Will Air Bags Cushion The New Morton?

When Morton Thiokol Inc. spun off its aeronautics business in mid-1989, Chairman Charles S. Locke hoped to take his company on a profitable new course--one free of painful associations. After all, a faulty booster rocket made by Morton Thiokol triggered the 1986 Challenger space-shuttle explosion and marred the outlook for the once-thriving aeronautics unit. Now, both the business and the Thiokol name have been jettisoned. But that leaves the refashioned Morton International Inc. decidedly earthbound. It is dominated by a clutch of slow-growing businesses in salt and specialty chemicals.

So how can Morton soar again? Locke thinks he has found the answer: air bags for automobiles. Since jumping into the field during the early 1980s, Morton has captured some 55% of the $400 million global air-bag market, which is expected to grow fourfold by 1995. But while the business shows promise, it has perils, too. Competition is heating up both here and abroad, and the technology is expensive and fast-changing. What's more, Morton will invest hundreds of millions through the mid-1990s to develop its air-bag business before seeing much in the way of returns.

HEADING EAST. Undeterred, Locke is expanding Morton's position on several fronts. In the U. S., Morton is now the sole air-bag supplier to Chrysler Corp., and it recently picked up Ford Motor Co. as a customer. Morton is also quickly making its presence felt in Europe. In mid-June, Morton and Germany's Robert Bosch announced plans to jointly develop an air-bag venture to serve the European car market. "We've got to get our feet wet overseas," says Locke.

If Locke sounds like a man in a hurry, it's not hard to fathom why. With air bags expected to be a standard safety feature on most U. S. and foreign cars by the mid-1990s, the market should enjoy explosive growth for some time to come. So far, air bags are little more than a trifle to Morton: It earned $15.3 million from air-bag sales of $163 million last year. But Locke expects Morton's air bags to be a $1.3 billion business, or 30% of total revenues, by 1995. And that potential has investors panting: Morton's stock has jumped 25% this year, to about 55--more than twice the run-up for Standard & Poor's 500-stock index.But even Locke admits that Morton's air-bag gambit could spring a leak. The company plans to pump $600 million into the business by 1994, but the earnings payoff will probably be slow in coming. Right now, profits in Morton's air-bag operation are about half of the 15% to 20% return-on-invested-capital goal that Locke has in mind for the unit. In fact, the company will probably have to wait until 1996 before sales grow large enough to provide a decent return. "The return on capital is pretty lousy," says Locke. "It's going to get even lousier before we're through."

That's too bad, because Morton could use a little lift. Its $1.02 billion specialty-chemicals business has been hobbled by the recession. And demand for its specialty polymers, coatings, and sealants has been hammered by the severe downturn in the auto and housing markets. Meanwhile, a string of relatively mild winters has zapped sales of Morton's road-salt products, slowing growth of its $450 million salt business. The glacial performance of its core units has dampened Morton's financial outlook. For the fiscal year ending July 31, it is expected to post a paltry 2.5% earnings gain, to $138.2 million, on $1.9 billion in sales.

PROMISING LINK. Small wonder, then, that Morton is elbowing its way into air bags. Its European link with electronics giant Bosch looks particularly promising. Morton boasts a sophisticated air-bag technology that involves the electronic triggering of a controlled explosion of the chemical sodium azide. That, in turn, generates hot gas that inflates the air bag in a fraction of a second. Morton's edge: Drawing from its experience in rocket propulsion, the company's former Thiokol unit developed a reliable production method for the air bags--a task that has bedeviled competitors.

Bosch will bring to the party an expertise in crash sensors and diagnostics, the triggers for air-bag detonations. The partners ultimately hope to grab the lion's share of Europe's still-tiny air-bag business, but it may be a while before that market grows much. With seat-belt use running at an impressive 90% in Europe, drivers may feel no compelling need to pay for air bags.To help nurture demand, Morton and Bosch plan to do a fair amount of lobbying in Brussels. The European Community is considering legislation that would mandate the use of air bags in all new automobiles by 1994. And Bosch has a reputation for knowing which strings to pull. "Bosch is politically smart," says Jordan Lewis, a joint-venture consultant based in Washington. "They know how to influence things."

BATTLEFIELD. Still, Morton will face decidedly stiffer competition in Europe than it did in the U. S., where it was among the first to develop a reliable air bag. Other companies, such as Germany's Siemens and Sweden's Electrolux Autoliv, already supply air-bag components to many European carmakers and plan to start assembling the devices soon. In September, Electrolux Autoliv will start supplying air-bag systems for Saab-Scania cars exported to the U. S. And Japanese carmakers, armed with air bags from Takata Corp., are trying to sell more cars in Europe, posing another indirect threat to Morton's overseas ambitions. "In air bags, Europe is going to be more of a competitive battlefield than Japan or the U. S.," says Andrew Flower, a consultant with SRI International in London.

Stateside, Morton will continue to square off against Cleveland-based TRW Inc., its primary rival in air bags. So far, Morton holds sway. TRW's system has been plagued by production-line fires as well as quality problems, both of which the company now claims it has solved. Admittedly, the technology is tricky to master. Last year, Ford had to recall more than 165,000 cars and cancel an exclusive supply arrangement after TRW air bags leaked hot gasses into passenger compartments. That's one reason TRW has yet to turn a profit on its air-bag business.

TRW isn't conceding the European market to Morton, however. The Cleveland company will push its current air-bag products, while focusing on a new-generation product that uses argon gas, a cheaper alternative to chemical mixes, which it hopes to have on the market by the mid-1990s. If TRW's advances come on line in time, say TRW executives, the Morton-Bosch alliance will still be beatable. Says Adolph Mueller, vice-president and general manager for TRW's occupant-restraints group: "I would be concerned with somebody who is in the business with only one technology."

For now, though, it looks as if Morton is getting ready to benefit from the coming air-bag bonanza. If so, air bags could be quite a boost for a company that hopes to leave some unpleasant recent history light-years behind.

Before it's here, it's on the Bloomberg Terminal.