leading position in heavy-duty steel fuel tanks and fan drives. 'These businesses add mass to Borg-Warner's business,' Kimball said.
Combined with an earlier acquisition of the German turbocharger maker Kuhnle, Kopp & Kausch, the Kuhlman deal positioned Borg-Warner as the world's second-largest turbocharger supplier. It has pro forma sales of about $350 million annually and double-digit growth expectations. Only AlliedSignal Inc.'s Garrett Turbocharger Systems unit, with about 50 percent of the world market, is larger.
The fact that Schwitzer's turbocharging business presents little immediate opportunity for light trucks and cars in North America is of little concern to Fiedler. Interest in turbochargers has been dormant in the United States since the early 1990s. That may change, but for now Fiedler has a different strategy: 'This is not a North American play; this is a world play.'
The down side to the Schwitzer acquisition is Borg-Warner's exposure to the cyclical heavy-truck, construction and agricultural markets in North America. Its new customers include Caterpillar Inc., Navistar International Corp., Mack Trucks Inc., Freightliner Corp., and in Europe the company picks up truck business from DaimlerChrysler and Volvo.
For this year at least, the Class 8 heavy-truck market looks strong, and the light-vehicle market for the company looks stronger than expected, according to Richard Hilgert, an analyst with First of Michigan Inc. in Detroit. But it has showed volatility in the past.
THE PLAN FOR GROWTH
Borg-Warner was created 70 years ago when Borg & Beck, Warner Gear, Marvel Carburetor, and Mechanics Universal Joint merged. In 1987, Merrill Lynch Capital Partners acquired Borg-Warner Corp., a holding company with seven operating divisions, in a leveraged buyout. The automotive group became a public company in an August 1993 spinoff.
Fiedler joined the company as president in June 1994, became CEO in January 1995 and chairman the next year. Before that, he spent 29 years with Goodyear Tire & Rubber Co., where he rose to executive vice president.
Last year, Fiedler led company discussions about Borg-Warner's future. Options included turning the company into a niche supplier or selling it. The consensus, said Fiedler: Give Borg-Warner management five years to double sales to $4 billion and still maintain profit margins at the top of the industry - between 14 percent and 16 percent before interest and taxes.
The reasoning: Borg-Warner enjoys a strong position in most of its business units. It has 50 percent of the world market for automatic transmission systems. And it is No. 2 in powertrain systems, including 4wd and all-wheel-drive systems.
But Fiedler's five-year program began under a cloud. First, a shortage of V-8 engines crimped Ford Motor Co.'s production of V-8-equipped F-150 pickups. Those trucks accounted for about 11 percent of Borg-Warner total sales, according to Value Line Publishing Inc. The trouble cost the supplier 13 cents per share last year.
Confounding the problem, the F-150s that sold without V-8s were not as likely to be ordered with 4wd, another Borg-Warner specialty.
At the same time, last year's General Motors strike cut Borg-Warner earnings by about 30 cents a share in the second and third quarters, according to Value Line Publishing. GM accounts for about 20 percent of Borg-Warner's annual sales.
Then, Asia's economic downturn cut earnings by another 60 cents a share. Losses stemmed from currency exchange rates, lost sales and a shift to less expensive manual transmission autos, where Borg-Warner has a smaller stake.
All told, while sales increased by 4 percent to $1.84 billion for the year, net income fell by 8 percent to $95 million.
Fiedler remains confident.
'We add $200 million net new business every year,' he said. 'If the market drops by 10 percent, we'd only be off slightly. We can still grow faster than the industry. If you're a company that only stays even with the industry, you're in deep trouble.'
And Borg-Warner's board seems to be confident in its CEO. Fiedler has been granted a $2 million company loan to buy stock in the company, according to the Borg-Warner 1997 10-K report. He paid $54 a share, well above the current price.
Now his personal fortunes are tied to Borg-Warner's. Fiedler wins big if Borg-Warner shares rise and he remains with the company through 2002. At that time, the loan and its accumulated interest will be forgiven.