MAGNA IN OVERDRIVE
NO CANADIAN HAS PROFITED FROM CONTRACTING OUT AS MUCH AS STRONACH
Frank Stronach is pointing the toes of his black reptilian cowboy boots in the air, heeling his way through the muck of the hoedown he holds every year near his Beechwood Farm, north of Toronto. He is dressed all in black, with little faux artillery shells running around the band of his cowboy hat. He has pushed the sleeves of his jacket to elbow height, giving him the passé look of the Big Steel man of the Seventies, someone who might be caught dancing under a disco ball. Which Stronach used to do.
Tonight, Stronach is trying to be very Nineties. He has paid for Cape Breton fiddler Ashley Maclsaac to entertain a crowd of 4,000-plus, crammed under tents while the outreaches of Hurricane Fran turn the grounds outside into a Woodstock for cars.
The tent cover does not help much, as one woman, shod in sandals—”1 can see the bar but I can’t get to it”— gets ankled by the mud.
Two guys in plaid shirts are merrily doing the macarena to Boogie Woogie Choo-ChooTrain.
When Maclsaac appears, looking very Joycean but for that black knitted tuque he has pulled down over his head, the Stronachs, Elfriede and Frank, move to the dance floor. It can be reported that Elfriede steps a fine Irish jig, cutting the figure of a ponytailed wood fairy. Alas, her other half, his face obliviously beaming the selfsatisfied air of corporate barony, is awkwardly jackhammering his boots into the plywood.
Six years ago, it was Stronach’s company, Magna International Inc., that was being ground to dust, beaten by a billion-dollar debt-load and the unbearable weight of interest charges. The conventional wisdom then was that Magna was going down. But there has never been anything conventional about Stronach, and darned if he didn’t keep his auto parts company from the clutches of those nasty bankers. Back from the brink, he then went on to build the largest auto-parts supplier in the country, one of the top 10 on the continent, with 100 manufacturing facilities spread hither and yon,
25,000 employees, and plans now, through European expansion, for international auto-parts hegemony.
The game, he says, is nothing less than “global economic warfare.” £
None know this so well as the a country’s unionized autoworkers, I who have ridden with the Big
Three carmakers as each has at| tempted to keep pace with a hotly Ë
competitive global marketplace. Seeking “cost containment” and “efficiencies,” the Big Three, led by Chrysler Corp., have outsourced huge chunks of work to smaller, mostly non-unionized, suppliers. Last week, the Canadian Auto Workers union won major concessions in contract negotiations with Chrysler Canada Corp., a template for the union’s talks with Ford Motor Co. of Canada Ltd. and the far more troubled General Motors of Canada Ltd. Starting this week, the CAW will again try to make the case for work ownership and seek to stanch the flow of outsourcing.
For every loser, there is a winner, and while myriad companies have benefited from the outsourcing trend, none in this country has been as successful as Magna, winning business that will take it to $6 billion in revenues this year, putting it in the company of Hudson’s Bay Co., which has been selling blankets
for 326 years. And smartly so. From its modest beginnings, back when a tour of a north of Toronto Magna plant would show smocked ladies inspecting door latches, the company has aggressively pursued advances in engineering and design that in some cases have made it an industry leader. It used to be that suppliers like Magna simply manufactured parts to an automaker’s specifications. Later, the design moved in-house, with Magna supplying parts to its own blueprint. Then came sub-assembly. Today,
FIT FOR A KING Canada’s highest-paid executives (total compensation, including bonuses, for the fiscal year ending in 1995) 1. FRANK STRONACH, chairman, Magna International Inc., Markham, Ont. $47.2 million 2. GERALD PENCER, chairman and CEO, Cott Corp., Laval, Que. $13 million 3. DAVID WALSH, president and CEO, Bre-X Minerals Ltd., Calgary $10 million 4. PAUL DESMARAIS SR.,' chairman and CEO, Power Corp., Montreal $5.7 million 5. STEPHEN HUDSON, president and CEO, Newcourt Credit Group Inc., Toronto $4.2 million ♦resigned on May 10, 1996
Magna supplies not just pieces of a door but the entire component—consisting of an inner panel, an outer panel, a lock, a handle, a piece of glass and a mirror—which it feeds on a just-in-time basis to the car companies. From the seats of the hugely successful Chrysler minivan, to the lead it has grabbed in hydroforming technology—watermoulded auto parts that reduce car weight and hence increase fuel efficiency—Magna has been there. And despite recent union concessions, the evolution of the relationship between auto-parts manufacturers and the almighty car companies is far from over. So far this year, Magna has spent $330 million on acquisitions, and has another billion or so in the bank to help finance the continued spending spree. “It’s a big, big, big company,” says Stronach. “People have no idea how big Magna is. It’s big.”
