The hardest part of breaking into the European market, says Frank Stronach, chairman of Canadian auto-parts giant Magna International Inc., is attracting top management. So he's offering a lure unheard-of in central Europe: homes in a luxurious golf-course development, built on the grounds of a 400-year-old castle in Oberwaltersdorf, Austria. The castle, which Stronach bought last year, is now part of Magna's European headquarters. When the residences are finished, managers "will be able to bike home for lunch," promises Robert Gruber, Magna's European finance director.
It's just the latest example of how Stronach has used incentives to build the business he founded in a rented garage near Toronto into one of North America's fastest-growing companies. Over the past decade, Magna, which makes everything from air bags to bumpers, has grown at a compound clip of 21% a year. Last year--its best--sales soared 37%, to $2.5 billion, while profits jumped 67%, to $166 million. Stronach took home $28 million, counting gains from exercising options--the highest earnings ever by a public-company executive in Canada.
PARTNERS IN CHROME. Magna's great strength is the entrepreneurial culture that Stronach, 62, has created. "Frank was into empowerment long before the business schools had ever heard of it," says Peter C. Godsoe, CEO of Bank of Nova Scotia, which lent him $1,000 to launch the business in 1957. By offering employees huge financial incentives, Stronach has made profit-oriented innovation one of Magna's key products. Since 1993, the company "has given us 148 different proposals for cutting costs," marvels Thomas T. Stallkamp, Chrysler Corp.'s powerful purchasing chief, who says the ideas could save more than $93 million a year. No wonder he expects Magna to remain his No.1 supplier.
Skeptics note that Stronach has made his share of mistakes. The worst came in the late 1980s when, distracted by an unsuccessful run for Parliament, he let Magna's borrowing get out of hand. Debt soared over $700 million. Then auto sales plunged. It looked like Stronach, who controls 73.4% of voting stock, would lose everything. Instead, he pulled off what Godsoe calls "one of the greatest turnarounds of the modern era."
Magna's near-death experience reenergized Stronach. In 1994, he moved his principal residence to Switzerland--not least because its top tax rate is 30%, vs. Ontario's 53%. There, he logs 14-hour days directing Magna's European expansion. "We still only have 1% of the global market. There's no reason why we shouldn't have 10%," he says.
As Stronach tells it, his drive and his entrepreneurial philosophy stem from growing up in war-ravaged Austria. "If you've never been hungry," he says, "you don't know what it means." When he was 14, his mother sent him to train as a tool-and-die maker. Even then, he dreamed of starting his own business, recalls boyhood friend Franz Deutsch, now chairman of Austrian ski-equipment maker Tyrolia. At 21, with Europe still on its knees, Stronach emigrated to Canada, arriving with one suitcase and $200.
Within six months of joining a small tool shop near Toronto, he had an experience he says shaped his management approach. The owner, praising his work, said he would make him a partner. "At first, I felt pretty good," Stronach recalls. But the owner "kept dragging his feet," so Stronach quit and set up his own shop in a garage. Within two years, he employed 20 workers. Then his foreman asked to become a partner. Thinking it over, Stronach reasoned that if the foreman left, he'd have to do all the work. "The next morning, I said, `Why don't we open up a new factory and give you an ownership in it?"'
That formula, replicated time and again, carried Magna to revenues of $1.3 billion by 1990. But as the company grew to 100 independently operated factories, "we ignored the budgeting process," Stronach admits. In the late 1980s, while he focused on politics, plant managers piled on debt to grow. Stronach, a Liberal, was trounced in 1988's Conservative landslide. And in 1990, Magna lost $159 million. The stock fell to less than 2 from a high of more than 25, and Magna violated some loan covenants.
By early 1990, some of Magna's bankers wanted to put someone else in charge, says then-board member James McCallum. Reacting with rage, Stronach convinced them he "would do whatever it takes," says Godsoe. Within months, he jettisoned 36 factories, cut headquarters staff by more than 50%, and instituted a plan to slash debt. He also imposed discipline and planning. Now, factory managers must clear major spending with senior executives, who approve only projects that fit into Magna's strategic plan. All debt has been erased, and new debt is verboten. Magna, Godsoe says, has "a rock-solid balance sheet and lots of capital for expansion."
Even with the new constraints, Magna remains "far more entrepreneurial than most North American companies," says Chrysler's Stallkamp. Each of its 86 plants is a separate profit center, and managers enjoy almost total control, plus a giant incentive: 3% of gross profits. Magna pays managers an average of $60,000 a year, but bonuses can top $500,000, which has made "many of them millionaires," Stronach says.
"FRANK'S WAY." It's a tactic that lures talent and fuels dedication. Ross N. MacLean, a 39-year-old mechanical engineer, left General Motors Corp. for Magna because "I saw the opportunity to make a lot of money." Since taking command in 1991 of Polycon Industries, a joint venture with Ford Motor Co. that was losing $12 million a year, MacLean has poured 70 hours a week into resuscitation efforts. Last year, Polycon earned $6 million on sales of about $100 million. MacLean says he'll be able to "comfortably retire in 10 years--10 years sooner than I would have at GM."
But however much autonomy Stronach grants plant managers, at headquarters he's known as difficult and forbidding. "It's Frank's way or no way," says one of many executives who have quit. The latest casualty, John Doddridge, resigned last October after two years as CEO. Stronach admits that Doddridge found "being CEO doesn't mean that much at Magna." New CEO Donald Walker is Stronach's son-in-law.
Stronach's current strategy is to make Magna a leader in producing not just parts but systems--finished seats, say, or outer body shells. Analyst Frederick K. Larkin of Bunting Warburg Inc. thinks the tactic could boost Magna's North American market share by 75%, to an average $275 per car, by 2000. Still, that big pothole just ahead--the slump in North American auto sales--has sent Magna's stock, like other auto stocks, plunging. It's at 37 on the New York Stock Exchange, down about a third from last year's high. That's a "gross overreaction," says Philip K. Fricke of Prudential Securities Inc., who expects Magna to keep growing, albeit more slowly, through any downturn.
With Walker in charge in Toronto, Stronach is focusing on Europe, where Magna is a relative newcomer. But over the years, it has hired some 500 European managers and technicians, so it can move fast now. Magna has 20 European plants, generating sales of more than $700 million. Finance head Gruber predicts that will double in three to five years.
But even after 1990's crisis, Stronach isn't all business. Wherever he is, he checks constantly on his "business of love," horse racing. He bought his first horse in the early 1960s. In the late 1980s, he began spending heavily, aiming to make his stable No.1 in North America. His Beechwood Farm is already tops in Canada, and since 1989, he has bought three farms in Kentucky. Some wealthy owners "check their brains at the airport" when visiting their farms, says Ray Paulick, editor-in-chief of The Blood Horse, "but Stronach is very intense and a lot more hands-on than other owners." In 1994, his horses won $3.7 million in North America, ranking him fifth among big owners. Sid Fernando, blood-stock editor of the Daily Racing Form, says he has "a very good shot at becoming No.1." One thing's for sure: He won't rest till he reaches that goal.