The acquisition of the respected PROTOtechnik-IFT Group near Stuttgart propels Ricardo into the premier league in Germany, the world's second-biggest market for outsourced automotive engineering services. Tony Lewin looks at the landmark deal and what it means for Ricardo
"Ricardo aims for growth in Germany" ran the headline in the Financial Times on July 1st this year; Ricardo CEO Rodney Westhead was quoted as saying that Germany had been a "serious gap" in the firm's map. But while those few bland statements, typical of the FT's calm and strictly factual style of reporting, were more than enough to earn an approving nod from the financial community, they nevertheless gave little hint of the real significance for Ricardo - and for the auto industry in Germany.
Prior to the acquisition Ricardo had a certain presence in Germany. However its representation was - on its own admission - too small and too far short of the critical mass needed to attract the staff and the business Ricardo's world-class skills portfolio merited. This had for some while been a source of frustration to Ricardo: Germany, after all, is ahead of Japan and on a par with North America as the world's biggest market for contract automotive engineering services.
Yet now, following the purchase of the PROTOtechnik-IFT Group - which received widespread and favourable coverage in Germany - Ricardo has catapulted itself from barely-visible visiting side to premier-league hometeam player in a division where the most important fixtures invariably go to national German squads. Through the PROTOtechnik-IFT Group Ricardo is suddenly much more visibly and publicly open for business in Germany: doors which were previously hard to budge are now thrown wide open, with the welcome sign hung out for good measure.
The change, as Ricardo plc director Chris Bates admits, is remarkable: "It was imperative for Ricardo to be part of the largest automotive market outside of North America, and our German customers had said that they would like us to be more local. "We have always supplied the major OEMs in differing degrees across the world," explains Bates. "The whole rationale for doing this is to meet our customers' requirements - and our German customers had said to us time and time again 'you must be closer if we are going to have a larger and greater relationship with you'. And we have seen since the acquisition that this is likely to come to fruition: it's more a question of doing a lot more business with existing customers rather than attracting new customers."
Having said that, however, the PROTOtechnik-IFT Group's client list could hardly be more impressive: among the Group's current programmes are the exhaust and induction systems for the prestigious Porsche Carrera GT, the exhaust system for the equally exotic Mercedes- McLaren SLR, and work for McLaren- Mercedes Formula One and Toyota's Cologne-based Formula One team. PROTOtechnik-IFT also has the durability testing contract for all models from Daimler- Chrysler's smart division, and contributed to the same group's V8 diesel engine programme and numerous racing ventures. Further work has included adapting Audi's V8 gasoline engine for off-road use in Volkswagen's Touareg SUV - as well as many other motorsport programmes where the company has agreed not to disclose the identity of the team.
Germany's premium triangle
If the PROTOtechnik-IFT Group's client list is the envy of every other engineering services provider, then so too is its geographical location. If you take a map of Germany and draw a triangle between the three cities hosting the nation's four most prestigious and profitable producers - BMW in Munich, Audi in Ingolstadt, and both Mercedes-Benz and Porsche in Stuttgart - PROTOtechnik-IFT's headquarters at Schwäbisch Gmünd is directly on the Stuttgart-Ingolstadt axis, with Munich just to the south. Its offices are just 30 minutes from Stuttgart, 120 from Munich and 100 from Ingolstadt; key Tier 1 supplier ZF is an immediate neighbour, as is Bosch, which has many of its major R&D and production facilities in the surrounding cities. It cannot escape notice that Germany's most important premium players are situated in this southern half of the country, while volume makers such as GM/Opel, Ford and Volkswagen lie further to the north. Yet PROTOtechnik-IFT's blue-chip customer portfolio is not just a reflection of its pole-position location in Germany's premium triangle: it has been earned over the course of many years on the strength of the sophisticated nature of the programmes it is able to deliver. For Ricardo it is a positive benefit that there is relatively little overlap between the PROTOtechnik-IFT Group's range of skills and its own. Once Ricardo had acknowledged that the only way to expand in the key German market was to acquire an existing player, it became clear that it could be self-defeating to take over a direct competitor. Instead, reasoned Chris Bates and Detlev Baudach, head of Ricardo operations in Germany, a firm offering a different set of skills would be a more logical move, eliminating any risk of duplication either in personnel or in orders with customers.
