Linamar's drive to $10-billion

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Let's get this out of the way right now: There are a number of eerie similarities between Linamar Corp. CEO Linda Hasenfratz and Canada's other auto parts heiress, Belinda Stronach.

They were both born in 1966. They are blond and gorgeous. Their fathers-both named Frank-trained as machinists in the same part of Europe (Hasenfratz in Hungary, Stronach in Austria) before immigrating in the 1950s to Canada, where they parlayed one-man tool shops into international auto-parts operations. The Hasenfratzes are akin to royalty in their hometown of Guelph, Ontario, where Linamar is the largest employer, much as the Stronachs and Magna International Inc. dominate their home base of Aurora, 125 kilometres to the northeast.

And between 2001 and 2002, Linda and Belinda were both installed as chief executive of the publicly traded but family-controlled companies their fathers built.

It's no wonder, given the number of second-generation flameouts Canadian business has seen, that the ascension of these two women was greeted with skepticism. (The day Hasenfratz was named COO in 1997, the stock took a 6% hit.) "Any time a family business transitions from first to second generation, people get nervous," says CIBC World Markets analyst Michael Willemse, who follows the auto sector.

In Stronach's case, one could argue that the nerves were deserved. After finishing a year of university, she joined her father at Magna's plush headquarters, where she skipped through a series of executive positions until she was officially running the show-though by then, Stronach père had restructured the organization to the point where she had virtually no day-to-day responsibilities. One faintly comical stint in federal politics later, she was back at Magna, this time as executive vice-chairman.

Hasenfratz, conversely, began her 20-year career at Linamar-named after her, her older sister, Nancy, and their mother, Margaret-on the shop floor, in safety boots. Since being named CEO in 2002, she has expanded Linamar's footprint in Europe and marched into Asia, building a plant in Wuxi, China, that supplies GM Daewoo, Caterpillar, Ford and others in the region. She bought Skyjack, which manufactures booms and scissor lifts for the construction industry. She has invested millions in R&D to help put Linamar components into the most cutting-edge engines on the market, as well as into wind turbines and solar dishes. The company has even launched an electric lawn mower that Hasenfratz hopes will be just part of a line of Linamar-brand consumer products.

And she has accomplished all this during the worst decade in automotive history, one that drove two of Linamar's biggest customers, General Motors and Chrysler, into bankruptcy and forced dozens of smaller suppliers to close their doors. "Since Linda took over," her father says simply, "she has doubled the size of the company."

The Linamar empire, while not nearly as big as Magna's, is still extensive, encompassing 37 manufacturing facilities in eight countries, including Mexico, Hungary, Germany and the United Kingdom, plus 11 sales centres and five R&D shops. Between 2008 and 2009, the worst of times for the auto industry, the company's revenue dropped by 26%, from $2.3 billion to $1.67 billion-only slightly ahead of where it was in 2002. (Magna was down by 27%.)

The setback means it will be that much tougher to hit the aggressive target Hasenfratz set for Linamar when she took over: $10 billion in sales by 2020. Even if Linamar's revenue rebounds this year to $2.1 billion, as Willemse expects, Hasenfratz will have to pull off compounded annual growth of more than 15% over the next decade to get to the big target. And that in the face of what are likely to be drastically lower automotive sales across North America, a high dollar and a severe shortage of skilled labour. All things considered, $10 billion seems very far away.

"We've had a little setback the last couple of years," Hasenfratz acknowledges, letting out a hearty laugh (which is something she does frequently). "But that's still our target."

Her father, now Linamar's chairman, has no doubt she'll get there: "The truth is, Linda is more capable than me."

Linda Hasenfratz is standing in the rain behind her Mercedes station wagon, swapping her chic pointy flats for a pair of black, steel-toed pumps.

This is not the kind of footwear you are likely to find in Belinda Stronach's closet.

Hasenfratz bought her first pair of the shoes years ago, from a truck that used to hawk safety equipment outside Guelph factories. Now, she buys them online and keeps a pair stashed in the back of her car for just these occasions. She's visiting one of the 22 Linamar plants scattered across Guelph, all of which operate as more-or-less autonomous companies, none exceeding 400 employees or 150,000 square feet. (Such deliberate fragmentation exists at both Magna and another competitior, Martinrea, as well.)

