"Consolidation, Globalization, and Partnerships in the Heavy-Duty Industry"
Joe Magliochetti
President and CEO, Dana Corporation

Thanks, Rick, and good afternoon.

Earlier today someone asked, why talk about globalization, consolidation and the forming of partnerships in the heavy-duty industry? Times are good in North America, our factories are at capacity and life couldn’t get much better!

Well, this is true, but as we look forward some of the most significant growth opportunities for our industry will be offshore. If we are going to participate fully in these new opportunities, it is essential that we think more broadly.

I thought this might be an opportune time to share a few thoughts on this topic, and speculate on the effects that we are likely to see in this industry.

I’ll touch on four key areas. First, the strategic benefits of globalization, consolidation, and partnering; followed by some comments on effects of similar trends we have already seen in the automotive sector.

Then, I’ll mention some of the near-term opportunities and challenges we face. Finally, I’d like to look at some of the future growth issues for the heavy-truck industry.

When we talk about the trends of growth, consolidation, and partnering, I think we are just on the threshold of a very significant period of change in our industry.

And I believe this is a positive development. The heavy-duty industry that successfully emerges from this period of change will be healthier, more efficient and better able to serve a developing global market.

But I don’t think that we should move down this path simply for growth’s sake.

Rather, I would suggest looking at globalization, consolidation, and the formation of strategic partnerships in the context of capital efficiency, speed to market, and maximizing asset utilization.

Most analysts expect the CAGR for heavy-duty over-the-road vehicles to be about 5 percent worldwide over the next five years. But how and where will that growth occur?

Traditionally, European truck manufacturers have had more of a global perspective than North American manufacturers. South America, as an example, is still dominated by the European OEs.

So, for U.S. manufacturers, the developing regions in Eastern Europe and Asia could be the next big-growth opportunities.

The only question – and this is an important question – is "When will these markets take off?" Clearly the industry has had a couple of false starts in recent years.

So, as long as there is still room to grow in North America, why bother with all of the effort and risk of going international at all?

Well, I think most realize that as the large markets of North America and Western Europe continue to mature, their growth will inevitably slow.

After record build rates in 1999, North America is expected to retreat slightly this year, which will ease some of the pressure on capacity, and Europe will be essentially flat. These will still be strong markets in terms of gross numbers, but real market expansion will come elsewhere.

But in order to enter these developing markets with any degree of confidence, manufacturers will need to have a strategy that allows them to manufacture and produce locally.

In this way, tariffs, local content rules, and other trade barriers can be managed more effectively.

For Tier 1 multi-national suppliers like Dana, being global has been an absolute necessity.

We have been there for our customers literally anywhere in the world.

In areas like Brazil, Argentina and Venezuela we have been present for 30 and 40 years.

Fact is, because of our global presence, we are sometimes asked by our customers and partners to assist them with site selection and other aspects of doing business in a new country.

However, globalization is more than just gaining entry in new markets – although that should not be discounted.

It can also provide a counter-balancing effect against national and regional economic swings, just as product diversification helps to offset cyclical swings in certain market segments.

Often globalization can also create opportunities for consolidation.

Surely consolidation through mergers and acquisitions is becoming much more common in the heavy-duty industry. And I think we will see even more of this among vehicle producers.

Some speculate that we could see the 20 or so OEMs consolidating into 10, or even 8 global giants.

Obviously, consolidation is a very fast way to gain significant marketshare and add to a company’s core product offerings. In addition, consolidation through merger and acquisition can minimize unneeded capacity by better utilizing people and facilities that are already in place, serving the same customers, and often creating an opportunity for synergy savings as well.

However, mergers and acquisitions are not without some risk. It can be difficult to integrate different business cultures and management styles, and the acquiring company sometimes must accumulate significant debt as part of the deal. This is often times not the most efficient use of capital.

In the end, the strategy must be considered with the best interests of the shareholder in mind.

But there is also a third strategy for growth that has very few of the risks associated with M&A activity – the formation of strategic partnerships.

I don’t think that there has ever been a time in the history of this industry when so many companies have found so many creative ways to work together, to the mutual benefit of all involved.

One result of the ongoing consolidation is that the remaining suppliers are working more closely together.

Even historical competitors are finding creative ways to offer the best overall product solutions to their common OEM customers.

A real sea change partnership for us, and perhaps one of the most comprehensive arrangements in the industry, is our collaboration with Eaton Corporation to manufacture and market the Roadranger System of drivetrain components and services.

Both of our companies could see that as our OE customers were beginning to demand more than components, they would soon want systems and complete modules. They would also need continued support in their efforts to satisfy their customers.

As historic competitors, we could do this independently by spending huge sums of money and adding unnecessary capacity OR we could more creatively exceed our customers’ requirements by teaming up with another world-class manufacturer with complementary products and expertise.

Initially, our agreement with Eaton covered only heavy-duty components, including all field sales and service, as well as representation at the OE.

But this partnership has been so successful, it was expanded to include all heavy and medium-duty customers, as well as an international agreement. And we are truly committed for the long haul.

The motivation for the alliance was easy: make it simple for our customers by focusing on systems technology and exceeding the expectations of the ultimate consumer.

