BUSINESS

MAGNA STEPS ON THE BRAKE

FRANK STRONACH STRUGGLES TO SLASH THE DEBT AT HIS MULTIBILLIONDOLLAR AUTOPARTS EMPIRE

JOHN DALY October 16 1989
BUSINESS

MAGNA STEPS ON THE BRAKE

FRANK STRONACH STRUGGLES TO SLASH THE DEBT AT HIS MULTIBILLIONDOLLAR AUTOPARTS EMPIRE

JOHN DALY October 16 1989

MAGNA STEPS ON THE BRAKE

BUSINESS

FRANK STRONACH STRUGGLES TO SLASH THE DEBT AT HIS MULTIBILLIONDOLLAR AUTOPARTS EMPIRE

For Frank Stronach, it is the most critical test of his self-styled Fair Enterprise philosophy. Over the past three decades, the Austrian-born tool-and-die maker has relied on a formula that features profit sharing and a lucrative array of production incentives to build Markham, Ont. based Magna International Inc. into a $1.95billion multinational auto-parts giant. Last fall, as a Liberal candidate for Parliament, Stronach promoted Fair Enterprise as the only way to rescue the Canadian economy. But when he was rejected by the voters, he returned to Magna to find that even his own company needed rescuing as it struggled under a $1-

billion debt. To cut costs, the 57-year-old Stronach quickly laid off management staff and stripped away some Fair Enterprise benefits. And last week, Magna’s shares, which traded as high as $33.13 two years ago, sank to $9.25, their lowest level since just after the October 1987 stock market crash.

The slide appeared to reflect investors’ fears that, even with Stronach back in the chairman’s office and determined to slash Magna’s debt, the company still faces difficulties. Last week, after two years of declining earnings, Magna reported, for the year ending on July 31,1989, a profit of $33.6 million on revenues of $1.9 billion, up from $19.5 million on sales of $1.5 billion the year before. But the 1989 profit figure is deceptive. It includes a $63.8-million gain that Magna realized by selling real estate and other assets. Without that gain, Magna would have lost money on its manufacturing operations. And at the same time as it released the figures, Magna announced that it will cut the annual dividend on each of its shares in half, to six cents. While Stronach declined to be interviewed on the subject by Maclean’s, a company statement predicted that it will only break even for the first nine months of its 1990 operating year.

The profit squeeze follows five years of accelerating sales, during which Magna has spent more than $1 billion to refurbish and expand its network of 120 facilities across

North America. It has also promised to build an entire car in its facilities—a $200,000 highperformance sports car, adorned with buffalohide upholstery. But analysts say that the mushrooming debt, which was only $57.3 million in 1983, shows that Magna has spent too much and grown too quickly. Said Fred Schilling, an automotive analyst with the Montrealbased brokerage firm Nesbitt Thomson Deacon Inc.: “It is obvious they’ve overextended themselves.”

In fact, many of Magna’s plants are already operating at as little as half their capacity, as North America’s Big Three auto manufacturers—General Motors, Ford and Chrysler— prepare to cut their output even further this fall, in anticipation of the most severe sales slump since the early 1980s. Analysts predict that the industry’s, and Magna’s, fortunes will likely not improve again until 1991. In the meantime, the pressure on Stronach to reduce expenses is even more intense in the wake of the postponement of two criticial share issues. In August, Magna had announced that it planned to raise a combined total of $114 million in cash by spinning off and selling shares in two of its most profitable subsidiaries— Decoma International Inc., which makes decorative metal and plastic trim along with aluminum-alloy wheels, and Cosma International Inc., which manufactures stamped metal parts.

But on Sept. 18, Magna issued a terse oneparagraph statement that it was postponing the issue. Executives have declined to elaborate on the reasons for the withdrawal. Earlier, in May, in another cost-cutting move, the company began laying off an undisclosed number of management employees at its head office

and administrative employees in other divisions.

At the same time, many of the approximately 15,000 employees who remain were stripped of expensive benefits paid by the company. In a memo to Magna staff, president Manfred Gingl and vice-chairman James McAlpine said that the 1,200 cars leased by Magna for its employees are luxuries and that the company would no longer reimburse employees for the cost of driving to and from work. As well, they said that employees who want to keep the car phones in their vehicles would have to pay $1,000 for them and that Magna would only reimburse them for the cost of business calls.

