Hinrich Mählmann, Otto Fuchs KG
Release Date: 2009-02-24
Certainly this last year was an interesting one to experience as the first in your tenure as CEO; what were some of the main highlights at Otto Fuchs one year out?Otto Fuchs is a diversified €3 billion company across different fields. In construction, the company owns Schüco, which is the largest producer of profiles for windows, doors, facade systems, and so on. In that area, Otto Fuchs moved significantly into solar and photovoltaics recently, and will see revenues of €750 million in that field in 2009. This is one major step of the company, and will be an interesting field not only in solar parks, facades and roofs, but also because the company has begun producing its own thin-film photovoltaic cells, with production in this regard actually starting at the beginning of 2009 in a factory that was completed at the end of 2008. On the automotive side, another major area that is of course suffering the most right now, Otto Fuchs experienced a boom and is actually doing parts for suspension systems, aluminium profiles and crash profiles for new models with so-called hybrid aluminium chassis, and is well-known for rims and wheels, such as the Fuchswheel which started with the Porsche 911 and since then has led to being the major player worldwide to do forged wheels, as opposed to cast wheels. There, Otto Fuchs has increased capacity and market share of forged wheels in general, and whilst there are now some setbacks, this is normal in any cyclical market. Otto Fuchs is also present in the industry sector, which comprises all sorts of activities, but one particularly interesting activity that has brought huge success has been turbochargers. Otto Fuchs produces all kinds of components like impeller wheels for turbochargers, especially for the big ones, and is also now starting to be in the small ones, which is another huge market everyone is jumping on, although the focus remains in big diesel engines for MTU, MAN, ABB, and so forth. Otto Fuchs started in the aircraft market long ago, and before the second world war was one of the first suppliers of aluminium parts for the business. At the end of the 1950s, Otto Fuchs resurrected this production and has increased know-how and the number of applications of extrusion and forging capabilities. When it comes to extrusions, the aircraft business is the strongest in turnover increases, and in the last years the business has experienced constant and heavy growth on that front. This is one field where the company has invested and will continue to invest in the present climate. For example, three years ago Otto Fuchs started building its own ring rolling facilities, and there’s a big construction site for a new titanium hand-forging press, altogether representing an investment of €60 million alone into the aircraft sector facilities. Otto Fuchs has a 100% subsidiary in Weber Metals in the United States, and there represents a further €20 million investment in another hand-forging facility for titanium. There is a trend toward titanium, because the more there is carbon fibre fuselage, the more titanium is needed. As a result, the aluminium business goes not away completely, and thus the company is not so much hit as Alcoa and others who provide the big parts of the fuselage. Otto Fuchs has never been into sheet and plate, but more into forgings and extrusions which are special extrusions.
Speaking to advancements in metals and other advanced materials, what are the most exciting developments on the research and technology side of Otto Fuchs?
Otto Fuchs is doing its own alloys here, and unlike many competitors, we have our own cast-house on-site. We don’t of course produce the aluminia, but all the alloys are done here, except titanium and nickel. There are more than 100 aluminium and titanium alloys only for aircraft, and broadly speaking, the most interesting or exciting tend to be those created which maintain the highest strength to weight ratios to get the very most out of the material in question.
Otto Fuchs prides itself on being a long-term partner, integrated into your clients’ innovation process. Is there any case study in particular you’d like to highlight?
Otto Fuchs gets customer designs, they show us the ready part, and we tell them and offer them how to make it the lightest and cheapest possible. Otto Fuchs is not an innovator as such in design of landing gears or whatsoever, but innovates in alloys. What is interesting is that Otto Fuchs has entered a complete new field which is the engines, and we have invested in a ring rolling mill, and also in what is called cold loop, the machining of fan disks and rotating parts. That was a major step, and Otto Fuchs participates in many such programs, starting with the CFM 56 which by volume the biggest market. The company is also in gear turbofan development, and although doesn’t do basic design, does offer services and parts to ensure optimum performance in those engines.