Porsche Carrera GT supercar (far right) - PROTOtechnik designed and manufacture both the intake and exhaust systems. Here, the V10 engine's exhaust system glows hot in the test cell
"We had been looking at various possibilities for about four years," says Bates, "and for the past three we've had our eyes on the PROTOtechnik- IFT Group." Baudach recalls how, in late 2000 - just two months after he took over the top slot at Ricardo GmbH - PROTOtechnik- IFT first attracted Ricardo's attention. PROTOtechnik-IFT had asked Ricardo to help with some advanced simulation work it was doing for Volkswagen - it was pretty significant, as VW had suddenly outsourced a lot of the work and PROTOtechnik-IFT didn't feel capable of offering all those extra services on its own. In the event it didn't turn out to be any real business, but from that point on we began talking to each other."
At this early stage Baudach had the grand total of five staff and was only recruiting at a junior level. He explains why PROTOtechnik-IFT appeared to fit the bill so well: "In PROTOtechnik-IFT I could see something already well established in the marketplace, something with an ideal location, and with good experience and a good spread of business - especially things like hardware, which complemented Ricardo's simulation approach. The deeper we looked into it, the more opportunity we saw."
Three-division structure Reflecting its origins as an organisation founded by talented and enthusiastic engineers, the PROTOtechnik-IFT Group has three divisions, each operating in clearlydefined areas of the market. Much the most familiar in the broader auto industry is PROTOtechnik GmbH, founded in 1985 by Karl-Heinz Gersmann and Günther König: its core business is the design of exhaust systems, and it has also gone on to build up an enviable reputation for the lowvolume manufacture of specialised high-performance exhaust systems for racing cars and ultra-high performance road cars such as the Mercedes-Benz SLR McLaren.
"Our biggest business is developing exhaust systems and manifolds for series production by other companies," explains Gersmann. "Nearly all the big first-tier suppliers in the exhaust business are our customers: we will design, develop and produce a prototype of a manifold with catalyst, and the rest of the system, and we will do all the testing. What we don't do is the real volume production - all we do in terms of manufacture is the niche and high performance applications." PROTOtechnik does not want to compete with the volume exhaust system suppliers, adds Baudach by way of clarification: instead, it prefers to maximise its value by concentrating on the niche high-performance sector where the volumes are so small that they don't fit production arrangements of the big manufacturers.
Having said that, PROTOtechnik does manufacture some systems in surprisingly high volumes: it makes the exhaust for the natural gas powered version of the Opel Zafira at a rate of between 10,000 and 13,000 a year. At the opposite end of the scale are the Mercedes-Benz SLR McLaren and the Porsche Carrera GT: the McLaren, says Gersmann, is "perhaps the biggest challenge we could have had in exhaust system development. It's a mixture of production and series techniques: from the technology side it's closer to a racing design."
The Porsche marks an important broadening of PROTOtechnik's activities into induction systems, too. "I think we're the first company in the world to do this - we supply the intake system as well as the exhaust. Together with Porsche we developed both systems," continues Gersmann. "We call it 'from air to air.'" One of PROTOtechnik's biggest advantages in the market is the flexibility born out of its racing experience, says Gersmann. Racing activities used to account for two-thirds of PROTOtechnik's business: "we've all breathed in a lot of exhaust fumes in our lives," he laughs. "It's a special business, and you have to have the right feel for it."
Founded in 1989 by Austrian-born engineer Dr Walter Schwelberger, IFT Ingenieurgesellschaft für Farzeugtechnik mbH majors on engineering development, electronics and software design. It also undertakes benchmarking work and other studies for the auto industry.
"I had earlier met Karl-Heinz Gersmann - in 1978 when he was R&D director at Bischoff," recalls Dr Schwelberger. "While I was working as an engine design consultant to Volkswagen in Wolfsburg I became conscious that customers for engineering services were interested in getting more than the prototype hardware - they wanted the design as well as the software for the parts. That's how the idea for IFT Fahrzeugtechnik was born."
"One of our first projects was the design of a special kind of inlet manifold for a six-cylinder VW engine," says Schwelberger, "and then the jobs increased: different tasks within engine design, including Porsche cylinder heads, and other components around the engine."
