Megatrends: A CEO Strategy Discussion

Stu MacKay, president of MacKay and Co., moderated a panel discussion of three CEOs to look at how their companies are weathering these difficult times. The three were asked to talk about mega-trends, including technology, energy, government regulations, global supplier competition, environmental regulations, sustainability, OEM globalization, and consolidation.

MacKay started out the discussion with a look back.

"If you look back at the heavy-duty market of 1960, there were at least 14 individual manufacturers of heavy-duty trucks. In 2008, we're down to six companies and four owners - a dramatic transition over a long period of time."

And during that time, he noted, we have been through a number of business cycles, of downturns, of recessions.

"We've been here before," he said. "We were here in 1973, in 1980, in 1990, and in 2000."

He went through a number of slides, showing how each downturn started out with excess truck sales, but each one had its own unique factors as well. For instance, the 1973-75 recession included the first oil shock, and the first generation antilock braking systems mess. In 1980-82, interest rates skyrocketed and the trucking industry was dealing with deregulation. In 1990-91, we saw the savings and loan crisis and the first Iraq war. In 2000-2001, we were dealing with the dotcom bubble and the effects of 9/11. Right now, we're dealing with 2007 emissions regulations, the sub-prime housing bust and the financial market meltdown.

"We got out of whack on capacity as early as the first quarter of 2006," MacKay said. 2006 was a record year for Class 8 production, he noted. "Capacity had started to come back into balance in 2008, then we had the financial market collapse and the overall economy coming apart. We ended up falling off the cliff in the last quarter or two in truckable economic activity (the company's proprietary measure of demand for trucks and trucking services.) In Class 8 sales, we have come down to 10,000, 11,000 a month."

"We've gone through this before. It really is a question of balancing capacity with the freight available to haul, and the challenge now is to get those back in line."


Chip McClure, chairman, CEO and president of ArvinMeritor

"You know, it's tough to be optimistic when the industry you serve appears to be collapsing around you," McClure said. "But, personally - even surprisingly - I remain positive about our future."

Why? 2009 marks the 100th anniversary of his company's heritage.

"So, as you can well imagine, our company has been through some very difficult times before - even surviving the Great Depression - but we always pulled through by planning, adjusting, and moving forward."

Crisis, McClure noted, is written in Mandarin by combining the characters for "danger" and "opportunity."

"In other words, every crisis presents both imminent threats and potential benefits. It's an important balance to keep in mind, especially in today's business climate."

Crisis, he said, is an opportunity for companies to improve their performance by making fundamental changes in size, structure, strategy, culture, and operations.

"It's an opportunity to not only ready our companies for some very strong headwinds, but also position us to thrive when the market does finally turn around.

"And it will turn around."

But if we're going to move forward, McClure said, companies must attack all the issues they face simultaneously:

• Strengthening the balance sheet. The economic crisis, he noted, is now global. "There are no safe harbors now. For those of us who plan to survive this recession, we should already be well on our way to implementing aggressive strategies that are helping us adapt quickly to today's unprecedented market conditions. The one thing the truck industry has always had to deal with is cycles, and we've proven over the years that we're pretty good at it. We need more than ever to focus on maintaining a solid bottom line, strong cash flow and liquidity. It's about being proactive, you have to be aggressive and start making necessary changes before the full crisis hits." And this, he said, ArvinMeritor has done. The company started restructuring in 2006 and has since closed 17 global facilities. Last year they cut more than 1,500 positions. The company has significantly reduced corporate spending and other costs, including a recent 10 percent pay cut for U.S. executives and a 5 percent reduction for other salaried workers.

• Identifying growth opportunities through diversification. "Another issue facing many suppliers is a business model heavily weighted to one product, one country, or one customer," McClure said. "There was a time when growing with one main revenue stream was a successful strategy. Today, it's a death sentence."

The solution is diversification - in geography, in customers, in product. ArvinMeritor has been doing this he says, and its long-term strategy is to eventually have one third of our business in North America, one third in Europe and one third in Asia Pacific. While diversifying into the light vehicle arena has not proven a success, and the company is trying to divest itself of most of that business, another area, the aftermarket, is doing well and growing. The company recently acquired Mascot and Trucktechnic to strengthen that business, and is growing its remanufacturing activities.

• Influencing pending government regulations, such as energy legislation, reauthorization of highway funding, fuel economy, highway safety technology, and labor relations. "I've spent a great deal of time in Washington, D.C., getting close to these legislative actions, and I believe, as business leaders, we have two choices: Complain about change, or get involved and impact the change."

• Investing in innovation and technology. "While it's tempting to cut our R&D efforts, you can't survive without investing in new products," McClure said. "We must remember that recessions end, and when this terrible stretch is over, we have to make sure our business is competitive. The most successful companies never stop funding their most critical competencies - product innovation, customer service and the like. Our company for 100 years has been fueled by new-product innovation. We're protecting the innovation pipeline so we come out of this recession strong."

For instance, the company will roll out a new lighter weight axle at the Mid America Trucking Show, just introduced an innovative new brake show and has a heavy-duty hybrid technology designed for long-haul trucking in test with Wal-Mart. "These are the kinds of products the market needs and that will differentiate us from our competitors."