And we are using this relationship with Eaton as a model for another partnership we have formed with GKN, on the automotive side of the business.

Many suppliers have similar stories to tell. They’re all looking for ways to be more effective, and they’re not afraid to set aside long-standing protocols to do it. We believe that the formation of strategic partnerships is one of the most capital efficient ways that Dana can grow in support of our customers at this time.

The strategy allows us to offer more choices to our customers without the need for additional capacity. The result is better use of capital (both fixed and working capital) and more efficient asset utilization.

By effectively applying these strategies, as a supplier, we are able to grow in support of our customers, eliminate waste and better serve the shareholder.

So what does all of this mean for the heavy-duty industry?

Well, we might be able to draw some lessons from the automotive industry, where these strategies have been in place for quite a bit longer. There are two important trends worth noting here.

The first trend is that as the global OEMs have become more responsive to market issues and customer preferences, there has also been a much greater emphasis on speed to market.

Where once it took three years on average to get a new vehicle into production, some OEMs are now striving for 14 months from concept to delivery – and I think we have all heard about the "five-day car."

To achieve these goals, OEs have come to rely more and more on the expertise of their major suppliers.

This leads me to the other trend I would like to mention, the rise of modular manufacturing and systems integration.

A few years ago, modular manufacturing was not much more than a conceptual dream. Today it is the talk of the industry, as the entire supply chain is streamlined to increase speed and efficiency.

Once OEMs realized that it was to their advantage to have suppliers deliver fully dressed axles modules, wiper systems, dashboard modules, brake systems, and other items – each ready for just-in-time installation on the their assembly lines – it was just a matter of time before these practices became institutionalized.

This arrangement enabled OEMs to be more cost-effective and efficient, while simultaneously allowing them to take full advantage of the supplier’s specialized expertise in their respective component areas.

The benefits are clear.

For the OEs, there can be cost reductions and improved capital efficiency while shortening development times and lowering administrative expenses.

For the suppliers, the benefits include the opportunity to increase content, provide value-added services, and further develop systems capabilities to reduce complexity. It can be a win-win proposition (or as they say in the dot-com world, there’s a lot of traction here!)

Who knows how far this relationship will expand in the next few years?

One thing that is likely as the OEMs continue to reduce time-to-market by compressing the design and manufacturing processes, they will ask suppliers to assume an even larger role as systems integrators.

At Dana we have already taken on a number of non-traditional functions, such as warranty administration, invoice consolidation, supply-chain management, and logistics.

So, what can we expect, as an industry, in the next year? In addition to the transformation of our industry to a more global orientation, there are other significant issues that will impact us in the very near term.

As I mentioned earlier, the CAGR for heavy duty is expected to be about 5 percent worldwide over the next five years. North American Class-8 builds last year were off the scale – better than 334,000.

This market may be down almost 14 percent this year to 288,000 builds, but let’s not panic just yet. It’s still going to be the second best year ever.

European builds will be up 2 percent to 373,000, and South America will be up a little better than 5 percent to about 40,000 builds.

Asia will be up significantly. We can expect total truck builds (med. and heavy) to increase more than 30 percent over 1999 to about 545,000 (vs. 490,000 in N.A.) this year. Of course, the Asian market is dominated by local players, but we would be wise to watch for opportunities there.

Closer to home, we need to keep a sharp eye on our friends in Washington. There are a number of proposals in the works that could impact North American markets in the near term. As we meet today, 13 states face mandatory EPA-imposed pollution control measures beginning in 2001.

In addition, new "Tier 2" emission restrictions that the President unveiled in December, could have a very serious impact beginning with model-year 2004.

And we still have not completely solved the October 2002 emissions standards that will impact fuel, cooling, after-treatment, engines, and perhaps even cab design.

Since 1970, there have been only three recessions in the heavy-truck industry. All have been prompted by mandates from Washington or concerns about fuel supplies.

Thus, it’s terribly important that we leverage the strength of industry groups like MEMA to make sure that our input is heard, and that the interests of our employees and investors are known and understood by our elected representatives.

Looking further over the horizon, our industry has to plan and prepare for continued global growth and new technologies to speed our success.

The first thing we might all do in our planning process is to accept that there is a clear imperative for growth. Global manufacturers are going to have increased advantages over smaller players as we move forward – economies of scale will enable further market penetration.

I believe that there are three important factors to consider for the future of the heavy industry: the effects of e-commerce, an increased emphasis on technology and safety, and the eventual emergence of the developing world.

Probably every company represented here today uses the Internet for something other than e-mail. One of the more useful tools we have developed within Dana is an extranet connection with our customers and suppliers.

This connection enables us – and our customers – to track shipments, inventories, and orders (in real time) 24 hours a day using the Internet.

However, it will be this thing called e-commerce that will have the greatest impact on our business, and on all business in coming years. I believe that most of these developments will have to do with increasing the speed and efficiencies of business transactions.

E-commerce, as it applies to business-to-business transactions, is growing at an extraordinary pace. But e-commerce per se is not totally new.

We’ve all been using computers to generate and fill orders for years. The real difference today is that we can leverage the power of the Internet to achieve greater connectivity and enhance our efficiency.

