In less than 18 months, Valeo SA has vaulted out of the ranks of mid-sized regional companies to become one of the auto industry's 10 biggest suppliers.
With the purchase of ITT Automotive in the United States in June 1998 and the signing of two joint ventures in Japan in October with Unisia Jecs and Zexel Corp., the French company has acquired a reach far beyond Europe. Revenue this year is expected to reach $9 billion.
The next step will be to strengthen Valeo's position within the ranks of the 20 or so $10 billion-plus companies that are expected to dominate the industry in the new millennium, Chairman Noel Goutard said.
That likely will be Goutard's last achievement before retiring and turning over the chairmanship of Valeo to his chosen successor, Andre Navarri, probably at the end of 2001.
Goutard, who has led Valeo since 1987, spoke with Staff Reporter Stephane Farhi in Paris on Oct. 28 and answered follow-up questions later from Automotive News International Editor James R. Crate. Edited excerpts from the interview follow.
Looking back to when you joined Valeo in 1987, how different is the auto industry today, as we reach the millennium, from your expectations of where it might be at this time? What has surprised you the most?
In 1988, there were 30,000 key suppliers worldwide, and their combined sales were $450 billion a year. That is the industry I joined. Ten years later, the number of major suppliers has been reduced to 8,000, but their combined sales now total $980 billion. So we've seen virtually a 75 percent reduction in the supply base but a doubling of sales. That's been the biggest surprise for me ... the scale of consolidation. I would have expected a 50 percent reduction at most. Now I suspect the industry will be down to about 2,000 companies worldwide in the next few years, with only 150 majors.
OEMs are demanding that suppliers shoulder an ever-bigger responsibility for r&d even as they insist on ever-lower costs. What are the implications of all this for the financial health and competitiveness of the supplier industry?
I don't feel that our industry is under any more pressure than any other. In a global industry, I believe such pressures are absolutely normal. Look at the consumer-electronics industry, for example. Components suppliers there have to cut prices by half every 18 months, yet the industry's technological advances are breathtaking. To survive and to thrive today, suppliers have to be prepared to operate in such a high-pressure environment.
But suppliers are not powerless in all this. Customers are prepared to pay more for innovation that yields some advantage. Today's cars are packed with new, higher-value products, and this has counteracted the pressure on prices. Costs can go lower and lower as the result of innovation.
You are pursuing an aggressive growth strategy for Valeo based on acquisitions. But how do you remain independent? Does your ownership structure render you safe?
We wake up running, and we continue running all day long. And we keep running into the night if necessary, because that's the only way to stay independent. We think staying independent is something you have to earn. You earn it through excellent performance for the customer. You serve your customer on price, quality, delivery, service, value. ... If you do that, you bring steady earnings growth, a high stock price and market capitalization and a strong balance sheet. All these factors make it very difficult for predators to gain access to your company.
We also are protected to a certain extent by our customers, some of which have stated their preference for our remaining independent. But, no, our ownership structure is not a guarantee. We are 20 percent owned by CGIP (a French investment fund) and 7 percent by a bank, but this is not a blocking stake. So more than 70 percent of our shares are widely held, available to be bought by anyone.
What return on investment do your controlling shareholders hold you responsible for?
They expect us to earn more than the cost of money, which is about 10 percent right now. Actually, they expect way above that ... 20 percent and more.
Geographically and productwise, where can we expect Valeo's acquisition strategy to take it next? Can we conclude from your two back-to-back deals in Japan that Asia remains your major priority?
No, any M&A strategy has to be wide open or it is self-defeating. Our strategy in Japan was to fill a gap. We were not present in Japan, so we went. That does not mean that we are not looking elsewhere. We're interested in anything and everything, but we're always guided by these principles:
An acquisition must yield synergies.
It must come with no debt or reasonable debt for its size.
It must be high-tech.
We must see potential for added value, such as a good pool of patents.
What is your strategy in Asia?
Our goal was to get bigger in transmissions and thermal systems, and we have achieved this through our agreements with Unisia Jecs and Zexel. We can now devote ourselves to a possible third project in the electric-electronics field. We need to find friends there, too, then we need to find convergent targets.
Did Renault encourage you to make deals with Japanese suppliers?
Renault has created a general climate. ... It allows Japanese suppliers, such as Unisia Jecs or Zexel, to benchmark and meet Renault's expectations in Japan. But Valeo has known Renault for decades. There is an obvious compatibility.
What does the alliance with Zexel bring to Valeo?
Valeo and Zexel are very complementary in the climate-control business. Valeo is strong in Europe, North America and South America, Zexel in Asia and especially in Japan. Zexel also makes compressors.
Our joint venture, which at first will be 60 percent owned by Zexel and 40 percent by Valeo, includes climate-control systems and compressors; 14 plants in Japan, the U.S., Thailand, South Korea and China; and has annual sales of 1 billion euros (about $1.05 billion at current rates). Under our agreement, Valeo purchases 100 percent of Zexel's climate-control operations in Europe and North America while, in return, Zexel has the right to take up to a 20 percent stake in Valeo Climatisation, our climate-control operation. But we are setting up a long-lasting venture.