You made your first trip to China in the early 1980s, a country which has changed enormously since that time. Although it is certainly driving global commodity markets, what more specifically does China mean to you and Otto Fuchs?
China is a challenge which Otto Fuchs has not started to deal with as far as capital investment is concerned. The company is family-owned, and as such is very careful, and has been that way for a long time. The family and I as General Partner look carefully before entering markets. For example, it was a major step to enter the US in 1978, and this has been very successful, but the US is very different than a country like China. Otto Fuchs went 15 years ago to Hungary and built a plant there together with partners in the US for wheels. That was another major step, and the next was building a plant in South Africa to manufacture automobile chassis components, especially for Mercedes-Benz. China is of course in the picture because many of Otto Fuchs’ customers are there in the car industry, and now starting in the aviation industry. We are in China with the Schüco subsidiary, although not on a broad scale, and despite fair levels of general activity in Southeast Asia, the company has not yet decided to follow those OEMs because we need to be guaranteed a certain volume to enter a market. It doesn’t make sense to start with a small number of links, when the clear advantage goes to high volumes and achieving much better economies of scale. China is not cheap anymore, and Otto Fuchs does not manufacture parts that are suitable for labour from migrating workers, which are still cheap. People with a lot of skills have to be trained in Europe, Germany, or the US, and I personally had experience with my former company that had several plants in China and went through the process in Shanghai. For engineers, salaries were not quite the same as Germany, but it’s getting close to get good people. The problem is that Asian locals are trained in the West, and when they return home they suddenly become very interesting for other companies who can easily entice certain workers to move. In my experience, it’s important to achieve certain volumes to successfully retain personnel, and it’s as important to not just enter the market with thoughts of simply having a cheaper source. It’s not cheap anymore. If you want cheap, head for Vietnam or other such countries, but not China. Some companies have tried to beat the crowd by going west to areas like Nanjing, but wages there are almost the same as in Shanghai area for skilled labour. If the company goes to China, it will not to be a source for OEMs from a cheaper base as opposed to Germany or South Africa. Incidentally, the latter is probably cheaper to produce in than China.
Ultimately, the driving factor behind opening new facilities is because the OEMs are manufacturing there and want local sourcing, which requires a certain volume before Otto Fuchs commits. Because of the company’s experience, I don’t suspect it’ll be a problem once the decision has been made, but it has to make sense, and we are not the kind to follow trends for the sake of following. There is a growing aircraft industry which looks for local content, and that makes sense. As you look at the aircraft business, you see that parts go around the world before being finished, for example some fan disks are already produced in Germany and then sent to China to be machined
You mention the particular case of the company’s structure and ownership; how does this influence your management style?
Otto Fuchs will be 100 years old next year, and wants to reach 200 and beyond. We’re not chickens. It’s not that we’re afraid of everything, but when we do things it’s on a very solid basis, and not just because it’s the fashion. We don’t have any advisory or consultancy companies. We know what we can do, and know our resources, and won’t overstretch them. Taking China as an example, we’re not just following the fashion, but it has to be a real good plan, with strong short-term return on investment, not because we don’t think long-term, but because it’s difficult to know what will happen in 8 or 10 years. The management style is to not impress anybody and try to be a hidden champion. Otto Fuchs doesn’t do many marketing efforts to impress people; we only have to impress our customers. Nowadays, this style of doing business is even more successful because with all the companies around us in Chapter 11 or not far off, customers are more than ever looking to deal with major suppliers they will not be in danger of losing in the long-term. As a result, Otto Fuchs’ rating is almost always number one, especially in the car industry when OEMs have problems balancing their strategy with squeezing out suppliers on pricing and on the other hand having a department which lends money to suppliers to let them survive, which is not a desirable long-term solution.
