The financial turnaround at Valeo over the past two years is, by any standards, impressive. The company has undergone substantial restructuring and returned to profitability in 2002. It has also been broadening its customer base and is placing much store on its cross-divisional market-led ‘domains’ approach to technology innovation. David Leggett, just-auto’s managing editor, spoke to Valeo’s chairman & CEO Thierry Morin about Valeo’s strategy and developments in the industry.
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Just two years ago Valeo was making record losses and there were integration problems associated with the 1998 purchase of ITT’s North American automotive electrical systems business. Looking back, how do you see the difficult time for Valeo of two years ago?
1999 and 2000 were bad years for Valeo. In early 2001, there were some extraordinary losses to be taken into account and the board of directors decided to change the chairman and appointed me as Chairman and Chief Executive Officer. We immediately put in place a turnaround plan but we didn’t split the group and sell off parts of it, as some people expected us to do.
The starting point then was to focus on the customer and it was from there that we created our five cross-divisional product ‘domains’ – something that we believe has been very successful.
We set about the turnaround with an eighteen-month plan for each of the eleven Valeo branches. Eighteen months later I can thank all those Branch managers and employees for accepting and carrying out the plan. We have reduced the number of factories from 170 to 132 and we have reduced the number of suppliers in number by 1,500.
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By GlobalDataThere is more to do, but we are very pleased with our progress so far.
Do you believe that Valeo was slow to grasp the trend towards modularisation in the industry, as has been said in some quarters – take front-end modules for example?
Certainly not. We have been delivering front-end modules for six years now and are a long-time supplier of FEMs to Volkswagen in Spain for example. We also have a joint venture with Plastic Omnium in France in the Renault factory at Douai to deliver front-end modules for the Megane II model. We also deliver front-end modules to Ford from South America.
The interesting question is this: does a module reduce cost or not? I believe that if a car manufacturer allows the supplier the freedom and flexibility to source and to integrate the various components that are part of the front-end then there are greater opportunities to create synergies and to work in a more productive manner.
We consider ourselves at Valeo to be advanced in front-end modules. We are also putting a lot of work into other modules such as cockpit modules and we are very advanced with an ‘e-module™’ – a hatchback concept, which accommodates the wiper, the latch, the rear camera for rear vision and the CHMSL (centre high mounted stop lamp/light) in an optimal design.
Do you supply Toyota in France?
Yes and to Toyota elsewhere in the world with products to a number of programmes. Two years ago I met with Toyota and Nissan and told them that they were my targets because I thought that Japanese makers were under-represented in Valeo’s customer portfolio. Things have changed dramatically in the two years since and I am very pleased that the second region in the world for Valeo is Asia – including with our partners – even exceeding North America now. We did 2.5 billion euros of business in Asia last year compared to 2.4 billion in North America. That’s quite a striking shift for us. In the whole of Asia we had 17% growth last year, against 10% growth in the market.
And how are you positioned in China?
We have eight factories in China and we believe we are very well positioned. We supply all car manufacturers there and we are in both the Beijing and Shanghai regions. Over the next few years we stand to benefit very much from the new projects in China involving Japanese and European carmakers and Valeo will benefit from having eight factories with eight different businesses.
Valeo has been in China since 1994 and were amongst the first suppliers, so we believe we know what we are talking about. I should also add that our Chinese factories have the same level of quality or technology as other Valeo facilities. They are not making old products either. They are treated the same as every Valeo factory in the world.
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Thierry Morin |
Are you concerned about copying or intellectual property issues in China?
I believe that the important thing here is managing innovation. Management of innovation in my mind is about speed; it is not just about patented production. Of course, we have to go for patented production, but speed is as important. If you are the first one everywhere, you are the inventor.
In the old days, companies like Valeo hid their innovations, preferring not to show them to anyone, including customers.
Now, as we develop an invention, I say to the people, ‘It’s time to go to market now!’ Speed to market is where I like to see focus with Valeo at the leading edge.