Today, Hasenfratz is at Vehcom, which supplies gears for Ford's F-series pickup trucks. Hasenfratz has a soft spot for this place: She was operations manager here in 1997, shortly before being called up to head office. Thomas Horvat holds open the door as the boss hurries inside. His round face is beaming. Earlier in the day, his shop won third place at the annual awards in Linamar's "Stepping Stool" program, which ranks individual plants on financial, customer and employee satisfaction (the three "legs" of the stool). The program is the bedrock of Linamar's culture; the awards regularly find Vehcom among the top five.

"Hi, Linda," Horvat says with a grin as he helps her shrug off her cream-coloured trench coat.

"Congratulations, Thomas! You guys must be so excited."

"We are, we are," he says happily.

The pair chatter away as they walk into the shop, poring over the program for the award event earlier in the day, the highlight of which was the presentation of bobble-head dolls modelled after the top three winners-Horvat's was a dead ringer, according to Hasenfratz. Neither seems to notice the deafening whine of machines as they cut, shape and grind metal blanks into gears, differentials, steering housings and other parts. Along the walls are stacks of finished components bound for regional assembly plants-General Motors, Chrysler, Ford, Honda.

As Horvat leads her past rows of robotic equipment and conveyor belts that carry hunks of metal through the line, Hasenfratz smiles and says, "Hi" and "Hey, how are ya?" to every worker she passes. They invariably smile back; some stop to chat, shake her hand, wish her a happy Easter, hold out a gleaming finished part for her to inspect.

Her bright blue eyes, encased behind safety goggles, rove constantly. Is there excess inventory kicking around? How many machines are up? Is the place a mess, or are the workers adhering to the "5S" organizational system: sort, set in order, shine, standardize and sustain? A tidy workplace, she says, is an efficient one.

She likes what she sees. All lines are running, which means orders are picking up. Every tool is hung in its proper place. Most important of all, though, are the smiles. "If I walk through a plant and no one wants to look in my eyes," she says, "I know I've got a problem in there."

Ten years ago, most of the orders flowing into Vehcom and other Linamar facilities were "made to print," meaning the company had no input into their design or engineering.

And the most complex parts in a vehicle were built almost exclusively in-house by the automakers themselves. Linamar's share of the gear market was almost zero. Ditto for most of the five Cs in an engine: camshafts, cylinder blocks, cylinder heads, connecting rods and crankshafts.

But over the past decade, with the North American auto industry in decline, the automakers have increasingly farmed out higher-end parts to more nimble suppliers. Seizing on the trend, Linamar invested in the more expensive equipment and highly skilled workers required to land the jobs. Today, 82% of its business comes from parts and assemblies for engines and transmissions (known as the powertrain) and drive-line systems-currently a $180-billion worldwide market. In 2010, Linamar expects to grind 4.5 million gears, making it one of the largest independent gear makers in North America. And it will produce five million camshafts this year, more than any other supplier in the world. Its average content per vehicle has increased from $60 to more than $130 over nine years.

Still, there's the small matter of that recessionary kick in the head. When North American production of light vehicles began to slide in the summer of 2008-within a year, output would drop from 12.9 million to 8.7 million-Linamar's revenue went with it. The mantra became: Cut costs and conserve cash. "We weren't just taking out the bottom 10% of the organization," says Hasenfratz. "We had to make dramatic changes to the cost base and focus on absolutely mission-critical spending." Executives took a 10% pay cut. The corporate jet, a Citation Excel, was grounded. Every payment to the company's suppliers had to pass through president Jim Jarrell first. Most painfully, Linamar's head count shrank from 12,000 to 7,000 (it has since rebounded to 10,000). In all, the company cut $60 million in annual costs.

Still, by the end of 2009, Linamar would slip into the red for the first time since going public in 1986. And it would be hit by that 26% revenue drop (it could have been worse were it not for the company's operations in the stronger Asian and European markets). Skyjack was a major drag: With the so-called construction access market even worse off than auto, Skyjack's contribution to total corporate revenue plunged from 20% to just 5% over two years.

