Smart Moves In 2010 Lead To Growth In 2011
If 2009 was a year for “weathering the storm” symbolized by the fall of Lehman Brothers back in the fall of 2008, then 2010 was a year for taking advantage of “sunnier skies,” though typical engineers may not have felt much improvement in their daily condition. However, many companies stayed faithful to the seven strategies we presented back in our 2010 list of the Top 50 Employers in Electronic Design (see “The Top 50 Employers In Electronic Design”).
• Building strength in good economic times
• Transparent over-communication
• Focused business portfolios
• Cutting the right costs
• Cutting costs during good times
• Increasing R&D
• Investing in information systems
These companies were able to begin reaping the rewards of their intelligent planning (Table 1).
Crunching the numbers
While the unemployment rate peaked at 10.1% in October 2009, by the end of 2010 it came down to 9.4% and is currently at 9.1%. In 2009, we lost 5.7 million jobs, but at least 751,000 jobs were gained in 2010. U.S. GDP decreased 1.7% annually in 2009, but it showed an annual increase of 3.8% in 2010. These improvements may not look substantial, but at a minimum, the negative trends have been reversed.
In 2010, the pool of 96 companies that we analyze collectively showed employee growth of 1.5%, sales growth of almost 10%, and pretax profit growth of 83%! While we are dealing with a low base, this was a significant improvement vis a vis 2009’s employee declines of 5.5%, sales declines of 8.3%, and pretax profit declines of 8.9%.
In 2009, companies did well to hold profit margins flat year over year and prevent debt to equity ratios from worsening more than one point. In 2010, companies knocked it out of the park, improving profit margins by five points and debt to equity ratios by nine points! Last but not least, R&D went from almost a 4% decline in 2009 to almost a 3% increase in 2010 (Table 2).
Another sign of optimism comes from our percentage of companies reporting growth in key categories. In 2009, 19% of our company pool reported increases in sales while only 9% reported increases in profits. In 2010, these percentages have soared to 89% and 90% respectively. In 2009, 22% reported increases in their employee count and 30% reported increased R&D investment. In 2010, again they have soared to 62% and 67% respectively (Table 3).
A closer comparison of this year’s results versus last year’s reveals five companies that showed tremendous growth. General Motors climbed 78 spots, TRW Automotive Holdings rose 64 slots, Teradyne and Caterpillar jumped up 62 and 61 places respectively, and Cadence Design Systems moved up 56 spots (Table 4).
Meanwhile, components and subassemblies represented the strongest category for OEMs, as six of the top 10 OEM companies specialize in this space (Table 5). Our methodology from 2009 to 2010 did not change, though. For a complete description of how we developed our list, see “The Method Behind Our Mathematics”.
So, what’s on tap for 2012? As employment and capital investment continue to slowly climb back up in 2011 and 2012, those companies that continue to shrewdly expand capacity and invest in their people, design and bring to market quality products that truly address customer needs, and keep a tight rein on costs and stay efficient enough to offset rising commodity costs and improve margins will be the ones that continue to generate solid gains in sales and profits.
GM Motors Up 78 Slots
General Motors Company (GM), which was company number 91 in 2008, moved up in the ranks by 78 places to land in the thirteenth slot this year. It operates as a global automaker, producing cars and trucks and selling them under the Baojun, Buick, Cadillac, Chevrolet, GMC, Daewoo, Holden, Opel, Isuzu, Vauxhall, Jiefang, FAW, and Wuling brand names.
The company sells its cars and trucks to dealers for consumer retail sales, as well as to fleet customers, including daily rental car companies, commercial fleet customers, leasing companies, and governments. Its major markets include China, the United States, Brazil, the United Kingdom, Germany, Canada, and Italy.
GM’s OnStar subsidiary provides vehicle safety, security, and information services. Meanwhile, GM provides automotive financing services through its subsidiary, General Motors Financial Company Inc., which purchases automobile finance contracts for new and used vehicles purchased by consumers primarily from franchised and select independent dealerships. Founded in 1908, GM is headquartered in Detroit, Mich.
GM’s Competitive Landscape
Demand is driven by employment and interest rates. The profitability of individual companies depends on manufacturing efficiency, product quality, and effective marketing. Large companies have economies of scale in purchasing and marketing. Smaller companies can compete by focusing on specialized markets. The industry is capital-intensive, as GM’s average annual revenue per employee is about $2 million.