While these cutbacks will not make a major dent in Magna’s debt, they are an unusual and symbolic stripping-away of Fair Enterprise. Stronach built Magna into Canada’s largest auto-parts manufacturer by attracting and maintaining a highly qualified, nonunionized workforce with his generous program of bonuses and incentives. Magna allocates 10 per cent of its annual profit to its employees, paying out seven per cent in company stock and three per cent in cash. In addition, Magna pays its plant managers three per cent of its pretax profits.

Fair Enterprise grew out of Stronach’s own experiences, rather than out of any enlightened theory he could have learned at school. He was born Franz Strohsack in 1932 in Weiz, Austria, also the birthplace of his colleague, Gingl. The only son of a communist factory worker, Stronach left school at 14 to begin an apprenticeship as a tool-and-die maker.

But postwar Austria offered too few oppor-

MAGNA’S ROCKY ROAD PROFITS ON A SKID

tunities for the ambitious Stronach. In 1954, with only $200 in cash and speaking little English, Stronach moved to Montreal. There, he briefly made a living collecting golf balls at a driving range, then moved to Kitchener, Ont., where he took a job washing dishes. After landing a toolmaking job in a local plant that produced aircraft parts, Stronach eventually scraped together enough money to move to Toronto and open his first company, Multimattic Investments Ltd., in 1957.

Over the following decade, he assembled a highly skilled team of fellow tradesmen and businessmen, many of them German and Austrian, and turned the company into a promising auto-parts manufacturing firm selling to the Big Three carmakers. In 1970, supported by a group of friends and associates, Stronach took over Magna Electronics Corp. Ltd., a Markham-based aerospace parts manufacturer and computer firm whose name became the centrepiece of his empire. By then, he already controlled four Toronto-area plants with annual sales of about $5 million. He had also married his childhood sweetheart, Frieda Sallmutter, the daughter of a Weiz furniture-maker. The couple raised two children on the thoroughbred horse farm where they live in Aurora, just 25 km north of Toronto.

During the 1970s and 1980s, Magna grew spectacularly. Between 1977 and 1988, its annual sales soared to $1.45 billion from $89.7 million. Magna now manufactures more than 5,000 different auto parts, ranging from steer-

ing wheels to electrical parts. The average new North American car now contains more than $100 worth of Magna parts, compared with $8 worth in 1977.

But despite his outspoken commitment to sharing profits and decision-making authority with his colleagues, Stronach still maintains a firm grip on 61.4 per cent of Magna’s voting shares. Still, last year he relinquished his re-

sponsibilities as chief executive to Gingl, then 39, and trimmed his distinctive long, grey locks in order to wage his costly bid for Parliament in former Conservative industry minister Sinclair Stevens’ riding north of Toronto.

Even before Stronach launched his unsuccessful foray into national politics, Magna’s profits had begun to slide. For the operating year ending July 31, 1988, they fell for the second successive year, to $19.5 million from a record $47.3 million in 1986. And now that the Big Three have begun to cut back on production in anticipation of a recession, the pressure on Magna to cut costs is intensifying.

At the same time, Stronach has said that, despite the debt, he plans to keep three of his costly pet projects. He said that the millions he has invested in Vista, the glossy, Torontobased lifestyle magazine he launched last year, will eventually show a return. An avid tennis player, Stronach also says that he will maintain his investment in Sports Products International Inc., which manufactures sports clothing and sponsors tennis tournaments.

Meanwhile, Magna is continuing to develop the macho sports car with the buffalo-hide interior—the Torrero. When Gingl unveiled a prototype of the four-wheel-drive car with a top speed of 240 km/h at an auto show in Detroit last February, he said that Magna hoped to begin producing the car in 1992. But so far, Magna, which spent $8 million to develop the prototype, has been unable to interest any of the Big Three automakers in sharing the cost of producing and selling it to the public. And unless Stronach can discover other ways of slashing costs and injecting more cash into Magna, he may be forced to discard his costly pet projects and further curtail the rewards that he and his employees have reaped from the Fair Enterprise system.

JOHN DALY

GREG W. TAYLOR