What does it mean to be a hidden champion? On one hand, you can be close to your customers and responsive to them, but then on the other hand there is the hesitancy with which you approach big business decisions. How do you balance the need for responsiveness and closeness with the pragmatism and ensuring there is a safe bet?
It’s not hesitancy, but customers have to give us or show us the opportunity. For example, the decision of Otto Fuchs going to South Africa was based on a long term exclusive contract with one of our customers for a certain number of parts on a worldwide basis, and at that point we decided the choice made sense. You can’t be everywhere, and Otto Fuchs is not in the business to just start something for a little bit of money. Every decision represents a heavy investment. The company has a 30,000 tonne press in Germany, and a 35,000 tonne press in the US, and if we want to do the same parts in China, then a comparable investment is necessary, representing an investment in the three digit millions, which is not to be taken lightly.
Otto Fuchs has had joint ventures in Hungary and with the FOXTEC program in South Africa. How do you see such opportunities as models for an eventual Chinese entry strategy?
The decision for the joint venture in Hungary is long past, but the point there is that Otto Fuchs was the one who knew best how to do forged wheels, and didn’t have the same know-how on the cast wheels side, so there was a natural fit with Superior as one of the biggest cast-wheel manufacturers in North America. In South Africa, Otto Fuchs has 70% and the local partner 30%, and the major reason for that is because of local rules such as Black Economic Empowerment, and because Otto Fuchs is a manufacturer, not a politician. If the company decides to enter China, it will not be as a joint venture. I went to China 25 years ago when the first license agreements were made. There are some obvious reasons to go with a 100%-owned venture where a lot of know-how is involved.
You mention the importance of having a strong long-term vision even if you’re concerned with short term returns. What is your long-term vision for the company’s involvement in China and the company as a whole?
My vision is to enter with a smaller operation dealing in less complex components, and then go from there. Otto Fuchs would not likely start in the aircraft sector, but in the automotive sector, producing forged links or the like, where there is limited investment. Even though I know China well, the whole organization has to deal with it and do business in China, and the best way to learn in this way is not by building a huge plant from scratch.
How is that knowledge going to trickle down to the rest of the organization?
It would involve going to China and having a constant exchange between the mother company and the daughter company, having people there on a longer-term basis, including expats for training purposes as well as locals. I always believe in a good mix. I would not advise anyone to have a 100% Chinese company where everybody is Chinese. Some people say if you’re not Chinese you don’t know how to do things in China. In sales, probably yes, but financials are financials and technology is technology.
The most challenging aspect will be to remain open while still keeping the IP to ourselves.
So you would start with a small automotive investment and expand to other divisions?
Yes, and always providing that there is a big enough and secure market where it makes sense to invest and go further, and aircraft parts and components definitely have that potential. There are already suppliers in China that manufacture such parts as subcontractors, but Otto Fuchs would probably not buy shares in one of those companies or do JVs, preferring instead to go the wholly-owned route.
What is your personal ambition for 2009?
To use the crisis to increase market share, and there’s a good chance that’s happening right now. Stability is one of the key factors in our customers’ business decisions. We are not only investing in the aircraft sector, and therefore we think that we have always been the ones who were and are considered to have a high quality and technology standard to be reliable on deliveries and across sectors. We are also considered to be among the most expensive and least flexible in terms of price, which doesn’t hurt as in these days, OEMs aren’t necessarily taking the cheapest option, which may have been the rule in earlier times.
What is your final message to readers of IBD as Germany as a whole and Otto Fuchs more precisely?
Knowing China well, I can say that China and Germany have had over the last 25 years a relationship where we have good business and China learns a lot from us, but also we learn from them. This partnership will continue, and of course China gets more and more mature and they enter markets as competitors, although we did the same thing.
When China entered the WTO, IP protection was part of the deal. As a company, we have to cope with that problem, but it can’t prevent us from doing business with China and in China.
| Company: | Otto Fuchs KG |
| Position: | CEO and Managing Director |
| Country: | Germany |