Ford, Chrysler, Toyota, Honda, Nissan, Hyundai-Kia, Daimler, Volkswagen, PSA Peugeot Citroen, Fiat, and Renault all compete with GM. Chinese auto manufacturers Geely, Chery, and Build Your Dreams (BYD) are up-and-coming threats.
Taking 2009 Off
We welcome GM back to our Top 50, having emerged from government oversight in the second half of 2009. The last time GM was in our survey was 2008, where it ranked 91st before the government began its oversight, so it has moved up 78 ranks. While it has shown tremendous improvement and is positioned to take advantage of anticipated global industry growth, there is still work to be done.
GM’s 2011 first quarter sales were up 15%, and operating profits without any extraordinary items were up 13%. Products including the Buick LaCrosse and Regal, the Chevrolet Equinox, the GMC Terrain, and the new Chevrolet Cruze all contributed to this revenue growth. In fact, the Chevrolet Cruze commanded a price that was $3000 higher than the vehicle it replaced.
For the first quarter of 2011, global deliveries were 2.2 million units, an increase of more than 220,000 units from the first quarter of 2010. This increase is attributable to a 1.3 million-unit increase in industry volume and a 0.4 percentage point increase in global market share to 11.5%. In April, North American market share returned to a strong 19.8%, despite managing customer sales incentives down to the lowest levels yet for the new General Motors.
To help offset increases in commodity costs, GM implemented price increases effective May 2. These increases included hot selling products, including the Chevy Cruze and Equinox, Cadillac SRX, GMC Terrain, and Buick LaCrosse. When combined with increases implemented during the fourth quarter and earlier this year, average prices increased 0.8%.
During the first quarter of 2011, GM continued to make progress in strengthening the balance sheet by selling non-core assets and further funding its U.S. pension liability. The crisis in Japan is not expected to have a material impact on full-year results.
First-quarter growth was achieved largely on the strength of stronger sales of fuel-efficient vehicles across the portfolio. GM is much better positioned today to meet the demands of customers looking for fuel-efficient vehicles, with no better example than selling 50,000 Cruzes in the first quarter alone (Fig. 1).
There are more fuel-efficient vehicles to come, as GM introduces the Chevrolet Sonic, the Chevrolet Malibu ECO, the Buick Verano, and the Buick LaCrosse and Regal with eAssist over the coming months and year.
GM Financial has also had a positive impact on the first quarter by improving credit availability and terms to GM customers. The primary objective of GM’s automotive financing strategy is to provide certainty of availability to customers all through the credit cycle and the business cycle as well as increased competition and transparency.
GM Financial has steadily increased its U.S. subprime financing penetrations from 4% in the first quarter of 2010. Leasing programs are now offered through GM Financial in 21 states through the end of the quarter. U.S. leasing penetrations increased from 7.6% in the first quarter of 2010 to 16.8% in the first quarter of 2011, but still below the industry average excluding GM of 23%.
Further improvement will come with the company’s target of national coverage for the GM Financial lease program by this summer. To expand availability of leasing into Canada, GMF in April acquired one of the major lease platforms in Canada. The early signs of this expansion are encouraging with GM Canada lease penetrations increasing to 7% in April.
As GM and GMF become more closely integrated, GM new vehicles as a percentage of GMF’s originations and GMF’s percentage of GM subprime financing and leasing volume have increased significantly. GMF posted strong credit performance for the first quarter with annualized net credit losses of 4%, down materially from the prior year.
In Europe, restructuring has focused on reducing costs, but equally important is the retooling of the product line. The Opel Insignia, Meriva, and Corsa are just a few examples of the product renaissance, and there are many more to come. In fact, by 2012, most of the European product line will be less than three years old.
In China, the largest automotive market in the world, GM maintained its number one position with a market share of 13.6%, and the future looks bright with the introduction of the new Baojun brand, the continued strength of Buick, and the launch of 60 new and upgraded models over the next five years. In addition, the expansion of Korea-built Chevrolet products being sold in countries throughout the Asia-Pacific region and in Europe is a significant contributor to revenue growth.
GM South America continues to be in the midst of overhauling nearly its entire product portfolio, with 2000 people hired in Brazil in the first quarter as GM ramps up for a very aggressive product launch over the next 18 months. In Brazil alone, GM plans to have nine new products by the end of 2012. In the entire region, 40 new products are planned for this year and next. In essence, South America is the new version of what China was or Asia was a year or two ago for GM.