Stronach believes his company has been the single largest private-sector creator of jobs in the country in the past decade. And he argues that the “compensation package” received by those workers is industry-competitive. According to the CAW, wages for auto-parts workers in union shops range from approximately $12 to $24 an hour; at non-unionized plants the range is roughly $8 to $18. Magna will not illuminate precisely what it pays its workers. “It’s a very sensitive issue,” says an executive there. “Behind the structure of labor rates lies outsourcing.” Then he adds: “The unions don’t understand the unique culture we’ve got.” Part of that is profit sharing: 10 per cent of pretax earnings goes to employees through a deferred stock plan (seven per cent) and cash (three per cent). Last year, a 12-year Magna employee making $35,000 received $1,364 in cash, $3,183 in shares. CAW president Buzz Hargrove dismisses the “paternalism” of the Magna culture, its “cheap labor,” the “gimmickry” of its compensation package. But he does concede that in the overall scheme of things, Magna is at the top of the heap for a non-unionized company. “A job today is a pretty damn good thing in the auto industry,” he says.
As for Stronach himself, he is frequently one of the most richly compensated executives in the country—more than $47 million last year. (Think of the taxes, says Stronach.) Thirty-five years ago, when he and Elfriede arrived in Toronto from smalltown Austria, Stronach had nothing but his tool-and-die skills. Now, he owns a castle outside Vienna, from which he leads the European advance. (“I needed a very large piece of land. It just happened there was a castle on it.”) In Kentucky, he raises thoroughbred race horses near a town called Versailles. (In “Versales,” as they say, a bunch of Arab sheiks have a spectacular thoroughbred farm and Queen Elizabeth still boards a few somewhere in the county.) He raises them in Ontario, too—his total horse head count is close to 500, 120 of them race horses. He recently bought
Friendly Lover, an eight-year-old colt, just so he could enter another race at the Breeder’s Cup at Woodbine Racetrack in Toronto in late October. Back near Beechwood, workers are ploddingly constructing the new multimillion-dollar Magna headquarters, complete with reflecting pool, a corporate Versailles to mirror Stronach’s Ozymandian ambition.
Frank Stronach has his red felt marker out. This is the moment when he steams through his rote presentation of the “fair enterprise” system. It does not matter how many times he has gone through it, nor that he has gone through it with the same interviewer. He will go through it again. He will draw his pyramids and circles. And he will autograph it.
The short version: that socialist systems stifle individualism; that totalitarianism benefits the few; that the free enterprise system “is from time to time self-destroying, with the lowest down suffering the most” And so there must be “fair enterprise,” a universal charter of rights; a fairer distribution of wealth; parliamentary reform; a “jury” to replace the Senate that would be voted in by householders.
Corporate titans have their schtick, just like politicians, movie stars and management consultants.
Stronach innately understands this. But while he has always had the vision thing, he missed the bit about keeping it focused. “Magna’s a culture,” he says, then,
“Magna’s a bank. More and more a bank specializing in three areas: the human capital, automotive technologies and the data bank. Three areas. Ya.”
Mixed with his failed attempt in politics—he failed to win York/Simcoe for the Liberals in 1988—and his past vanity exercises, including Rooney’s bar in Toronto and the defunct Vista, a glossy pro-business magazine, Stronach could be dismissed, gently, as a flake. Yet in November, the likes of former Ontario premier Bob Rae, Vancouver futurist Frank Ogden and CanWest Global TV news anchor Peter Kent will participate in Stronach’s As Prime Minister, I Would. . . . symposium in Toronto (satirist Mary Walsh, says a Magna representative, “bailed at the last minute.”) They have all penned contributions on their take on the state of the nation. How does Stronach do it?