Can you give an indication of how much of Valeo’s necessary restructuring has been completed as a result of the restructuring measures of the past two years?
Stating a precise figure would be unfair. Let me put it another way. We have spent more of our restructuring provision over the last two years than is normal -approximately twice as much. We had to catch-up. But we cannot be complacent now – there is more to do. If you stop for one minute and think ‘we are fine’ the company will suffer: you have to keep running. And you also have to enjoy the race and have fun.
Valeo’s five percent operating margin in 2002 underlined Valeo’s financial turnaround and was almost double Faurecia’s – a company to which Valeo is often compared. Are you forecasting a further improvement in operating margin to six percent in 2003?
No, that is a target perhaps – but it is not a forecast that I have given. I believe that – everything else being equal – a company like Valeo should be able to improve operating margin and if we were at six, I would tell you that seven was an acceptable target.
But on the other hand, what is happening in the world?
What I think today is: firstly, that the economy will be down worldwide in 2003. Secondly, there is too much inventory in North America and thirdly, that the objectives of outstanding incentives such as the ones the Big Three are running in the US are questionable in the long-term.
It is interesting to see that even though Japanese carmakers are not giving such incentives in North America, they are gaining market share – and that is one reason that it is important for Valeo to supply the Japanese manufacturers as well.
What about the Koreans?
We are number one with Hyundai in starters and alternators; we are number one at Hyundai in clutches – with something like 95% or more market share. We are eagerly looking at their movement toward China and Hyundai is very impressed with what we can do for them out of China.
You have said that you want to almost double the value of Valeo’s North American business to $4 billion by 2007. That sounds like quite an ambitious target.
You always need to have ambitious targets.
The Big Three have been using their suppliers as commodity manufacturers and I believe that as a result of that, the differentiation and customisation of their products in the eyes of the consumer is quite small, or less than it could be.
What is Valeo – as a suppler doing?
Valeo is on the leading edge of technology to support its clients. For example, we are working on flat blade wipers, bending light headlamps, night vision systems, a lane departure system and we are working with Raytheon on a blind spot detection system. And there is also a starter-alternator to start the car in a noiseless manner, to facilitate better efficiency and lower emissions.
I believe that Valeo’s leading edge technology approach can help the US car manufacturers to sell more cars with further differentiation. Encouragingly, Valeo has recently won business from GM in the field of wipers for the next generation of GM full-size pickup trucks and sport utility vehicles (SUVs) and full size passenger cars. We are very pleased about that. And I think that US carmakers are realising the need to differentiate their cars and not only have cost reductions.
What do you see as the competitive advantages for Valeo as a Tier 1?
We have four criteria.
First is cost. On this, Valeo has done an outstanding job over the past two years. We can hold our heads up there. There is no company – as far as I am aware – that has reduced its industrial cost base in the manner that Valeo has.
Second, quality. Mr Kawashima, our quality director who was previously with Nissan, has really changed our way of thinking. His experience in Nissan’s Quality Department has been invaluable to us.
Point number three is globalisation. Valeo is global – is everywhere and is supplying out of everywhere, our clients all over the world.
But when we talk about industrial footprint, let’s not forget that a huge proportion of our costs are dealt with through our supplier base.
We had 4,500 suppliers two years ago, now we have 3,000 and in two years time we will have 1,500 suppliers. This was a huge effort and is not an easy process. Simultaneously, we have increased the number of our favoured suppliers – what we call ‘Valeo Integrated Partners’ (VIPs). We now have eighty VIPs with whom we work very closely. They work upstream, which means that they are integrated in our long-term projects 3 or 4 years before the car is launched – in order to bring us the ideas before we actually create the product.
On the above three criteria, I do not believe that our competitors can beat us.
And then there is technology. Some of our competitors are good at one technology – outstanding in terms of say electronics, or mechanical or driveline technology. We, at Valeo, believe that what is important is to be an integrator and an importer of technology. So we import technologies from Raytheon, Iteris and other companies that we are partnering with. Each of them is a master in its field outside the automotive industry and we import this technology and at the same time we meld together the electronic and mechanical.
