With our recent visit to the tier 1 automotive supplier Federal Mogul, I decided to look into the relationship between the infamous Carl Icahn. For those who don’t know Carl Icahn is a Wallstreet legend. With a current net worth of 24.5 billion, Icahn runs “Icahn Enterprises” a extremely diversified holdings company. He is known for his majority holdings in companies such as Viacom, Marvel Comics, Blockbuster, Time Warner, and many more.
Icahn is notorious for replacing officials in his acquired companies with the high-ups in Icahn Enterprises. This is exactly what happened in Fed. Mogul. This past February Fed Mogul announced that the CEO would be stepping down due to “personal reasons” to be replaced by Daniel Ninivaggi, who has been CEO of Icahn Enterprises for a few years. Ninivaggi seems to have an extensive background in both law and business. Time will tell if this Icahn officer can help Federal Mogul turn steady profits in the future.
Today, we all saw just how dedicated the people at Federal Mogul seem to be to designing and manufacturing nothing but the best products in the business. While only making a handful of products, they seem to do it with the utmost care and thought. Ninivaggi has recently made it his project to stray away from this model of few products with a focus on quality. He expressed his interest in this statement, “There’s been a significant consolidation in the industry and as our customers have become very large companies, we need to do the same thing; we need to grow fast, improve our capabilities and expand our product lines”. It will be extremely difficult, if not impossible to keep the faulty parts to the current level of 5 per million if they expand product lines. While this may be a good business model when looking strictly at profits, will it help the reputation of quality products that these employees at Fed Mogul have worked so hard to uphold?
His position in Federal Mogul was established during the economic downturn of 2007. According to Automotive News, Icahn misled the company so much so that they were at a negative income of $45 million in 2009 and a staggering $117 million in 2012. This loss didn’t last long. Icahn chose to majorly downsize the company, closing many plants and downsizing others. Last year, in Q3 2013, they were able to turn a profit of 38 million dollars. Hopefully this success will continue since Mr. Westbrook today explained that the operating cost of just the Plymouth facility is over $30 million.
It seems to me that Federal-Mogul focuses more on long term gains instead of short term profits. Many researches that Federal-Mogul do are six years ahead of the current technology. Federal-Mogul is confident enough to make these long term investments because it has “strong relationships with all major OEM makers”. Most significantly, no single customer consists more than 10% of total revenue. Federal-Mogul diversifies its investments to a great extent, and therefore the failure of one investment will not significantly impact the company.
Also, Federal-Mogul is backed by money. It is a subsidiary of Icahn enterprise, a multi-billion holding company. Financial security provides Federal-Mogul more freedom to develop products and conduct researches. It is a privilege that not all automotive suppliers are able to enjoy. Federal-Mogul uses this opportunity very well: it hired the best employees and purchased the best equipments. This is how it can produce some of the best quality products in the industry.
It’s not clear what the new CEO actually means by his statements. Look at the financial statements and annual reports of FDML because it is publicly traded. Expansion may mean more engineering centers close to customers engineering centers, a modest expansion of lineup through select M&A … I’ve not researched further. But if an acquired company is valuable, then net of what you pay you don’t end up ahead profit-wise unless there are real “synergies” with what you already do, and in practice claims of synergy seldom pan out. In any case, quality comes from careful attention to production processes, and isn’t directly tied to company scale. Customers react very quickly and negatively to any policies perceived as hurting quality, and FDML is in it for the long haul…