BorgWarner's Well-Timed Gear Shift
At 63, BorgWarner Chairman and CEO John Fiedler has spent 40 years in the auto industry, but he still acts like a 16-year-old who has just been given the keys to dad's wheels. "I love cars," he says. Who can blame him? Over much of the last 18 months, Fiedler worried that his auto-parts outfit was headed into the ditch with the rest of the factory sector. As it turned out, BorgWarner (BWA ) maneuvered through the recession with only a few scratches and dings.
In 2001, net income dropped 29%, to $66 million, as sales fell 11%, to $2.35 billion. By comparison, most of BorgWarner's peers lost money last year, as did its biggest customer, Ford Motor (F ). Moreover, BorgWarner's profits are already on the upswing. Previewing its Apr. 22 first-quarter report, Fiedler says BorgWarner earned $30 million in the first three months of 2002, before goodwill write-downs. That's up 10% from analysts' consensus estimate and a 40% increase from a year earlier.
His secret? He admits that BorgWarner, which makes key transmission components for four-wheel-drive vehicles, has benefited from the still-rising popularity of sport-utility vehicles in the U.S. But the company's success is about more than America's love affair with SUVs. The 13,000-employee company, which also produces engine parts and fluid and cooling systems, has been expanding in Europe, which Fielder sees as the big growth market in the next decade. He also imposed a hiring freeze in September, 2000, and steered the company away from large acquisitions, which have left many of its competitors mired in debt.
Fiedler, who took over at BorgWarner in 1995 after more than 30 years at Goodyear Tire & Rubber, recently spoke with BusinessWeek Correspondent Michael Arndt in downtown Chicago. Looking out from his corner office on the 18th floor at a vista that includes Grant Park and Lake Michigan, Fiedler chatted about sales trends, differences between American and European consumers, and his all-time favorite car. Here are edited excerpts of the conversation:
Q: You've been in this business a long time and seen downturns before. The one thing that seems remarkable about this last one is that car sales held up extremely well. Although your profits went down, you still made money. What's going on here? A:
Q: You've been in this business a long time and seen downturns before. The one thing that seems remarkable about this last one is that car sales held up extremely well. Although your profits went down, you still made money. What's going on here?
A:This is my ninth downturn, and we finally got this one right. In the mid-'80s, people were spending 12% of their monthly disposable income on their car payment. In 1999, it was 7%. In downturns in the '70s and '80s, the first thing that people did was postpone the purchase of a car. This time around, we surveyed people, and they said, "No, I'm not going to cut back on a car, it's just not that [big an item] in my budget."
We also have a lot more real-time information, so we can react faster. I can pull up on my computer right now Ford's inventories at all their plants. We just don't build a product unless you are buying today. We have less than a week's inventory of anything in our company.
Q: Can sales stay this high? Or through all the rebates and come-ons, have the car companies cannibalized tomorrow's sales? A:
Q: Can sales stay this high? Or through all the rebates and come-ons, have the car companies cannibalized tomorrow's sales?
A:There were a lot of things done with rebates and financing by the car companies. But if you net it all out, what's amazing is that the consumer really didn't take advantage of much of it -- even those 0% financing offers. So barring another September 11 and a total loss of confidence by consumers, the first half of this year is going to be great. What will happen after that? If we don't get an external shock, we're not expecting anything to change much.
Q: When it comes to the growth markets for BorgWarner, are they the emerging economies in Asia and Latin America? A:
Q: When it comes to the growth markets for BorgWarner, are they the emerging economies in Asia and Latin America?
A:If your time frame is the rest of this decade, no, because the income isn't there. It's wonderful to talk about 1 billion people in China, but you've got to talk about how much they make and what an automobile sells for. If your time frame is several decades, obviously, those are the growth markets. But in the next 10 years, Europe will be our fastest-growing market.
Q: But even if the developing world isn't a growth market for you immediately, might you not want to move operations to low-cost countries anyway to avoid the high cost of manufacturing in the U.S.? A:
Q: But even if the developing world isn't a growth market for you immediately, might you not want to move operations to low-cost countries anyway to avoid the high cost of manufacturing in the U.S.?
A:What's happening in the world is counterintuitive to what you think should happen. The yen is getting weaker and weaker, and the Japanese are putting more and more plants in the U.S. What people have learned is, if you don't make it in the market, you're not likely to sell it there for very long. In our business, you can make it as cheap as you want -- in fact, the best car I've seen is the one they make in India, but you couldn't sell it in the U.S.
Let me give you an example from our business. One of our really good divisions in the U.S. is our four-wheel-drive division. It makes transfer cases for SUVs. That technology doesn't do you any good at all in Europe, because they don't use that product.
Q: You hit on one of the big trends in the U.S., and that's the big rise in SUVs. Where do you see that market headed? A:
Q: You hit on one of the big trends in the U.S., and that's the big rise in SUVs. Where do you see that market headed?
A:Where do you see the price of gas going? As long as it's less than $2 a gallon, it's going to be a wonderful market. People love everything about them.
Q: What kind of car do you drive? A:
Q: What kind of car do you drive?
A:I drive a Jaguar S-Type. Prior to that, I had an Audi A6 with a twin-turbo engine. Prior to that, I had a Mercedes M-Series. And prior to that, I had a Range Rover. I switch cars every year. I'm getting ready to get a new one. I'm looking at a Lexus S430, which is a two-seat convertible.
Q: What was your all-time favorite? A:
Q: What was your all-time favorite?
A:It was a '55 Chevy. I bought it when I was still in college, and I had it when I got married and got rid of it when we started having kids. [I thought it was] a great car.
I've gone back and driven a '55 Chevy recently, and it's not really a great car. It looks great, but my memories of it are actually much better than the car.
Edited by Patricia O'Connell