Linamar was in far better shape than many of its competitors, with relatively little debt and $160 million in cash. It counted on GM and Chrysler for less than 25% of its sales. But investors were in panic mode. Several parts suppliers were unable to meet their debt obligations; rumours began to circulate that Linamar was in the same position. In December, 2008, its stock price hit $3.50, down from $21 a year earlier, and Hasenfratz personally bought one million shares (at an average price of about $3.70), a bold show of confidence that impressed analysts but did little to boost the stock. By March, 2009, the price had slipped to $2. "Even though we were fine," says CFO Ted Mahood, "we were getting painted with the same brush."

To soothe jittery investors, in June, 2009, Linamar repaid $80 million (U.S.) in debt that wasn't due until October, giving its stock a bump. It also secured $375 million in new short-term business from floundering competitors unable to fulfill their orders.

These days, its stock is back in the $20 range (meaning those one million shares Hasenfratz bought for a few million in late '08 are worth a cool $20 million). Yet, Linamar has a market capitalization of just $1.4 billion. Bruce Murray, executive vice-president at money manager McLean Budden, a major Linamar investor, says the company's biggest challenge over the past 10 years has been getting a decent return on equity. Jarrell puts it down to the fact that its parts are now in such a vast array of products: "It might have been a good strategic plan for the company, but it doesn't fit nicely into one analyst area," he says. "We're in construction, energy, agriculture, off-road, on-road-and I think that hurts us a bit, because it's hard for analysts to understand all those markets and portray that to their clients."

All that said, Linamar's stock is up 70% over the past decade. Magna's: 25%.

Ask Linda Hasenfratz's colleagues to describe her and you will hear words like disciplined, hard-working, even regimented.

Ask her dad what she was like as a kid, and he immediately comes up with: "party girl-just like today." On one occasion, while he and Margaret were away, Linda threw a bash (and charged a cover-albeit to raise money for the senior prom). Things got rowdy. The cops showed up. When the Hasenfratzes came home the next day, earlier than expected, they found kids passed out all over their country home, the sump pump unplugged (to accommodate a beer fridge) and two feet of water in the basement. "Ah well, that was Linda," Frank says fondly.

Though Frank desperately hoped one of his two children would follow him into the family business, he'd all but given up hope by the time Linda headed off to study chemistry at the University of Western Ontario in 1985. (Nancy is a homemaker; her husband, Mark Stoddart, is Linamar's chief technology officer and executive VP of marketing.) A year later, he took Linamar public, in preparation for a future outside Hasenfratz control.

After graduation, Linda spent nine months selling pharmaceuticals for Servier Canada. Then she gave her head a shake and realized that it would be nuts to turn her back on her father's company, at the time a $130-million-a-year operation. She couldn't wait to tell him, but he and Margaret were on vacation in the Caribbean. Over the phone, Linda told them she needed to talk face-to-face. Her mother's first reaction, says Frank, was: "Oh my gosh, I bet she's pregnant." Linda met them at the airport. "I've got bad news and I've got good news," Frank recalls her saying. "The bad news is, I'd like to quit my job. The good news is that I'd like to work at Linamar."

Here, Frank pauses. "It was very emotional for me. I asked for a Kleenex right away."

Linda adds sardonically: "He was thrilled-more thrilled that I wasn't expecting, I'm sure, but thrilled nevertheless that I was coming to work for him."

Frank had seen many businesses fail after being handed down to unprepared kids. So, instead of walking straight into head office, Linda would go through a carefully planned eight-year apprenticeship. He told her: "I only know one job where you start on the top-when you dig a hole. And you end up on the bottom."

First stop: two noisy, sweaty months learning to operate a lathe and other machines. From there, Linda did stints in materials, production control, accounting, engineering, quality control and estimating. "We agreed that my father would give me opportunities to advance and, assuming that I was successful and both of us felt I was ready and capable of taking the next step, I would," she says.

In 1995, the year she started her executive MBA at Western, Hasenfratz was promoted to operations manager at the Comtech plant. Within two years, she was running two additional facilities, including Vehcom; finishing up her MBA; renovating a house with her contractor husband, Ed Newton; and getting ready to welcome their second child. They now have four: Katie is 14; Emily is 12; Tommy, 11; and Olivia, 9. One has to ask: How did she do it?

"I just squeezed 'em in," Hasenfratz says with a shrug. "I have never been so busy. In retrospect, though, anything else feels almost easy. I learned that you can accomplish so much more than you think you can." Having lieutenants like Jarrell is crucial, she says. "I just steer the boat. They shoot the ducks!"