Revenue growth is an important objective for GM, and it is investing the necessary resources to refresh its product line over the next couple of years. The company’s mindset and new operating model center around designing, building, and selling the world’s best vehicle—not better than the model it replaces or as good as the competition, but actually defining the standards of being the best.
As revenue grows, there will be intense focus on cost containment at GM. The company currently faces increasing commodity costs, which need to be offset through cost reduction in other areas, supplier performance, and increased prices.
Efficiency in the product development cycle will have to be emphasized as its engineering and capital spending are increased and stabilized over time. Yet GM is off to a strong start in making 2011 a solid improvement over 2010, and it needs to continue to build the momentum.
TRW Flexes Its Muscles
In 2009, TRW Automotive Holdings Corp. came in as 82 on our list of the top employers. This year, it placed eighteenth, moving up 64 slots. Together with its subsidiaries, the company designs, manufactures, and sells automotive systems, modules, and components for automotive OEMs and related aftermarkets. It operates in four segments: chassis systems, occupant safety systems, electronics, and automotive components.
The chassis systems segment offers product lines relating to steering gears and systems, foundation brakes, modules, brake controls, and linkage and suspension. The occupant safety systems segment provides airbags, seat belts, steering wheels, and occupant restraint systems.
The electronics segment offers various products comprising safety electronics, radio frequency electronics, chassis electronics, powertrain electronics, and driver assist systems. And, the automotive components provides body controls, engine valves, and engineered fasteners and components./p>
The company offers its products for passenger cars, light trucks, and commercial vehicles worldwide. Founded in 1904, TRW Automotive Holdings Corp. is based in Livonia, Mich.
TRW’s Competitive Landscape
Demand for auto parts is driven by new car sales, which are strongly affected by interest rates, and by the replacement market. Company profitability depends partly on the difficulty of manufacturing products and partly on demand volume, since many costs are fixed. Small companies can compete successfully by focusing on a small number of products or some highly technical ones.
The industry is capital-intensive, with an average annual revenue per employee of more than $450,000. The structure of the industry is complex, with most smaller companies (referred to as “tier 2” and “tier 3” suppliers) selling parts to larger suppliers (referred to as “tier 1” suppliers), which in turn sell component assemblies or modules to car and truck assemblers such as GM and Ford, collectively called OEMs.
Principal competitors include Advics, Bosch, Continental-Teves, JTEKT, and ZF in the chassis systems segment; Autoliv and Takata in the occupant safety systems segment; Autoliv, Bosch, Continental-Teves, and Nippondenso in the electronics segment; and Delphi, Eaton, ITW, Kostal, Nifco, Raymond, Tokai Rika, and Valeo in the automotive components segment.
TRW is our most improved company comparing 2010 to 2009, moving up 64 places in the rankings to number 18. The first quarter of 2011 continued to produce strong results with sales up 15% and operating profits up about 24%. Operating profit before special items was $382 million, with a margin of 9.3%. This marked the highest level of operating profit and margin for any quarter in TRW’s history.
Considering seasonality and the capital investments TRW is making to support growth, the company still was able to generate record cash flow levels and continued to reduce its debt and strengthen its balance sheet. Vehicle production trends continue to be positive, too.
In North America, overall vehicle production was up 14% compared with the prior quarter. On a sequential basis compared to the fourth quarter of last year, production was up around 12%. This level of production has been supported by the gradual increase in consumer demand. For the quarter, the seasonally adjusted annual selling rate averaged 13 million units, up from the mid-12 million range experienced in the fourth quarter of 2010.
In Europe, vehicle production was up about 8% compared with last year’s quarter. On a sequential basis compared to the fourth quarter, production was up around 4%. Improving customer demand inside Europe, combined with strong consumer demand outside of Europe, continues to support this level of production. In fact, in Germany and France, TRW recorded 14% and 9% year-on-year increases in registration, respectively, during this first quarter, and these are definitely positive signs as we move further into the year.
For Western Europe, first quarter production was up around 4% or 190,000 units compared to the fourth quarter of 2010. China and Brazil continue to be growth champions for TRW. For the quarter, TRW sales outpaced industry production in both markets. Combined sales in these two markets accounted for more than 12% of TRW’s total first quarter sales.