• Involving our people. "Downturns are particularly hard on people," McClure said. "If the staff is distracted with uncertainty and anxiety, you're not going to get the focus, strategy, creativity and diligence you need to pull off many of the things I've been talking about today. The best advice I can give you today is to convert a crisis into an opportunity by creating a sense of urgency, clear focus and shared purpose." In ArvinMeritor's case, he said, the company involved its employees in its restructuring and cost-cutting efforts by asking them for ideas. "When I personally addressed our entire staff at our Troy headquarters and announced the cuts our people rallied behind these initiatives. Many of our employees said that even though the salary cuts were painful they understood why we needed to do it. What's more, since employment laws in other countries don't allow us to legally enforce salary cuts without our people's consent, I was amazed when 100 of our overseas leaders stood up and volunteered to cut their salaries by 10 percent" as was happening with their U.S. colleagues.

McClure, a runner, said he does a lot of thinking while I'm running. "I can't help but think about what Steve Prefontaine, a running legend, said, 'Many of life's failures are people who did not realize how close they were to success when they gave up.' We in this industry are fighters and we aren't about to give up."


Dennis Slagle, president and CEO, Mack Trucks

Pointing to the Heavy Duty Dialogue theme of "The Commercial Vehicle Industry in Transition," Slagle noted that perhaps no heavy-duty truck OEM has gone through as many transitions as Mack.

The company was founded by the Mack brothers in Brooklyn, N.Y., in 1900. "They started building horse-drawn carriages, and their first motorized vehicle was actually a bus, not a truck. Over the years, Mack has been involved in just about any kind of vehicle or powertrain manufacturing you can think of - from pick-up trucks, to tank engines, to fire-fighting equipment.

"Our headquarters has been at various times in Brooklyn, Long Island, the Empire State Building for about 20 years, New Jersey, and finally Allentown. And of course this year, we'll move to Greensboro.

"We've evolved from a small, regional truck maker to a global company with production facilities in 19 countries and products in more than 180 markets."

Slagle pointed out that Mack is hardly alone these days in being part of a large, global organization. "It's become very important and arguably necessary to be part of such an alliance."

A number of factors have driven global consolidation among the truck makers, one of which is emissions regulations, both in North America and around the world.

"Emissions-related challenges and the global consolidation they have spurred is just one outcome of the world's increased emphasis on care for the environment, a trend that's going to continue to have a very significant impact on our industry."

Slagle spoke about how clean today's truck engines are, and how Mack and Volvo are turning to SCR for 2010 engines - a technology they even looked at for 2007, deciding it was ahead of its time at that point.

"With the price of oil relatively low these days, the issue of fuel economy might not be as front and center as it was last year," Slagle said, "But it's certainly not going away. Fuel prices will go up again, and there's not going to be any back off on fuel efficiency from customers or policy makers."

That's because, he says, having knocked out NOX and soot, CO2 reduction is on the horizon - and the less fossil fuel a vehicle uses, the less net CO2 it emits.

"The need for continued progress on fuel efficiency is one of the reasons Mack and the Volvo Group are fully committed to hybrids," Slagle explained. "We've continued to fund hybrid R&D throughout the challenge of various emissions standards. We certainly understand and support the development and use of alternative fuels. But regardless of the type of fuel, the goal will always be to minimize its use, which is exactly what hybrid technology does."

Slagle closed with some comment about vertical integration, another driver of consolidation. "Mack has a long tradition in this regard," he pointed out. "We started as a vertically integrated manufacturer and we remain one today, offering our own engines, transmissions and axles."

With trucks becoming increasingly sophisticated and complex, Slagle said, it's more important than ever to have major components specifically designed and engineered to work together.

"Being vertically integrated also increases important revenue streams, such as parts sales, benefitting not only us as OEMs but our dealers as well."

Healthy parts and service operations are vitally important to the success and stability of a dealer network, especially in a downturn like the one we're experiencing now.

"There's no question that the current global recession is extremely painful. And it's not clear exactly when the pain is going to end."


Kelly Dier, president, Marmon Highway Technologies

Marmon Highway Technologies is the parent company of brands such as Fontaine (fifth wheels and trailers), Webb, Hogebuilt and Triangle.

"I became president of the group back in '82, and it was a brutal recession," Dier said, "but the one we're going through now in my mind is worse than that one.

"But there is an end."

Marmon is a fairly cash-rich organization without a lot of debt. "We've been letting employees go and shutting plants, but our earnings were actually up 20 percent last year, and we think we'll do pretty good this year," he said. "But it's some brutal actions we've had to take to get there."

Although Marmon is primarily a North American company, they have been sourcing globally since the early '80s. But high fuel prices are reducing the appeal of off-shoring, he said.

"We're going to come out of the global recession and the demand for energy and diesel fuel is going to shoot back up," Dier said. "I'm convinced we'll see $4, $5, $6 diesel fuel again."

Marmon has spent hundreds of millions of dollars automating its factories, Dier said, so today the second largest cost factor they have is not labor, but logistics expenses.

"I believe going forward, the bloom is off the rose on global sourcing, and I believe the companies that develop a supply base and customer relationships close to the markets they deal in will be successful going forward. We're shortening these supply chains."

Dier also pointed to what's called the Pareto principle, that for many events, roughly 80 percent of the effects come from 20 percent of the causes. Thus, he said, 20 percent of your customers generate 80 percent of your sales; similarly, 20 percent of your products lead to 80 percent of your profits.

"You must identify the key customers, the key products, and the key suppliers - the 20 percent that generate that 80 percent. So it's all about identifying and realigning our companies to do an outstanding job in those areas."

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