Where do you rank now?
The joint venture doubles our climate-control business to 2.4 billion euros. That makes us the same size as Delphi and Visteon in climate control and behind only Denso, which remains No. 1. The difference is, we are independent. Denso depends in large part on its mother company, Toyota; Delphi on GM; and Visteon on Ford. We have a very large geographical base and a diversified customer base.
Who are Zexel's main customers?
Zexel gets 70 percent of its sales from Nissan and 30 percent from other Japanese carmakers. Valeo has a strong position with Renault. So the complementarity between the two of us is excellent.
You plan to set up a second joint venture with Zexel in engine cooling? ...
Yes. We want to be able to offer complete thermal systems to automakers in the Asian markets, especially in Japan, so we have set up a second joint venture in cooling systems. Valeo will own a 60 percent stake and Zexel 40 percent. Zexel has no engine-cooling operation. We expect interesting synergy from all this - in purchasing and manufacturing, for instance.
How will the deals with Unisia Jecs and Zexel affect Valeo's worldwide sales split?
Before the deals with Unisia Jecs and Zexel, Valeo would have achieved 1999 sales of 7.8 billion euros or about $8.15 billion. Of that total, 21 percent would have come from France, 40 percent from the rest of Europe, 31 percent from North America, 3 percent from South America and 5 percent in Asia. Consolidating 40 percent of Zexel and 60 percent of Unisia Jecs into our revenue base, to reflect our joint-venture shares, sales this year will reach 8.5 billion euros, about $8.9 billion. In the new mix, France accounts for 19 percent of sales; the rest of Europe, 38 percent; North America, 31 percent; South America, 3 percent; and Asia, 9 percent.
So you've practically reached your target of 10 percent of sales in Asia ...
Yes, indeed, but we must not slack off.
When you purchased ITT Automotive, you said it was imperative to move quickly in integrating a new company. In the Japanese situation, is it more difficult to move swiftly?
In the case of ITT, our corporate cultures were very similar. Americans integrate very quickly on the financial aspects of a merger. With the Japanese, there are other opportunities to move fast. Manufacturing, for example. Their culture fits perfectly with Valeo's production and quality systems. So you may use different levers, but there is no strategic difficulty.
Do you plan to increase your presence in the U.S.?
All Valeo divisions with the exception of alternators-starters and door-locking systems are present in the U.S. market. We intend to invest in alternator-starters in the U.S. and in locking systems in Mexico to meet the needs of customers like DaimlerChrysler and BMW. Valeo has annual sales of $2.5 billion and 12,000 people in North America. We intend to increase that presence.
Does Valeo need to strengthen its technical capabilities, especially in electronics?
Today, whether you look at air conditioning, transmissions or alternators, you're looking at electronics. If we were not excellent at electronics, we would have been pushed out of the market.
In 1987, when I joined Valeo, it was a mechanicals-based company that made clutches and thermal exchangers. Everyone in the industry was convinced that a company based on mechanical systems couldn't make the switch to an electronics focus. But I knew that electromechanical engineering is the key to electronics. That's because, in a system, it's no use having a sensor and software if you don't manage the electromechanical hardware simultaneously. So, we first developed electromechanical skills that were naturally completed by electronics. The companies that did not make the effort to invest in EM engineering never succeeded in developing standalone electronics. Today, Valeo is one of the top companies in EM engineering; therefore, in electronics.
That being said, much of your product lineup seems fairly low-tech. Items like wipers and starter motors can be sourced almost anywhere. So what special competitive advantage does Valeo offer its customers that keeps them in the fold?
No, no, no. Listen. ... you can no longer state that any product in the supply chain is low-tech. Take a wiper for example, a common automobile windshield wiper. It requires extensive R&D and often ingenious engineering solutions to become real. It must be 100 percent reliable over extremely different driving conditions. It must work equally well for someone driving in snow as for someone driving in rain at 135 mph on a German autobahn. These solutions can only be developed by extremely sophisticated engineering teams. So, yes, a wiper may not look high-tech, but it is the result of extremely sophisticated engineering solutions.
Starters are another example ... they seem like a commodity. But here, too, appearances are deceiving. The starter has undergone major technical advances; they have become longer-lasting and more powerful even as they have become lighter and less costly. Now we're developing combined starter-alternators designed to last 100,000 miles. So you see, even in starters, we're really talking about extremely sophisticated engineering solutions.
That's the key to what we do. Our job is to constantly improve performance and add value to apparently simple products for the customer's benefit. That's our competitive edge ... if you apply sophisticated r&d resources to a simple product to create added value, you can wipe out the lower-cost producer.
Look around ... there are almost no wiper producers left in the world today. But we're here, producing 120 million wiper motors a year.