When Charles “Chip” McClure took the wheel as CEO of ArvinMeritor back in 2004 the automotive industry wasn’t such a bad place to be. But even before the Troy, Michigan-based company and its industry sector peers got pummeled by the recession, McClure saw a need to radically restructure.
Known at various points in its history as Timken-Detroit Axle, Rockwell and Meritor Automotive, ArvinMeritor had spent the 1990s and early 2000s acquiring its way into a global leadership position supplying a broad range of integrated systems, modules and components for commercial and light vehicles. By fall of 2004, says McClure, the company was a muddle. “We couldn’t be all things to all people,” he recounts, describing a “three Rs” overhaul program he launched shortly after joining the company. “We needed to rationalize, refocus and regenerate.”
ArvinMeritor moved quickly to “rationalize,” or pare down operations, closing plants both in the U.S. and abroad and divesting divisions. In 2007, McClure launched a Performance Plus program geared toward further trimming costs and boosting efficiency. By the time the economic crisis hit in 2008, he had already unloaded the company’s coil coating subsidiary, as well as its light vehicle aftermarket and light vehicle emissions businesses. “At that point people began to understand the strategy, which was to become a commercial vehicle company,” explains McClure, who came to ArvinMeritor after serving as CEO of Federal-Mogul Corp, a $5.5 billion automotive supplier struggling to emerge from Chapter 11.
Shedding the company’s remaining light vehicle operations, including its wheels and chassis businesses, was next on the agenda. But potential deals dried up along with the credit market as the economic downturn intensified. McClure tackled that hurdle by breaking down the chassis business to put smaller, more digestible pieces on the sales block. The strategy led to three separate sales—the most recent slated for completion by yearend—comprising approximately 87 percent of ArvinMeritor’s chassis business. In August, the company, which posted sales of $7.1 billion in 2008, inked a $180 million deal to sell its wheels business to Iochpe-Maxion S.A., a Brazilian producer of wheels and frames.
ArvinMeritor: Fourth Quarter Outlook
FY 2009 Q3
FY 2009 Q4
FCF before factoring
“Even in this tough, tough market, we either have deals in place or have completed two-thirds of what we needed to do,” sums up McClure.
Over the past year, ArvinMeritor weathered three further rounds of painful cost-cutting—slashing its headcount by 3,000, closing plants in Tilbury and Milton, Ontario, Canada and cutting the salaries of employees worldwide. McClure credits those cuts—which total over $192 million— along with his restructuring efforts, for significantly offsetting the impact of the economic downturn. Even so, ArvinMeritor posted a loss of $162 million in the third quarter of 2009, as compared with net income of $44 million for third quarter 2008.
Despite the difficult climate, the company generated free cash flow of $73 million in the third quarter of fiscal 2009—the result, says McClure, of keeping a tight leash on expenditures. A newly installed cash conservation plan requires all transactions involving more than $5,000 to go through a rigorous approval process. “We literally track cash every day,” he notes. “We focused on that and said, ‘This is the lifeblood, the oxygen of the company.’ I’m down to sea level right now, but during tough times that’s just what you have to do. I’ll back off and delegate more as I see things start to get better.”
In the meantime, McClure is pressing ahead with the “refocus” and “regenerate” legs of his overhaul plan. To complete its efforts to focus on the commercial vehicle and industrial industry, the company plans to sell off its light vehicle body systems division and move into expansion mode. “Going forward we’re now looking at the third leg of the plan—regeneration,” says McClure. “We want to diversify along product lines and global lines.”
ArvinMeritor has already enjoyed several wins on the commercial vehicle side. In July, the company won contracts to supply axles to Navistar, which manufactures International brand commercial and military trucks, and to Yutong Group Co., a bus manufacturer in China. In August, MAC Trailer, a leading supplier of safety and control systems for commercial vehicles, selected ArvinMeritor’s Meritor WABCO as its standard anti-lock braking system (ABS) supplier.
Efforts to develop mine-resistant protective vehicles for the military, move into remanufacturing equipment for heavy duty trucks and buses and deliver greater fuel efficiency have also proved promising. Back in February 2009, ArvinMeritor debuted its first hybrid drivetrain, a system designed specifically for the largest segment of the commercial vehicle market—linehaul, over-the-road trucks. Currently being tested by Wal-Mart for possible use in its fleet of commercial vehicles, the system got a lot of attention after it was paraded in front of politicians during a hybrid truck convoy to Capitol Hill.
But to McClure the real potential is much broader. “One of the things we want to get into is what we refer to as ‘smart systems,’” he says. “People focus on the hybrid truck we developed, but mid-level controls that get you better fuel economy by reducing resistance or lightening the weight can offer tremendous fuel savings.”
With sales still down more than 47 percent for Q3 2009 and the company anticipating a slightly more dismal outlook for Q4, realizing that potential may take time. Still, McClure is optimistic that a corner has now been turned. “Globally, in our industry, I think we’ve hit bottom,” he says, noting that “Europe didn’t enter the recession until about six months after we did, so there’s still a bit of a bottom going on there.” But business is picking up in countries like China and India, as well as regions like Asia Pacific and South America. “These are tough times. We’ve had to do a lot of soul searching and my hair is probably grayer because of that. But I knew what we had to do and that we had the cash and the liquidity to survive and get through this.”