The sum is greater than the auto parts

Linamar is evolving from an automotive supplier into fields such as agricultural equipment and infrastructure. As CEO Linda Hasenfratz tells us, it’s all part of the 100-year plan.

Linda Hasenfratz is chief executive officer of Linamar, a global auto parts and equipment company based in Guelph, Ontario. With 28,700 employees at its 60 plants around the world, and 2017 annual sales of $6.5 billion Canadian (US$4.9 billion), Linamar is in many ways a prototypical 21st-century manufacturing organization. Yet it is also a family-influenced company. Founded in 1966 by Frank Hasenfratz, an immigrant from Hungary, as a one-man machine shop in his basement, Linamar has been led by only two CEOs in its 52 years: Frank Hasenfratz, from 1966 to 2002, and Linda Hasenfratz, his daughter, from 2002 until the present. Hasenfratz, now 52, joined the company at an entry-level position in 1990 and steadily worked her way up to the corner office. In her nearly 17 years at the helm of the company, Hasenfratz has steered Linamar through the global financial crisis, which laid low large swaths of the North American auto industry; grown revenues fivefold; and led the company’s diversification into areas such as industrial lifts and agricultural equipment. In the process, Hasenfratz has established herself as one of Canada’s leading corporate statespeople and an advocate for the advancement of women in trades and STEM. She sat down with strategy+business to discuss the company’s 100-year plan, how Linamar is coping with the turmoil surrounding trade, and how manufacturing businesses can work intensively to increase opportunities for women.

S+B: It seems companies in the auto sector are redefining themselves. Ford is now a mobile solutions provider. Your website says your mission is “powering vehicles, motion, work and lives.” Can you tell us a little bit about the evolution of your self-definition?
HASENFRATZ:
We came up with that at least 10 years ago. It’s purposefully broad because part of our overall strategy is to diversify into some new markets and give ourselves more opportunities to grow the business.

S+B: You have made some significant moves to diversify into agricultural equipment and lifts. Is this diversification, or is there a transformation at work here? Are you trying to change the nature of the company itself, or are you just trying to alter the mix of the business?
HASENFRATZ:
To us, it’s more of a diversification strategy. Globalizing, diversifying, and focusing on environmentally beneficial markets and products and ways to run our business has been a core part of our strategy for many years. I sometimes find this terminology around transformation and disruption and whatever a little frustrating. When people say, “Are you the disruptor or disrupted?” — why do you even have to say that? You’re innovating and you’re growing your business. I hate the idea that everybody’s got to be in a bucket. You’re in a bucket over here where you’re a disruptor or, by definition, you’re in this disrupted bucket. We’re just trying to grow our business, innovate, and take advantage of new technologies, and we’re constantly doing that. I think there’s a difference between innovation around product, process, and material development, and what I would call true disruption of really new and innovative thinking of a completely different approach. Like Uber with taxis — that’s a true disruption. The reason I get irritated is people get caught up in the allure, and suddenly investors only invest in companies they think are disruptors, whatever their definition is of that, which doesn’t make sense.

“People get caught up in the allure, and suddenly investors only invest in companies they think are disruptors, whatever their definition is of that, which doesn’t make sense.”

S+B: In February, you bought MacDon, a Canadian company that makes agriculture harvesting equipment, for $1.2 billion [Canadian].
HASENFRATZ:
We have a 100-year plan at Linamar that includes expansion into a variety of markets. We’ve identified six key markets we want to be a part of. Some of them we’re already heavily invested in, like transportation or infrastructure, which is our Skyjack business. But food and agriculture was another market that we’d identified as one that we wanted to have a bigger play in. We were already doing some work with harvesting equipment out of one of our Hungarian facilities. But we felt that there was a lot of opportunity for innovation and efficiency improvement and improving yields in the field. We were really happy to find MacDon almost in our backyard as a great company with great technology and growth potential.