Hugh Segal, former chief of staff to Brian Mulroney who briefly advised to Stronach’s Fair Enterprise Institute, defends the autodidactic entrepreneur. “If Frank were the kind of person for whom conventional orthodoxy mattered, he’d probably still be running a one-man machine shop on Dupont,” he says, referring to the mid-town Toronto tool-and-die shop Stronach started in the mid-1950s. Stronach worries not, says Segal, about the “forces of conformity. He doesn’t seem to need Establishment opprobrium.”
Well, who does? But that’s what Stronach, the son of a staunch Communist, a poor boy who recalls too many suppers of cornmeal as a youth, has sometimes drawn. He knows, he says, he has been cast as a “smart-alec” and “obnoxious.” “It irks a lot of people, you know,” he says. ‘Very few people can build things.” There were, he adds, “vultures” circling in 1990, ready to pick the Magna carcass if only Stronach would fail. To Stronach, the company’s lead banker,
the Bank of Nova Scotia, felt like one of them. Scotiabank wanted to move Stronach out, and move a new chairman and CEO in. The bank rather liked the idea of giving the chair to Earl Joudrie, the turn-around artiste who had helped salvage Algoma Steel. That might have made the creditors happy, says a Magna director of the time, “but Magna as we know it today would not exist.”
Instead, Stronach hacked and slashed and found an anti-debt religion. Don Walker was there for the company’s dreadful days, when it had grown, financially, wildly undisciplined. Walker today is Magna’s chief executive officer, and also happens to be Stronach’s son-in-law, though he has since separated from Stronach’s daughter, Belinda. The erstwhile marriage made Bay Street skeptical, to put it mildly, of Walker’s appointment to the top job last year. The 40year-old engineer has since drawn plaudits for his car smarts, and his straight-ahead, straight-talking style, which is most welcome,
particularly when Stronach starts to sound astrally removed from, to use a fashionable business term, Magna’s core competencies.
As Walker sees it, there is a shakeout looming in the car business. There are roughly 50 car companies worldwide today, and while he bets there will always be a GM, a Ford and a Chrysler, he expects consumers will one day think in terms of a global “big seven” as opposed to a North American Big Three.
And as the car companies jockey for global positioning, they are moving increasingly towards single-source supply for their far-flung operations, which explains Magna’s acquisitive nature. Just as important, the car companies are partnering with companies like Magna on bigger and bigger pieces of the production line. To that end, says Walker, Magna can now assume the role of systems integration, taking exterior and interior projects from clay models, through design and engineering, through prototype and ultimately
production. Says Stronach: “We are a virtual car company except we don’t make cars.” Well, not quite. Greg Misztela, director of research at Toronto brokerage Griffiths McBurney & Partners, believes the automakers will forever want to control the power train—the engine and transmission—as well as the overall look of the car and the distribution. But all else can, and is, being ceded to outsiders.
In January, when Ford unveils its Lincoln Navigator sport-utility vehicle at the Detroit auto show, its entire interior, more than $5,000 worth of content, will have been “program managed” by Magna. Misztela sees this as an interesting experiment. “Ford is taking a lot of risk,” he says. But the risk is being taken in small doses—the Navigator is a small-volume project expected to run under 80,000 units a year. If the program is a success, says Misztela, this could be the first step towards other platforms with higher volumes.
In theory, says Walker, “if you counted everything we make, from seats, to body structure,
mirrors, interior panels, transmissions, bumper systems and air bags, we could get our content to $6,000 on a $25,000 car.” Walker is not suggesting that’s going to happen tomorrow. Part of the evolution in the industry will see car companies creating fewer platforms, with, say, half a dozen cars being spawned from a single chassis.
