Linamar looks beyond the automobile

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What a year it's been for Linamar Corp., Canada's second largest automobile parts manufacturer after Magna International.

There were rumours early in the year, promoted by short sellers, that due to the recession and a brutal slump in car sales Linamar wouldn't be able to meet debts coming due and that the company might have to be sold.

While Linamar shares fell almost 90 per cent the company handily met its obligations through severe cost-cutting and a fairly clean balance sheet. The stock hit $2, but has since climbed back to about $15.

Linda Hasenfratz, chief executive officer of the Guelph, Ont.-based company, believes, "We're starting from an incredibly negative point, but there's going to be a huge opportunity on the other side for those companies who survive it."

Earlier this month, she spoke to the Canadian Manufacturing Technology Show 2009 organized by the Society of Manufacturing Engineers.

Vaughan: How did you cope when the economy stalled, GM and Chrysler were going bankrupt, the stock tanked and there was panic in the streets? What was going through your head?

Hasenfratz: It was very frustrating.

We saw that 2009 was going to be a very, very difficult year with low production volumes and potential actions from GM and Chrysler as they entered into bankruptcy.

We certainly saw the risks, but we felt we were financially strong and stable with a reasonably strong balance sheet and a huge amount of opportunity.

We felt the market really overreacted by lumping everybody who was an automotive supplier into the same boat and that our stock was undervalued.

I wish I'd bought it at two bucks.

I did take advantage of that very low share price and picked up some shares myself. I'm pretty happy about that.

You've also gathered in about $105-million of government interest-free loans from Ontario and the feds. Did that spark the turnaround inthe stock and the outlook others had for the company?

I think the performance of the stock was directly related to the success of our action plan.

Starting at the beginning of the year and the reality of what 2009 was going to look like, we started talking about a very aggressive plan that focused on growing top-line revenue obviously, but also significant cost reductions and a huge focus on cash conservation.

We set a target of reducing overhead costs by $40-million a year. By the end of the first quarter, we had instituted $60-million of savings.

Which included cutting 800 jobs.

We absolutely had to cut jobs.

When your sales drop from $650-million a quarter to $400-million, there is going to be an impact.

Those aren't easy decisions. Everybody struggled with it but it was something we needed to do.

I heard you talking recently about more opportunities through more outsourcing and reduction of the supplier base. We've heard that since the 1980s.

We've seen 50 bankruptcies this year in the supply base. That's unprecedented.

But there's not much consolidation happening because there's way too much capacity in the industry.

I don't have a need to go out and buy another machining company. I've got lots of open capacity.

It's more a matter of rationalization of companies - companies going away or exiting automotive.

There's companies out there saying, "Okay, I've had enough."

And, at the same time, the OEMs [original equipment manufacturers]are actively reducing their supply base. Ford has set a goal of reducing their supply base from more than 2,000 to 750.

Are you going to make the cut?

Absolutely we're going to make the cut.

What lines us up for more outsourcing is our technical capability and our financial capacity to invest in the equipment we need to be a big winner in the outsourcing trend.

So you'd rather put your money there than to try to acquire Opel?

Definitely (laughs), definitely. No, thank you.

I think we'll stick to the knitting of what we know how to do.

All right, opportunities beyond automotive. I see Linamar working on wind turbines and other things.

I think the opportunities are fantastic; our energy division, where we focus on wind, solar, nuclear, power generation, oil and gas, plus our interest in aerospace, defence and rail - I think there's a ton of opportunity.

In wind alone, the numbers show we will ultimately have more installations in North America than even in Europe and there's not much available in the way of supply base in North America.

You're doing $2-billion a year in automotive. What can you do in energy?

The target is $1-billion dollars within the next 10 years.

Where are you today?

It's very small.

Last year was $56-million but on the solar side we have an opportunity that could be worth $200-million, and there's wind on top of that. And in rail - the world is looking for new ways to get around.

Do you sell to the big rail companies like Siemens and Bombardier today?

We have in the past.

We used to do a lot more in aerospace, defence and rail. As we shifted to more of an automotive focus, we kind of got out of those markets, but we're actively looking to get back into them now.

Michael Vaughan is co-host with Jeremy Cato of Car/Business, which appears Fridays at 8 p.m. on Business News Network and Saturdays at 2 p.m. on CTV.