In automotive, everything finishes with mechanics – your car cannot move electronically. For example, if we take a simple wiper system of a few years ago, you press the button and the wiper blade moves. Now you have a rain sensor, speed sensor and they send signals to a computer, which processes and sends information to an actuator so that the system permanently washes at the perfect speed. This is what I call ‘mechatronic’ – the association between mechanical and electronic.
This approach also yields synergies and competitive advantages for Valeo and our customers. Let me give you two examples.
We have successfully developed a windscreen-mounted rain sensor to control the operation of the front wiper system. Our engineers then decided to integrate a second sensor, a light sensor. This automatically operates the headlamps on low beam when travelling through tunnels. So if a client wants to specify ‘automatic’ headlamp technology for a particular car model, then by working with Valeo’s wiper and headlamp businesses, cost benefits can be achieved because we can supply multi-function sensors for a competitive price.
The second example relates this to steering angle sensors. We supply these sensors to many car makers and they provide vital signal inputs to enable the correct operation of the vehicle Electronic Stability Program (ESP). When we developed the innovative Fixed Bending Light headlamp system, now specified on the new Porsche Cayenne, our lighting engineers were able to adopt this same steering angle sensor technology to control the intensity of headlamp illumination as the vehicle progresses through road bends. In effect, when the driver turns the steering wheel to negotiate a bend, signals from the steering angle sensor, mounted in the steering wheel, are sent to an ECU to make progressive adjustments to the intensity of light emitted from either the left or right headlamp. So the driver has the impression of turning headlamps and, most importantly, is able to see the contours of the bend very clearly. The tighter the bend, the more light is directed into it, so making night driving a much safer and far less stressful experience.
I think this example demonstrates how we are able to achieve real benefits for customers and consumers by exploiting our expertise in one technology, sensors, to develop exciting new products in a seemingly unrelated technology like lighting.
All these innovations are created through the cross-divisional domains of Valeo. In the old days, when each Branch was separate, these synergies could not happen easily. Now the transverse domains mean that new Valeo products benefit from cost reductions and technology differentiation.
In what area does Valeo make its highest margins?
Valeo makes its best margins where competition is less. When you have a worldwide market share, when you have a few years of progress and you are making a product that adds value and is not treated as a commodity, that helps the client to differentiate his product. Then you make good margins.
Conversely, when you are late, catching-up, or having quality problems, then you will have low margins.
What is the geographical mix of Valeo’s business and where is it growing?
Approximately, 25-28% of our business is in France; the US is at about 25%. I believe that the fastest growth we will have over 2004-2006 will be with Japanese and German car manufacturers in terms of technology and US car manufacturers in terms of volumes.
Is business in South America important to Valeo?
We are a significant player in South America, but we have no risk out of Argentina because, as we anticipated the economic crisis early in 2001, I decided to withdraw most of our businesses from there. But we have been in South America since the mid-1970s.
How do you see the North American and West European markets this year?
I said some three months ago some -5% for Europe and if nothing exceptional happened to the US there were three items to be taken into account.
Firstly, a natural decrease in the market due to the economic situation that is roughly -5%. But secondly, the Big Three will be hit by the level of incentives. Thirdly, the level of inventory is quite abnormal for the Big Three – 90 days plus was recorded at the end of January – 60 days is more normal.
What do you think of Visteon’s so-called ‘pay-to-play’ initiative for its suppliers?
I am not going to criticise any kind of initiative in the industry and I am of course interested to see what others are doing. But I think Valeo looks at its relationships with suppliers in a far-sighted way, because if your supplier has nothing to gain why should he work with you?
What are the advantages of Valeo’s VIP programme for Valeo suppliers?
Volume is important in this business. We all know that. What happens to VIPs? Point number one – they know that they receive every Valeo RFQ and they know that they are always considered. They know that they will be favoured because they will give us better prices through better integration. They will give us more every year and we will give them more every year.