Help at home makes a difference, too. Hasenfratz says she couldn't function without the support of her husband, a New Zealander who runs his own group of companies that build bridges, schools and water-treatment plants. "He has never once shown me an ounce of resentment or complaint for the long hours and travel schedules I maintain," she says. "Ed is proud of me, and I am so proud of him. He's a great sounding board for me, and I hope vice versa."

Besides, she jokes, "I have a bigger staff at home than I do here." Someone arrives at 6:30 to make breakfast and get the kids off to school. "Happily, I have the ability to have people do the things at home that I don't want to do, like the shopping and the cooking and the cleaning and the laundry," she says. "So that means that when I'm at home, all I have to do is be with my kids. In some ways, I think I have more time with my kids than a lot of working moms do."

The core of Linamar's business has always been building precision machined parts for just about anything that moves-not just cars and trucks but also boats, tractors, Caterpillars, RVs and motorcycles. Around head office, they call it "feeding the monster." Linamar's strength is that it has rarely veered from that focus into Stronachian lala-land. No racetracks. No theme parks. No energy drinks. No grand plans to one day become not just a supplier, but a full-fledged automaker.

So, that's the 2020 plan: Keep feeding the monster. Ten years down the road, Hasenfratz expects Linamar's powertrain and driveline business to be worth $6.7 billion in sales, half of that from the North American market.

It's a reasonable target. Traditionally, the domestic automakers have dealt with hundreds of suppliers-stampers, injection moulders, tool shops. Now that they're outsourcing so many parts of the vehicles they build, they're looking to streamline the process, driving a wave of consolidation in the industry-and with cash in the bank, Linamar will no doubt be buying.

The other half of powertrain and driveline growth has to come, of course, from overseas. In 2010, automakers will produce 16 million light cars and trucks for European consumers; in Asia, 27 million. The two continents combined are a market four times larger than North America, which is expected to rebound to just 11 million by the end of this year and top out at around 16 million six years from now. Europe and Asia are forecasted to grow by 40% in the same period.

One reason Linamar feels it is well positioned to clean up is its focus on building parts for the most fuel-efficient vehicles on the road. That's the primary mission of Linamar's McLaren Performance Technologies test lab in Detroit. The facility was spun off from the McLaren Formula One organization in the 1980s and bought by Linamar in 2003. Since then, the lab's efforts have been directed almost exclusively toward designing, engineering and testing faster, more fuel-efficient engines, transmissions and drive-lines for Linamar's customers. It's paying off: In the past few years, the company has booked $1.2 billion in new contracts to supply parts for high-efficiency vehicles due to ramp up by 2013.

A key part of Linamar's quest for $10 billion in sales is its green-energy division, the centrepiece of which is a deal with Phoenix-based Stirling Energy Systems (SES). Five years ago, SES tapped Linamar to design and build an external combustion engine for its concentrated solar dishes (see story, page 44). Linamar also builds gearbox components, shafts and other parts for massive wind turbines, mostly for the more mature European market. In Ontario, it's working with start-up CWind Inc. to design its turbine technology, a deal that could be worth more than $3 billion over 10 years.

By 2020, Hasenfratz expects that green energy will be worth about $1 billion a year to Linamar. But there are a lot of ifs. "The problem with green energy is that, like when the Internet started, you'll typically have big winners and big losers," analyst Willemse points out. "If your technology doesn't happen to be the most cost-efficient, that could be a lot of money you don't capture."

If there's one exception to Linamar's feed-the-monster mantra, it's Skyjack. Given the recessionary hurt in the non-residential construction market that is Skyjack's bread and butter, the diversification strategy didn't do much to cushion Linamar's bottom line. Willemse, for one, suggests that perhaps Hasenfratz should have unloaded Skyjack in 2007, when it would have fetched a high price: "Is it a distraction?"

Hasenfratz balks at this suggestion. By 2020, she expects the market for the type of products Skyjack makes to be $8 billion globally; the plan is to capture 15% of that. "We'll just need to start building it back up," she declares.

With the bulk of Linamar's sales in the U.S. market, that will be slow going, thanks to a Canadian dollar that doesn't look like it will be knocked down any time soon. Hasenfratz and CFO Mahood dismiss the dollar's impact on the business, insisting the company is naturally hedged, with Skyjack's U.S. dollar sales offset by Linamar's expenses in the same currency. Willemse is not entirely convinced. "They like to downplay [the high dollar]" he says, "but it's going to make Mexican companies more competitive."

