After 104 years in business, Timken Co. (TKR) knows how punishing the ups and downs of the industrial economy can be. Since many of the nation's largest manufacturers are its customers, Timken feels every bump in the road. "We're a manufacturer's manufacturer," says James W. Griffith, Timken's president and CEO. Yet the Canton (Ohio) maker of steel and bearings has kept sales steady -- in the neighborhood of $2.5 billion -- and recorded only one annual loss in the past five years, despite the ongoing industrial recession.
To Griffith fall the tasks of turning survival into growth, and of guiding Timken's Industrial Age products into their second century. Bearings are as old as the mechanical era, but as machines shrink in size and increase in complexity, they demand more and more engineered bearings. Timken's products show up in rugged, high-performance machines such as trucks and airplanes, as well as in ultrasmall, high-precision niches such as medical devices and NASA spacecraft. Timken's largest bearing these days is a 7.5-foot wide hoop-like apparatus studded with sensor-laden cylinders, used to help keep the massive turbines on windmills spinning smoothly.
In February, Griffith oversaw the completion of Timken's biggest bet yet on the future of manufacturing. The company acquired Torrington Co., a onetime competitor, from Ingersoll-Rand Co. (IR) for $840 million. Based on 2002 revenues, the combined entity will boost Timken's revenues by nearly 50%, to $3.8 billion, while increasing the size of Timken's workforce and the number of plants and R&D centers to a similar degree. The merger also boosted Timken's debt to an unprecedented level. Griffith recently spoke with Industries Editor Adam Aston.
Q: The economic slump is three years old and still going. Where do we stand?
A: This is the worst industrial recession we've had at least since the early '80s. All you have to look at is the half-trillion-dollar swing in the merchandise trade deficit over the past five years for a sense of what we've lost. I believe we reached bottom sometime in early 2002, and we've been bouncing along that bottom -- with different industries moving up and down over time -- since then. We haven't yet seen the driver that will pull us out of that.
Q: In the past few months, the dollar has weakened, lowering the cost of U.S. goods to the rest of the world. Will this help?
A: It could. In the 1980s -- during the last major industrial recession -- a dramatic move in the dollar coincided with the start of the rebound. We aren't yet seeing the effect of this move to our financials in a material way. But you know when the currency moves 15%, it's got to happen.
Q: When will the currency effect begin to help Timken?
A: The real driver is when customers such as the U.S. steel and aluminum industries start to improve their export competitiveness, once they're not buried under currency-related cost competition from overseas. Then they will begin to reinvest in their manufacturing facilities here. When they do, they will buy equipment that's made with Timken bearings. It's an indirect impact. When our customers do better, we do better.
Q: What will the industrial economy look like when this is all over?
A: U.S. manufacturing will come out of this a very different player, much as we did during the 1980s, with the competition from the Japanese. Most of our customers have established projects in Eastern Europe, China, Southeast Asia, or India -- or sometimes all of them -- in recent years. As a manufacturer's manufacturer, Timken has to be there, too. So in addition to weathering the storm ourselves, we have positioned ourselves to serve those customers wherever they go in the world.
Q: Does that mean a steady movement of capacity offshore?
A: It's not as simple as that. Manufacturing expansions at Timken have been disproportionately in emerging markets. We've expanded or built facilities in China, Poland, Romania, and South Africa. At the same time, we've developed R&D centers in Bangalore, India, and in Ploiesti, Romania, and a new customer technology center in Colmar, France. It's all part of this globalization game. Yet we've also expanded plants in North Carolina and Virginia. Overall, we've moved about five percentage points of capacity to emerging markets, leaving us with about 70% to 75% [of capacity] in the U.S.
Q: Given that labor is relatively costly in the U.S., how do you guide your capital-spending decisions here?
A: In manufacturing investment, return on invested capital drives the decision. Labor cost is not the determinant. There are higher priorities: proximity to the customer, or nearness to raw materials, or the presence of a skills base close to the customer. So, for example, our Faircrest Steel Plant, right here in Canton, is one of the lowest-cost, highest-quality mills in the entire world.
Q: In an industry as troubled as U.S. steel manufacturing, that's remarkable. What makes this operation different?
A: In 1985, we invested $450 million -- two-thirds of Timken's net worth at the time -- to build the only completely new alloy steel plant in the U.S. since World War II. We apply state-of-the-art manufacturing and control processes to good human resources practices, and drive, drive, drive productivity. Just after that plant opened, there were seven hours of labor in each shipped ingot. Today it's less than one [labor hour per ingot]. When you apply that sort of technology, you can manufacture anywhere.
Q: That implies each worker is relying on -- and managing -- more technology.
A: Sure. For example, Timken has a plant in Ashboro, N.C., that can set up and begin producing a new customized product in as little as 24 hours. Normally in the bearing business, that takes 8 to 12 weeks. There again, it's a combination of IT investment, plus new-to-the-world manufacturing technology, and human resources. It demands skilled workers. The average shop-floor employee there has two years of college.
Q: Still, with the recession continuing and war under way, it seems like a tough time to make a major acquisition like Torrington.
A: The decision reflects our belief in the manufacturing industry and in globalization. Because we believe the world will continue to need manufactured products, we took on a big risk, and did an acquisition that will boost overall sales by almost 50%, but that takes our balance sheet up to the highest leverage we've ever had.
Q: Does the acquisition bring you into new businesses, or are you looking to gain efficiencies of scale?
A: This isn't your conventional acquisition, where we have a successful Timken company buying a less successful competitor, or a company in a different business. We acquired a very successful company. In fact, in some of its capabilities, Torrington is faster and better at what it does. Overall, only about 5% of our product lines overlap. The challenge is to identify which is the better company on a given practice or area, and then work to translate that to create a new entity. This allows us to bring value to our customers over a much broader range of applications.
Q: How does the deal change your market reach?
A: Torrington makes us clearly the No. 1 player [in this market] in America, and bumps us up to No. 3 in Europe. It doubles our presence in China and in India. And it gives us a much stronger position in Japan. Overall, it helps the company's global position, with a scale -- $3.8 billion in sales, and 76 bearing plants around the world -- to better serve our global customers.
Q: Has the Iraq war affected your integration plans or day-to-day operations?
A: Rising energy prices have had an impact on the steel side. Steel is a major energy consumer. Pure and simple: When natural gas prices go up, our profits go down or our prices have to go up. A bigger concern is that energy price spikes take cash out of the consumer's pocket. It's premature to make a judgment about that. But I would be concerned about a long-term increase in energy prices.