Outpacing industry growth is not limited to China and Brazil, as TRW overall has outpaced the industry growth in each and every year in recent years. TRW expects this to continue in the medium term, with incremental growth in excess of $1 billion per year based on the company’s current views of vehicle build.
The recent production disruptions for TRW’s customers due to the earthquakes in Japan had a minimal impact in the quarter, though Japan-related supply disruptions and commodity costs will have to be managed the rest of the year to maintain margins (see “Distributors Respond To The Earthquake In Japan”).
Product launches during the quarter continue to strengthen TRW’s diversification and leadership in intelligent safety solutions. A few examples include electric power steering, the driver’s airbag module, seatbelt systems, and steering wheels on the Ford Focus in North America.
In Europe, Audi launched the Q3 with TRW’s stability control, driver and passenger and side impact airbags, electronic park brake, and steering wheel. The Honda Civic was launched in North America with TRW’s airbag control units, crash sensors, and RF technologies.
As a result of TRW’s ongoing quality and six-sigma programs, it continues to launch world-class quality products. For the quarter, TRW’s quality average was just over 5 parts per million across all products and customers worldwide.
TRW also unveiled several new products and announced future product launches during the quarter that will continue to strengthen market position. One highlight is TRW’s electronic park brake for front axles, a development that makes the technology more affordable to a wider range of vehicle segments and brings advanced safety to smaller vehicles.
Similar to rear electronic parking brake (EPB) applications, the front axle system enables emergency braking performance and provides a wide range of competent safety features that can include heel and drive oasis, electronically controlled deceleration, rollaway detection, and premium stencil management to support stop and go and also hold functionality.
Within the steering business, TRW secured a major contract to supply a range of vehicles with electrically powered hydraulic systems for light commercial van platforms. This EPHS system offers comparable reductions in fuel economy to electronic power systems (EPS) and reductions in CO2, and it also accommodates higher rack load applications for the light van segments.
Another area of growth for the company is the growing demand for cameras and radar driver assist systems in vehicles. TRW has gained a number of production contracts, including Ford collision warning enabled by camera and automatic emergency braking activities using its 24-GHz radars. If the worldwide auto industry continues to rebound and grow, TRW’s product line is well positioned to continue to take advantage.
Caterpillar Crawls Into First
Last year, Caterpillar was number 62 on our list. This year, it inched up 61 ranks to take the top slot. The company manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives worldwide. It operates through two lines of businesses: Machinery and Power Systems, and Financial Products.
The Machinery business offers construction, mining, and forestry machinery, including track and wheel tractors, track and wheel loaders, pipelayers, motor graders, wheel tractor-scrapers, track and wheel excavators, backhoe loaders, log skidders, log loaders, off-highway trucks, articulated trucks, paving products, skid steer loaders, underground mining equipment, tunnel boring equipment, and related parts (Fig. 2). It also manufactures diesel-electric locomotives and manufactures and services rail-related products and logistics services for other companies.
The Power Systems business provides diesel, heavy fuel, and natural gas reciprocating engines for Caterpillar machinery, electric power generation systems, marine, petroleum, construction, industrial, agricultural, and other applications. It offers industrial turbines and turbine-related services for oil and gas, as well as power generation applications. It also remanufactures Caterpillar engines, machines, and engine components and offers remanufacturing services for other companies.
The Financial Products business provides retail and wholesale financing alternatives for Caterpillar machinery and engines, solar gas turbines, and other equipment and marine vessels. It also offers loans and various forms of insurance to customers and dealers. And, it provides financing for vehicles, power generation facilities, and marine vessels.
The company markets its products directly, as well as through its distribution centers, dealers, and distributors. It was originally organized as Caterpillar Tractor Co. in 1925 in California. In 1986, the company reorganized as Caterpillar Inc. in Delaware. Caterpillar Inc. is headquartered in Peoria, Ill.
Cat’s Competitive Landscape
Demand for machinery depends on overall industrial activity and on the health of sectors such as agriculture, construction, and power generation. The profitability of individual companies depends on engineering expertise and efficient production. Large companies have economies of scale in purchasing. Small companies can compete effectively by specializing.
The industry is capital-intensive, as average annual revenue per worker is about $300,000. It encompasses a number of segments: construction, mining & other heavy equipment manufacturing; electronics; electrical products; power generation & storage transportation services; and logistics services.
