Valeo CEO Thierry Morin plans to cut costs by purchasing 70 percent of the company's components from low-cost countries by 2010. He also wants to expand engineering at the company's development centers outside western Europe. Morin spoke about these topics and more with Automotive News Europe Staff Reporter Sylviane de Saint-Seine at the company's headquarters in Paris.
Is U.S. billionaire Wilbur Ross' expansion into the European auto parts industry a threat?
On the contrary. Nothing is worse than the current situation. Companies are so desperate for revenue that they sell their products at any price.
What's special about the present crisis is that there is so much cash around. Weak suppliers manage to get cash to stay afloat and then undercut their competitors.
I think people like Wilbur Ross are good news. They will want their companies to be profitable and will stop them from dumping their goods. Other investors like him may step in because companies in our sector are cheap at present.
How long will the current crisis among some suppliers last?
It started four to five years ago and is getting worse. Tier 1 suppliers are squeezed between raw material producers that increase their prices and carmakers that want to cut their purchasing bills. The positive signs are that interest rates and inflation are rising. That means there will be less cash around to keep the weak companies alive.
What are your acquisition plans?
We could spend up to 2 billion euros (about $2.52 billion at current exchange rates) in the next 18 months. It will not be one big, spectacular operation but a series of them. We already have been quite busy on the acquisition front. About half the 15.4 percent increase in revenue to 2.7 billion euros ($3.40 billion) in the first quarter of 2006 was generated by our recent acquisitions, such as the engine electronics business of Johnson Controls.
Will you buy in the United States?
There are opportunities, but we will be very selective. Labor unions must be willing to adapt. Our hourly labor costs in the U.S. are about $20 to $25. That is what is required to be competitive.
Do you plan to divest any assets?
We've sold assets worth some 700 million euros ($881 million) since 2001. The group's overall architecture is fine, and our three domains -- driving assistance, comfort enhancement and powertrain efficiency -- are well-balanced.
Carmakers increasingly are outsourcing powertrain work. Will Valeo benefit from this trend?
Engines are becoming less of a focal point for volume carmakers. They realize that customers care less about speed and more about vehicle safety and comfort. That means they'll develop fewer engines to cut investment costs. If engines become less of a selling point for carmakers and more like a commodity, this opens opportunities for suppliers such as us.
When will you market your camless engine system?
We are on target for 2008-2009. We already have two prototypes running and will soon add several more. The system will help car manufacturers meet tougher environmental norms. We spend about a third of our total r&d budget (of about $782 million in 2005) on environmental-friendly products.
Will you globalize engineering?
We now have a third of our engineering staff based outside western Europe. We opened a center in Wuhan, China, last year; and we have centers in India, Mexico and the Czech Republic. My pet project is for development to be done around the clock, with people in one time zone taking over from another.
Will you increase purchasing from low-cost countries?
I am not satisfied with what we have achieved so far. The proportion of purchases made in low-cost countries was 26 percent at the end of 2005. It takes a long time to find quality suppliers in those countries. But I expect 2006 to mark a watershed in this respect. Our ambition is to source 70 percent of our purchasing from low-cost countries in 2010.
Can you combine quality and low-cost sourcing?
We've made big progress in quality, with an average of 32 ppm (faulty parts per million) worldwide. Out of 134 plants worldwide, 48 score under 10 ppm, and 11 are at zero ppm. (That compares with Valeo's average ppm rate of 252 in 2001.)
In 2005, car production, especially in France, experienced a lot of ups and downs. How are things now?
Production has been adjusted down, so things are a bit less erratic. But 2006 won't be a good year for car production in Europe. There will be a slight drop from 2005.
You may e-mail Sylviane de Saint-Seine at [email protected]