That sounds positive for companies like Magna, but also means that bidding the right platform will become
increasingly crucial. _ And that means guessing right on what the customer will want to buy three years hence. “Someone who says trucks are important right now, well that’s kind of trite,” says Dennis Bausch, the company’s executive vice-president of marketing and planning. “Can some-
one tell me what’s going to be the hot segment in 2002?” Magna bet right, big time, on the minivan project. Twenty per cent of Magna’s revenues last year came from the Chrysler group of minivans, with the company accounting for $1,400 in content in each and every vehicle. Chrysler’s minivans were so successful that the Windsor plant went to a third shift. One could make the case that this time, outsourcing worked to the benefit of the CAW workers. “Part of the outsourcing was aimed at improving the quality of the components that made the minivan so successful,” says CAW economist Jim Stanford. “That guaranteed our jobs. Clearly, you have to be stupid to argue with that.”
On the other hand, not all outsourcing contracts have worked well for Magna. The company blundered in the late-1980s with the Chrysler Eagle Premier, which was projected to sell 200,000 units but instead hit a per annum high of 60,000. Bausch does not like the word “blunder.” He prefers “less than acceptable outcome,” and blames the failure on the “French flavor thing,” referring to the car’s European cosmetics and “unusual shifter.”
So Bausch, who as a teen fell for a 1959 Ford Fairlane with a convertible hardtop that folded into the trunk, scrutinizes consumer predilections. He thinks the sport-utility market is likely to plateau, particularly in the high end—“How big can you go, and how luxurious can you go, before someone says, ‘Stop?’ ” He is not much into
THE PARTS THAT FRANK MAKES
• Magna manufactures all of the major interior and exterior metallic body components
• Magna will supply seats, seat tracks, front and rear bumpers
*on sale in early 1997
• Chrysler minivans include a wide array of Magna parts, including seats with selftensioning belts, integrated child-safety seats, front and rear plastic bumper covers
sports cars, given the way sales tend to fall off a cliff after their initial launch. He tries to figure what the older crowd will fancy. “You have to be careful. I don’t think getting the 55-to-dead market excited is as lucrative as getting the other end excited.” He thinks navigation systems—“You want to go to Fourth and Sheboygen, this tells you the best way to do that”—will be “in 30 to 40 per cent of vehicles, for sure.” He says Magna, with a car company he will not name, tried to design a hybrid station wagon, with a taller back end. They called it the Martha Stewart Option, for it had enough in-the-rear-room to do, yes, crafts. The automaker killed the project dead. On the other hand, Magna has played a lead role in engineering the so-called Swatch micro-car, a German-Swiss co-venture that comes to market next year.
Such are the small, energetic strokes of Frank Stronach’s empire. He seems content now to allow the North American operations to run relatively free of his influence, though the family trust retains a hammerlock on the company’s shares with 64
per cent control. What matters most, Stronach suggests, is that what he has built here so far is imbued with his personally inspired corporate culture.
A cornerstone of that culture is Stronach’s anti-union ideology. “I’ve always said Frank Stronach or Magna will never participate to dismantle labor organizations,” says Stronach. The CAW argues otherwise. Through the Magna empire, just one small plant, a stamping operation in St. Catharines, Ont., that employs 63 workers, has been certified by the CAW. Last January, a decertification petition was passed through the plant. The CAW still charges that Magna management was behind the drive. In
April, the CAW barely hung in by a vote of 31 to 29. Half a dozen campaigns have been carried out by the CAW in other Magna plants. None has been successful. In the spring of 1992, as the autoworkers tried to organize the company’s Integram plant in Windsor, Ont., where all those minivan seats are made, Stronach personally reminded employees in a letter that “no union and no government” can guarantee jobs. “Your best guaranty of job security is to build a quality product at a lower price so that you remain competitive globally. . . . Until the CAW demonstrates that it will abandon adversarial management-employees relations, I would advise you, in your interests, to vote NO UNION.”
The Integram employees strongly voted exactly that in May, 1992. The CAW has not, of course, given up. “I think one day we will organize Magna,” says Maureen Kirincic, national director of organizing for the CAW. ‘We will see Magna in our union under a master agreement.” This seems unlikely. “Relatively speaking, they treat employees better than most non-union employers,” says Jim Stanford. “That’s one of the reasons it has been hard to crack Magna.” Stronach knows it. He says he is going to triple the size of his company, to $20 billion in revenues. That will mean more jobs. More wealth creation. And Stronach promises to share. “The success of life can only be measured by the degree of happiness you reach. But let me tell you, it’s a lot easier to be happy if you got some monies.” □