It is what I call the ‘Valeo extended enterprise’. Valeo plus its VIPs. I consider them to be Valeo’s partners.
Who do you see as the vehicle maker front-runners on combined starter-alternators and when do you think mild hybrids will be on the market?
Firstly, who was the only company able to contracts for belt-driven starter-alternators in 2002? There was one in the world and it was Valeo. We have one commercial order for a 14v combined starter-alternator with two carmakers in Europe. You will see our first system in production in 2004.
But it is already a starter-alternator, linked by belt and it allows ‘stop and go’ and has a torque booster.
And secondly, let’s envisage that the 42v product – that is coming in several years’ time – will be in the clutch casing, as a large starter that moves and part of the clutch. Who has the clutch technology and starter technology and the alternator technology? We do. We are the world leader. Those manufacturers who divested their alternator operations are now lagging behind.
When will THEMIS intelligent engine cooling make it to the market? 2004?
THEMIS is about the optimisation of engine cooling so it does not happen all at once. We are moving step by step and improving. What is interesting is that today we are able to save 6% of car fuel consumption through THEMIS, but if you see me in nine months I will probably tell you that we have optimised a further 5%. It is about permanent improvement.
How quickly do you think bending light headlamp technology – debuted on the Porsche Cayenne – will be taken up in the market?
We have eight commercial orders to date.
Are these upscale models?
Yes, but it will go downscale very fast. The nice thing about this product is that it makes use of some of the electronics that is already in the car. The bending lights are more complicated but there are no moving parts, so I think we have an advantage in terms of technology and also in terms of cost.
What about infra-red night vision?
Our product has an active camera which is cheaper than the passive system. The idea is that you can still project your high beam, but without high-beam glare. We are currently in negotiation with a European carmaker.
How is the Raytheon JV going and when do you think you will have a blind-spot detection system ready for the market?
It has just started up, but the engineers are cooperating very well. We did not know the world of radar, they did not know automotive. We have showed our product at the Convergence Show in Detroit and that was very successful. I think we will have a blind-spot detection system in a couple of years.
What are the things you especially enjoy about your job?
It is always important to be successful. I don’t like failure. When there is a failure, I concentrate on it to be able to turn it into a success. I don’t know of any failure that can’t be turned into a success. It requires so much energy, it requires so much time and it requires a stubborn attitude sometimes. It is important to be successful – not for me – but for the team. You can’t lead a team and tell them that you won’t take them to success – this is what they want. And sometimes on their own it is difficult for them, so if the leader does not bring them to success it is problematic. I enjoy success.
What inspires you in this business?
All of the technology inspires me. You want cars to be safer. You want cars to be emissions-free. You want cars to be – still – exciting to drive. And let’s not get confused. Many people think that tomorrow’s cars will be boring. That is not the case. They will be exciting. In a car a few years ago, you had to carry out more manual tasks than is the case today. Make these things automated and you can concentrate on and enjoy the driving. I love to drive and I hate to be driven. I love to have the steering wheel and to drive in a safe manner. You don’t want other burdens.
I also feel that – with the number of cars we have in the world – we have a duty to reduce emissions and improve safety. In every product I announce for Valeo there are always either safety or emissions benefits.
Valeo’s cross-divisional ‘Domains’ Valeo says that the Valeo “Domain” approach is designed to offer vehicle manufacturers global solutions that meet fundamental consumer-driven market needs related to comfort, safety and security, reduced fuel consumption and emissions, and driving pleasure. Valeo also maintains that the transversal nature of Valeo’s Domains generates creative synergies between the Group’s different areas of expertise and opportunities for external partnerships. Focusing all resources on an ambitious target allows for breakthrough solutions beyond those achievable through the mere improvement of existing components, according to Valeo. Valeo claims that vehicle manufacturers benefit from shorter development lead-times for innovative, user-friendly and fully integrated systems and modules, that are cost-effective and easier to install. Five Valeo Domains have been identified and set-up:
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