Other programmes have included the first research work on Mercedes-Benz direct injection gasoline engines, and work on a family of modular engines for the then-independent Daewoo in Korea. Today, IFT Fahrzeugtechnik's principal client is DaimlerChrysler's smart division, carrying out durability testing on the road. Another recent engineering programme has been the development of the lubrication circuit for the Audi V8-engined Volkswagen Touareg: here, the existing system had to be adapted to perform faultlessly at the high angles of inclination likely to be found in extreme off-road driving. The Touareg programme alsohighlights the capabilities of the youngest company in the Group, IFT Prüftechnik, founded in 1996 as a "logical move forward for us" to round out the activities of the original firms.
As its name suggests, IFT Prüftechnik has testing as its core competence. "We had the capacity to design the parts and to build those parts," says Dr Schwelberger. "The next step was for us to develop the capacity to test the parts too."
The formula has proved very successful: IFT Prüftechnik did all the durability testing on the three-cylinder smart diesel engine, as well as Mercedes' V8 diesel and Audi's V8 diesels. The location in Schechingen - just 9 km from the Group headquarters - boasts an array of 12 sophisticated test cells equipped with the very latest measuring and control systems: just over half its work is durability testing, with calibration, mechanical development and component testing accounting for the remainder.
IFT-Prüftechnik has carried out the on-road and durability testing of all smart models. Here the Roadster is under evaluation
"Ricardo provides a lot of additional abilities right at the top end of development," explains Dr Schwelberger. "There are of course some areas where we do almost the same things, but I would say that now, with the Ricardo connection, we are able to undertake bigger programmes and with more sophisticated content."
Big presence, big opportunities While Ricardo plc director Chris Bates is enthusiastic about the additional skills and specialisations the PROTOtechnik-IFT acquisition brings to the Ricardo group, his greatest excitement is reserved for the huge new opportunities presented by PROTOtechnik-IFT's geographical location:
"Firstly we can offer our customers a local presence, a service that can be delivered to them in their own language, with an understanding of their requirements in every detail that they could wish for. We can do it more cost-effectively for them, in the sense that we no longer have to ship vehicles to the UK, and we can now give them access to the whole breadth of Ricardo technology to be delivered in Germany, in conjunction with our other operations around the world, and we can give them global coverage to meet their own global aspirations, be it in North America, Germany or the UK."
Having struggled for several years to achieve organic growth in its German operations, Ricardo GmbH MD Detlev Baudach is the first to welcome this dramatic expansion of the company's presence.
"When we started to really build the business in Germany we found it quite difficult to recruit the kind of people we needed to provide the appropriate services to our clients: we were far too small for people to feel any kind of security with the company, to feel that they were being offered a good career structure.
"Now, however," he continues, "we've reached that all-important critical mass where we can be a serious force in the market and compete with the established companies on equal terms."
Chris Bates, back at Ricardo headquarters in the UK, is bullish about the prospects for the future: "Our number one strategic aim, set out some years ago, was to become part of the German automotive industry - and this successfully fills that gap. We have work to do to grow it, but it is a very good move for Ricardo, for PROTOtechnik-IFT, and for all the staff involved."
Chris Bates, a director of Ricardo plc and managing director of Ricardo Consulting Engineers Ltd, is based at Shoreham in the UK. Tony Lewin spoke to him about the acquisition of PROTOtechnik-IFT
What is the strategic thinking behind the German acquisition?
For some while we had sought to grow organically in Germany, but as far as staff are concerned it is difficult to recruit when you are a small company in a new country and are viewed as a UK company. To meet customer requirements and to be able to recruit and retain staff and give them career development, a substantial presence is necessary.
What is the critical mass of the company in Germany that could then snowball and become bigger?
Can you explain what added benefits your customers will now get following the acquisition?
In terms of skills that the group can now offer its German customer base, what extra does the new group bring?
So it sounds like language is quite an issue. Is it because you are dealing with people at all levels that the German language helps?
Has this opened doors to car companies that were not open before to you?
So will Ricardo be perceived as a global company rather than an English company in Germany?
Was the geographical location of PROTOtechnik-IFT an important factor in your choice of company to acquire?
PROTOtechnik-IFT differs from Ricardo in that it has manufacturing capability - how does that sit with the rest of Ricardo's operations?
Is it better to work with specialist niche products than volume lines?
Will you retain the PROTOtechnik-IFT brand name? I understand it is a respected brand in the German industry.
Has the acquisition filled the most important gap in the Ricardo portfolio?
Are there any other acquisitions Ricardo is looking to make?
You have got good contacts with the Japanese car makers through HORIBA, German car makers through the new acquisition and a well set up organisation in the US. Does this not leave gaps with French, Italian and Korean car makers?