Magna International Inc. emerged from the industry's recent crisis in relatively good shape. Now North America's largest supplier hopes to reap the benefits of a global footprint.
Magna CEO Don Walker predicts smaller suppliers will be winnowed out during the recovery of 2011 as automakers channel more orders to major suppliers for vehicles built on global platforms.
Suppliers also will be asked to shoulder more upfront engineering and design costs.
Walker says Magna is ready. The Aurora, Ontario, supplier hopes to grow in emerging markets and as a major supplier with a broad portfolio of parts.
Magna makes seats, roofs, electronics, powertrain parts and other components. It also operates a contract assembly plant in Graz, Austria. In 2010 the company posted sales of $24.10 billion, up 39 percent from 2009. It has more than 96,000 employees in 26 countries.
Walker, 54, spoke with Editor Jason Stein at last month's Geneva auto show, before the Japan earthquake.
Q: Characterize the overall state of the supplier community right now. How do you feel suppliers -- especially large global suppliers -- are positioned for a recovery?
A: The position of the industry varies slightly by geographic region. In North America, obviously, we had a big decline in the production, and it has come back. It's still by historical standards relatively weak, but I think it's come back a lot.
I think the Tier 1 suppliers and Tier 2 suppliers that got through the downturn are getting reasonably good returns now. In many cases -- because some capacity was taken out and everybody's demand for production has come back up faster than people anticipated -- there's actually a little bit of pressure in the supply base to meet demand.
From a long-term trend, I think in North America and Europe, you're going to continue to see the supply base consolidate because the customers are looking for global suppliers for global vehicle platforms. They also want to try and deal with suppliers that are financially healthy. They had a painful lesson about suppliers with weaker balance sheets going under.
In the post-bankruptcy world of 2009, what are automakers looking for in their supply base?
They're looking for global suppliers, global tooling, design. They want the ability to optimize how you're going to do the tooling, optimize the logistics, how a company can handle currency swings. So that means the consolidation will continue, and I think that's just based on the fact that the industry is global and our customers are looking at it globally.
Tier 2 suppliers and Tier 3 suppliers won't have to be global; however, they're going to have to be healthy financially. They're going to have to be competitive. They're going to have to be doing r&d as well.
The real benefit a car company can get -- it's not just lower labor costs or lower costs -- it's really working with a global supplier that's got the understanding of where the technologies are going and who's invested in those technologies to bring products to the car companies to allow them to be more competitive and sell their product more.
How healthy are your suppliers?
The suppliers that got through the downturn are reasonably financially healthy. There are still some that the banks didn't close down because they figured the production was picking up. I still think we're going to see some failures and some consolidation, but it's more of a controlled situation than it was before. Before we had a lot of suppliers on our watch list, so we still track the health, the quality, the delivery, the engineering capability of our supply base just like the car companies do.
I think there wasn't as much consolidation or failures in Europe, so I suspect if we go into any sort of downturn, we'll probably see some more failures in the European community. Right now, it's much better than it was a year ago.
And in North America?
We are still tracking some suppliers, but it's much better than it was a year ago as well. Everybody did put a lot of work into it, trying to accent people that were in financial distress. There's still going to be a consolidation over a period of time.
How helpful have the automakers become in trying to help suppliers work through pricing issues or trying to build better relationships with their supply base?
For all the car companies, if they can get the same level of quality from a healthy supplier and they can get good delivery -- than if they can [just] get it cheaper -- they'll come and talk with us.
I would say for the most part, the OEMs are taking a longer view than they did a couple of years ago. Moving parts for five cents means that the supply base will be concerned about dedicating capital for new technologies.
So I would think now compared to three years ago, most of the car companies are taking long-term views, and they're asking us to do more upfront: more engineering, more program management, more in innovation and designing costs out.
How have the relationships with Detroit's automakers changed?
If you're running a company and you're on the brink of bankruptcy, you'll make decisions that make sense in three months but maybe not in two years. For the most part, the car companies want to have a healthy supply base that invests in innovation, that's good at program management, that has good quality delivery.
They want us to be competitive, but they also want us to understand that the best way to do that is to work cooperatively to design the optimum product upfront. Most of them are trying to put their efforts there. So, get a target cost, a target design, and really optimize it, rather than say, 'Look, every year we're going to come back and move things.' That's very disruptive, and I think it's very expensive.
What about pricing of raw materials? Copper, resins and rubber have risen considerably. Are Magna's customers allowing you to pass on that higher cost of raw materials to them?
The raw materials that have the biggest impact to Magna are steel and resin or oil-based product. Steel has gone up a little bit higher than we anticipated. A lot of our contracts are on steel resale where we have mixed contracts.
Oil predictability and price is a little bit more difficult right now with everything going on in the world. That will translate to a certain extent into resin, and it depends on our relation, or our contract, with each customer and what they demand.
It depends on how we've written the contract with our customers. In some cases we're on an index. In some cases when we're talking about price reductions, we'll also take into account the inputs, so they've gone up.
Aluminum is also another commodity that's going to be fluctuating. Typically we'll have an index situation there as well. So, if there's pain, it's typically partly shared.
Magna's annual sales in China now are above $600 million. Last November, you said that Magna would beat the industry's growth projection. By how much?
We are growing faster than the industry is growing there. You can see our rest-of-the-world segment has grown. I've forgotten what the number was. I'd have to look it up. I think it was 40 percent. We're going to continue to see fast growth there, but we're underrepresented.
So we have pretty aggressive growth targets in China and South America. We're going to continue to grow in Russia. We are expanding into places like India as well, but we want to make sure we are in the locations we need to be in to be competitive but also to support our key customers' global platforms. By supporting the global platforms, it's the best way to continue to support our operations and our core markets of Europe and North America.
Some analysts are saying electric vehicles are going to be a tough sell to North American customers. Do you share their skepticism?
Everybody has their own opinion on volumes. I've been pretty consistent. I think the electric vehicle market will grow. There's a limitation based on where the battery technology is right now in infrastructure. So as batteries become lighter weight with better energy and power density, then you're going to get better range.
What are some of the latest ways you're getting weight out of vehicles?
It all comes down to design and material selection. Aluminum can be stamped; it can be cast. In some cases, magnesium; a lot of high-strength steel.
Now we're starting to see the beginning of carbon fiber. A lot of long fiber resins, composite material. So it's a combination of a number of different areas. It comes down to material as well as optimum engineering, and you really need to have those two go hand in hand.