True. But compared to the other stuff Linda Hasenfratz has had to cope with-her long apprenticeship, the doubts that attended the boss's daughter, her entire industry's near-death experience-it's just one more bump on the drive to 10 big ones.

COST-CUTTING: BRED IN THE BONE

When Linda Hasenfratz became COO in 1997, Linamar had $770 million in revenue from 16 plants, most of them in Guelph. Yet head office had no formal systems in place for gathering results from individual facilities. Plants filed a monthly performance report, true, but each one used a different format. "We had a more informal understanding of where we were going as a business, what we were trying to achieve, the values and the culture-everyone just knew," she says. As Linamar began to grow-it went from 16 plants to 24 in two years-it became clear that the old way wouldn't do.

So Hasenfratz and president Jim Jarrell took the "Stepping Stool" program company-wide. Jarrell had created the system years earlier, as manager of the company's then-struggling Hastech plant. It was based on a 30-second conversation he had with Frank Stronach on Jarrell's first day at Magna, where he worked in the eighties: "Don't screw up the financials. Don't screw up the customers. Don't screw up the employees."

The program fosters friendly competition between plants, measuring the usual financial metrics, but also workplace safety, absenteeism, success at meeting deadlines, and cost savings. Employees whose shops meet their targets get a quarterly bonus-$78 million worth over the past 10 years. "Shhh," Hasenfratz says, holding a finger to her lips. "Don't tell my father."

Around Linamar, Frank Hasenfratz is renowned as a sort of cost-cutting savant. His primary responsibility, aside from being chairman, is running CAT, or Cost Attack Teams, a concept he created a decade ago. Twice a week, he meets with a different group of plant managers to analyze how they can save money. The sessions last six or seven hours. "We never have a meeting where we don't find $200,000 in savings a year-never, ever," Frank boasts.

He keeps tabs on CAT activities in a bulging three-ring binder. Each potential cut is highlighted in green for "complete," yellow for "in progress" and red for "not possible." Bringing pest-control in-house at one plant: $1,080 a year (green). Taking advantage of off-peak electricity rates: $250,000 (yellow). He has determined that shipping costs should never exceed $1.10 per kilometre. Even something as simple as installing an adjustable work table-to accommodate "a short guy on the day shift and a tall guy on the night shift"-can pay off in productivity.

About two-thirds of the cuts CAT identifies get implemented. The target is to save between $10 million and $15 million a year. "I can easily do $1 million a month," he says. "If you don't do that, you can't stay competitive."

APPLYING SOLAR POWER TO AUTO PARTS

In the Arizona desert, a 20-minute drive outside Phoenix, stand five dozen mirror-covered dishes that follow the sun's progress across the sky. The mirrors concentrate all that solar power and use it to heat and cool hydrogen gas, which in turn drives the dish's Stirling engine-a 194-year-old invention that draws power from an outside source-to produce grid-quality electricity.

Stirling Energy Systems Inc. (SES), the company behind the so-called SunCatchers, approached Linamar five years ago with a challenge: Could it apply its auto-parts expertise to help design and build an ultra-efficient external combustion engine and overall power conversion unit for its dishes? Today, SES's Arizona test site is producing 1.5 megawatts of electricity (enough to power 200 homes) for a local utility. The company is also building the largest solar plants in the world-including an 850-megawatt installation for Southern California Edison, an $11-billion (U.S.) utility-and is working on deals for another five gigawatts of power. All told, that means more than 200,000 SunCatchers.

That's good news for Linamar. But SES's technology will never dominate the solar space-no one's will, it appears. "There's enough difference in various markets that there's going to be a portfolio of technologies," says Chuck Andraka, a lead engineer with Sandia National Laboratories, which collaborated with SES. Because they run off direct sunlight and have no way of storing the electricity they produce, SunCatchers work fine in sunny southern regions, Andraka says, but they're pretty much a no-go in cloudier Canada. Photovoltaic cells, on the other hand, can produce energy from diffused rays-but they're only appropriate for smaller installations. And so on.

That said, SES's technology does have some major advantages over photovoltaic and another popular large-scale solar technology, the parabolic trough plant, which uses sun power to drive a steam turbine.