In 1999, business-to-business transactions over the Internet accounted for $109 billion, by 2003 that figure will be closer to $1.7 trillion. And the fastest growing portion of that amount is e-purchasing.

At Dana, we recently announced an initiative to develop our own unique global e-procurement system. This new web-enabled system will allow us to better aggregate our purchases, improve logistics and leverage our annual worldwide purchases more efficiently.

For example, a normal transaction might cost in the neighborhood of $100 to complete once you figure in paperwork and other time-consuming activities.

Compare that with a transaction made electronically that might cost less than $10 to complete, and you can see how valuable this initiative will be. In addition to significantly reduced transaction expenses, we anticipate other benefits.

These include better relationships with preferred suppliers, consolidated information on supplier performance, and reduced inventory requirements.

Dana is one of the first OEM suppliers to undertake this e-commerce initiative. And I believe our new global e-procurement system is simply the first leg of a continuing journey.

It’s only a matter of time until we’re all dot-com companies – doing business over the web. The only minor differences being that, as manufacturers, we actually make things and strive for profits.

Use of computer-based technology, as well as the Internet, are increasing at speeds never before seen in industry. And everyone is trying to get on board before they are left in the dust.

Today, more than half of U.S. households have access to the world wide web, and Internet traffic doubles about every 100 days. That’s better than three times a year. (Ford example)

I think this is great news for the trucking industry - because products bought on line are delivered on trucks.

As a matter of fact, the BBC – just about two weeks ago – reported that there are now more than a billion unique web pages on the net.

They also reported that 4,000 of these are Pokemon sites.

Technology will also play a major role in the development of safer trucks, busses, and other heavy-duty vehicles. The heavy truck population in this country has doubled in the last decade, with no significant increase in highways.

We need safer trucks, and with the current driver shortage, we need trucks that are easier to drive and even more user friendly. Increasingly, we are going to be turning to technology to provide solutions.

Today, we have completely intelligent on-board diagnostic systems for everything from fuel control and environmental control, to the monitoring of the most significant performance characteristics of our vehicles.

Soon suspension and braking systems will be integrated to provide safer, smoother, and easier-to-drive vehicles. Sensing of tire pressures, pavement conditions, loads, weather, horsepower, etc. will all be harmonized to bring further safety improvements to the highway.

Finally, I believe that we don’t have to look very far over the horizon to plan for the emergence of the developing world.

Jeff Rosenweig, who will be speaking in a moment, makes a tremendously important point in his recent book, Winning the Global Game.

He cites the fact that by the year 2030, most U.S. baby boomers will be retired, and frankly, we don’t know how this will affect the U.S. economy.

But with a steadily aging population base in North America, businesses had better be engaged in nations with young and growing populations – simply to fill labor needs.

Regional economies will continue to develop at the expense of national boundaries. These regional economies will continue to be anchored by the familiar economic powers: Japan, Germany, and the U.S.

But we could also see the emergence of some very interesting regional economies based on the sleeping population giants of China, India, and Indonesia.

While I don’t believe we are quite to the point where we should be building a bunch of new factories and distribution centers in these regions, they may very well emerge as the most important growth markets in the next 25 years.

Let me conclude by saying that globalization, consolidation, and the formation of creative strategic partnerships are initiatives that are not going to go away.

On the contrary, these strategies will continue to become even more important in the heavy-duty industry.

I say this based on observations within the automotive industry, which may only be a few steps further down this path. We have already seen the positive results of these strategies within the automotive sector including improved quality, speed to market and customer satisfaction.

Automotive OEMs, and by necessity their suppliers, have become more nimble and efficient in response to the ultimate consumer. New models and features are coming out faster than ever before as the industry moves from a traditional push system to a customer "pull" system.

Up until very recently, it has been essentially a "push" system. The vehicle producers tried to anticipate the preferred features, and customers typically settled for what was available.

But today’s customer wants more choices.

Car buyers are better informed, and they are beginning to exert more influence. To their credit, many OEMs are responding proactively.

And while this new "pull" concept presents a number of challenges for suppliers, including even shorter cycle times, smaller lot sizes, tighter standards, and additional features - these challenges also provide opportunities for suppliers to provide more content and to create added value.

Again, cost and speed to market require an increased reliance on suppliers to meet customer expectations.

Automotive OEMs are focusing more on product design and differentiation, improved delivery systems, and closer relationships with the vehicle owner. They are leveraging the skills and abilities within the supply base – and achieving enhanced capital efficiency.

I believe we can expect to see the same developments in the heavy-duty industry.

In the very near future, heavy-duty OEMs will focus more on product design, which will be developed using more computer simulations to speed the development cycle. Electronic survey data and feedback reports will track customers’ wants and needs.

Responsibility for modules and assembly will be shifted further onto suppliers.

And let’s not forget service. A vehicle breakdown is money standing still. There will also be a continuing focus on reliability and service after the sale.

For the customer this will mean better vehicles more competitively priced.

And for our industry, I truly believe the opportunities ahead can be a win-win situation for the vehicle producers, the suppliers, and the ultimate consumers.

Thank you