When it comes to machinery, Caterpillar’s chief competitors include Cummins Inc., Tognum AG, GE Energy Infrastructure, Siemens Energy, and Wartsila Corp. Other competitors, such as John Deere Power Systems, MAN Diesel SE, Mitsubishi Heavy Industries Ltd., Volvo Penta (part of Volvo Group AB), Kawasaki Heavy Industries, multiple emerging Chinese competitors, and Rolls Royce Group plc compete in other markets where Caterpillar is active.
An additional set of competitors, including Generac Power Systems Inc. and Kohler Co., includes packagers that source engines and/or other components from domestic and international suppliers and market products regionally and internationally through a variety of distribution channels.
In the engines space, Komatsu Ltd., Volvo Construction Equipment (part of the Volvo Group AB), CNH Global N.V., Deere & Co., Hitachi Construction Machinery Co., J.C. Bamford Ltd., Doosan Infracore Co. Ltd., and LiuGong Construction Machinery N.A. LLC all have varying numbers of product lines that compete with Caterpillar products, and each has varying degrees of regional focus.
The Secret Of Its Success
Infrastructure investment is back, which is a key force behind Caterpillar’s ascension to the top ranking in this year’s Top 50. The company continued its strong performance in the first quarter of 2011 with sales up 57% and profits up more than 400%, the most profitable quarter in the company’s history. Most of the sales increase came from machinery and power systems, which were up 61%. Financial products were basically flat.
Within machinery and power systems, construction industries were up 71%; resource industries, up 84%; and power systems sales were up 51%. Most of the increase came from higher customer demand, but dealers did increase their inventories to meet future demand as well. There was also some improved pricing, as well as the acquisition of Electro-Motive Diesel (EMD), a maker of diesel-electric locomotives, contributing to the sales increase.
Sales improved in all four major geographic regions; North America, up 72%; Latin America, up 90%; Europe Africa/Middle East, up 67%; and Asia/Pacific, up 35%. While commercial construction in the U.S. is still very depressed and machinery sales are at about half the 2006 peak, it appears aging machines are starting to be replaced.
During the recession, Caterpillar’s customers cut machine purchases much more rapidly and deeply than the overall construction spending decline. As a result, their fleets both shrunk in size and got older. However, customers are beginning to buy enough machines now to slow or stop their fleets from continuing to degrade.
Mining activity and higher commodity prices, including coal, have encouraged investment in large mining equipment. Higher sales to oil and gas and electric power customers, along with the acquisition of EMD, drove the increase in power systems sales.
While the reasons for European growth mirror North America, basically replacement, growth in developing countries has been good and is driving investment in infrastructure and increased demand for commodities. Incremental margins were good in the construction industries, resource industries, and power systems segments. The company executed well in the quarter and controlled its costs.
Besides EMD in 2010, the company has announced the fairly large acquisitions of MWM Holding GmbH, a Mannheim, Germany-based manufacturer of combustion engines, and Bucyrus International, a company that designs, manufactures, and markets surface and underground mining equipment.
Caterpillar’s facilities in Japan were not damaged by the earthquake and tsunami, but many of its suppliers in Japan were. Caterpillar expects to experience sporadic production disruptions at many facilities around the world, which will have a negative impact on sales, factory efficiency, and costs like premium freight. While the situation is improving, the biggest impact will be felt in the second quarter of 2011./p>
Since the end of the first quarter of 2010, Caterpillar has added almost 21,000 people to its global workforce. About half are full-time employees, and about half are flexible workforce. In total, that represents an increase of over 19% in the total global workforce.
Cash flow has shown excellent improvement, while the machinery and power systems debt-to-equity ratio dropped from over 47% at year-end 2009 to 34.8% at year-end 2010, down to 30.4% at the end of the first quarter of 2011. That’s a drop of almost 4.5 points from year-end, which is an excellent improvement.
While there are some capacity constraints currently forecast for some products such as excavators and many of the company’s large mining products, Caterpillar continues to invest in capacity increases around the world to be prepared for 2012 and beyond, including substantial investment in the U.S. In fact, more than half of the $3 billion that it expects to spend on capital expenditures in 2011 is being invested in the U.S.
After a couple of very tough years, the continued high investment in infrastructure throughout developing countries and the continued replacement of aging machinery in Europe and the United States has Caterpillar well positioned to continue its rebound in growth. If commercial construction rebounds in North America and Europe as well, it will only make the company’s prospects even stronger.
TOP 50 EMPLOYERS
TOP 50 EMPLOYERS