Suppliers to the Big Three U.S. automakers, including Milwaukee-based Strattec Security Corp., have had to get leaner and leaner in recent years. Two of the Big Three, Ford and General Motors, have been hemorrhaging money and losing market share to foreign competitors for years. Through the third quarter of 2006, Ford had net losses of about $7 billion, and GM had net losses of about $3 billion. As a result of those problems, their suppliers are losing business too. Delphi Corp., one of the largest tier-1 suppliers to the auto market, declared bankruptcy last year.
Strattec also has felt the pinch, with orders from its four biggest customers, the Big Three and Delphi declining during fiscal 2006. Strattec designs and builds locks, latches and related components for the automotive market. The company produces more than 200 different parts, each of which is designed specifically vehicle platforms.
“Because of that, we are heavily dependent on our customers to do their job well, to produce cars and trucks that do well in the marketplace,” said Harry Stratton II, chairman, president and chief executive officer of Strattec.
Strattec had $12.5 million in net income for 2006, with $181.2 million in net sales, down from $15 million net income and $190.3 million in net sales for 2005. The company had $3.35 in diluted earnings per share for 2006, down from $3.94 in 2005.
However, Stratton isn’t panicking. His company has seen slumps in the American auto industry before, and Strattec has a plan to ride this one out.
Strattec wants to keep its business with the Big Three and Delphi, because it believes those customers can recover at least a portion of their former market shares.
Strattec’s fiscal 2007 started on July 1, 2006. Its first two quarters, which concluded at the end of December, were rough. However, there’s potential for improvement in the second half of the fiscal year, Stratton said.
“I think the worst is right now,” he said. “There are some reasons for increased optimism.”
However, Strattec is also actively seeking new opportunities to work with foreign car makers that have manufacturing facilities in the United States, such as Honda, Toyota and Nissan. Stratton calls those companies the “new domestics.”
Strattec also created the VAST Alliance, which gives Strattec and its partners global manufacturing capabilities. Through joint ventures, the alliance has two manufacturing facilities in China and another in Brazil.
Through its VAST Alliance, Strattec has become a tier-2 supplier to both Honda and Nissan.
Strattec is still waiting to receive its first big order as a tier-1 supplier to a “new domestic”.
The company’s overtures to Honda, Toyota and Nissan began about five years ago, Stratton said, after Strattec saw signs of weakness in the Big Three. However, entering into a new business relationship is not something Japanese manufacturers take lightly.
Keiretsu, an aspect of the Japanese business culture, has complicated Strattec’s attempts to win contracts with “new domestics,” Stratton said. Keiretsu relationships are generally between companies that sometimes have common ownership and usually work closely together in complimentary industries. Because they have long-standing relationships with suppliers, Japanese manufacturers are usually reluctant to change suppliers, Stratton said.
“To get into the Japanese supply base, you need to develop relationships built on your integrity as a supplier,” he said. “The technology, level of quality and process the Japanese go through to qualify (suppliers), there are a number of steps which take years. It’s not unusual to go through the courting process for four to five years. We’re probably a year or two from getting a potential order from one of the transplants.”
The loyalty of a keiretsu relationship makes all of the time and effort of getting into one worth it in the end, Stratton said.
“They’re very thorough and demanding,” he said. “But they work with their suppliers to develop them. And once you’re in the fold, you’re not jettisoned lightly.”
Strattec isn’t placing all of its hopes in securing contracts with the “new domestics”. In mid 2006, it formed Vehicle Access Systems Technology LLC (VAST) with Germany’s Witte Automotive and Michigan’s ADAC Automotive. Witte makes components similar to Strattec for European car makers such as Volkswagen, while ADAC makes and paints plastic components for vehicles. Most of ADAC’s components are used for interior controls. It also makes some exterior trim for cars.
Strattec and Witte each own 40 percent of VAST, while ADAC has a 20 percent stake.
VAST has two manufacturing facilities in China and another in Brazil, Stratton said. All three of those facilities are joint ventures with merchants in those markets.
“The mass of business we have together is better than three-quarters of a billion dollars (per year),” Stratton said. “We have plants all over the world, either direct or through our joint ventures.”
The VAST agreement enables Strattec to manufacture and sell Witte’s products in North America, while Witte can make Strattec’s designs and sell them in Europe.
VAST secured its first contract last year to produce a series of access controls for vehicles built on General Motors’ Epsilon 2 platform. The next generations of Saab 9-3 and 9-5, Opel Vectra, Buick LaCrosse, Cadillac BLS, Chevrolet Malibu and Pontiac G6 will reportedly be built on the new platform.
The Epsilon 2 platform made sense for the VAST partners because of their global capabilities, and because cars all over the world will use the platform.
“Over one million vehicles per year will use it globally,” Stratton said. “This is the first global program GM has ever done. They’re feeling their way through it, and this puts us in a great position for future possibilities.”
Strattec and ADAC also started a new joint venture in October 2006, named ADAC Strattec de Mexico LLC. The new venture makes injection molded plastic products and does assembly, and it will make plastic components for the Ford Fusion and FC49 Dodge midsize crossover vehicle.
Strattec is also considering acquisitions for additional growth, Stratton said.
In late 2006, Strattec launched a joint venture with Master Lock to produce a re-codeable lock that can be placed in lock cylinders for non-automotive devices. Because the new lock is re-codeable, it can be calibrated to work with an existing key, meaning that multiple locks can work with the same key.
Strattec has been contracted to build the patented re-codeable lock cylinders for Master Lock. Master Lock will market the new locks, Stratton said.
Strattec has about 450 employees in Wisconsin, 43 in its Detroit office and roughly 1,200 in its two facilities in Mexico.
The company will slowly begin adding employees in the next few years in Mexico, as it begins ramping up production for a new contract with an existing customer. New contracts in the auto industry typically take several years to come to fruition, Stratton said, because auto producers are working on new products several years before they come to market.
Employment in Strattec’s Wisconsin manufacturing facility will stay flat for the foreseeable future, Stratton said. However, the company will likely be adding to its engineering staff soon.
“The timing depends on how some of the new programs with our auto customers end up in their schedules,” Stratton said. “Most of them would be longer lead schedules. There’s a lot of opportunity out there we can look forward to if we can win the business.”
Harry Stratton II
Title: Chairman, president and chief executive officer
Education: Bachelor of arts in economics from St. Lawrence University in New York; MBA from Notre Dame University
Residence: Fox Point
Family: Wife, Barbara, andfive children.
Strattec Security Corp.
Location: 3333 W. Good Hope Road, Milwaukee
Industry: Locks, latches and related products for automotive market
Number of employees: About 1,700 in the U.S. and Mexico
Annual revenue: $181.2 million in 2006
Web site: www.strattec.com