S+B: Are there a lot of these types of acquisitions coming?
HASENFRATZ:
No, this is a more paced investment. We’re focused on three markets now: transportation, infrastructure, and food and agriculture. And I think there’s a huge opportunity to grow in each of them. Although we have three other markets we’d like to be a part of — water, power, and age management — we’re not anxious to leap into every one of those right away. Doing something every five, six, seven years that’s significant in terms of a play into a new market probably makes sense. That doesn’t mean we can’t lightly invest and start to understand a little bit more about these different markets and build our strategy accordingly. It is, after all, a 100-year plan, so we don’t need to do it all in the next six months.

S+B: You’re one of the few CEOs of a major auto industry company who led her company successfully through the 2008–09 downturn and is still living to tell the tale. What lessons, if any, of the way you survived inform the way you operate?
HASENFRATZ:
Who we are as an organization to begin with helped us during that time frame. We are naturally a fast-moving, very responsive company. We’re entrepreneurial. We’re super-focused on lean and efficiency and constantly improving our cost structures. So we didn’t have all this fat to cut. But we still had to cut costs because sales dropped 30 percent. And we did do so, and we moved quickly to do it. We also focused on conserving cash. And again, some of our philosophies of how we run our company allowed us to do that more effectively than others. We tend to utilize flexible, programmable equipment in our machining lines. Not all companies do that. A lot of companies use special-purpose equipment, which by definition is custom-made for that particular part, and it does tend to be less capital intensive. But your volumes don’t always pan out where your customers think they’re going to be. And when you have special-purpose equipment, you are married to that capacity. The fact that we had flexible CNC [computer numerical control] equipment that we could reallocate to new programs meant that when the downturn came, we were able to liberate equipment from existing production lines, better match capacity to actual requirements, and reallocate that equipment into new jobs. That was important because the third part of our strategy — after cutting costs and conserving cash — was to grow. We were actively looking for new business opportunities, taking over business from other suppliers who were either going bankrupt or exiting the business, and we had equipment to put those jobs on without having to spend cash. We’d grown our content per vehicle so much by taking on all that business that our sales really shot up once volumes started to pick up again. Sales fell from $2.2 billion to $1.6 billion to $1.7 billion, but then we picked up $400 million of takeover work.

S+B: What level of debt are you comfortable with?
HASENFRATZ:
We’ve always been conservative on the debt side. Which, again, served us well in that time frame because we never came close to breaking a covenant. I think in any times of uncertainty — and right now, obviously there is a lot of uncertainty around technology and politics and trade — who we are culturally is helpful. In times of uncertainty, it is really critical that we stay as flexible as possible in every way possible, not just in terms of our equipment but in terms of our strategy. We like to say the flexibility of our strategy and our business should directly correlate to the level of uncertainty.

S+B: I’m sure it didn’t escape your notice that the only one of the Detroit Three that didn’t go bankrupt was Ford, which is family controlled or influenced. You don’t have the class of shares that gives the family extraordinary control. But the company, founded by your father, has had only two CEOs in the past half century. Is Linamar a family company?
HASENFRATZ:
Well, we’re a family-influenced company. We went public in the 1980s. We’re not family controlled, but we do still own about a third of the shares. I think that family companies — whether they’re family controlled or family influenced — have a longer-term viewpoint. And to me that is directly correlated to your success. Because people can get way too caught up in short-term things that are going on and make decisions that aren’t good for the long term. Family businesses, because they envision future generations potentially being involved and deriving their wealth from the organization, focus on success in the long term. And when your name’s on the door or on the founding document, there’s a sense of responsibility.

Not that I don’t think that CEOs care about their businesses. But I do think there’s a deeper level of responsibility and accountability that comes with a family. Certainly we’ve been able to use our perception of being a family business to our advantage on the acquisition side. We’ve been able to acquire some family businesses that actually cared a lot about who bought their business. MacDon’s a good example of that. Its leaders were looking at selling their business for six or seven years but just couldn’t get comfortable with private equity and whatever. I mean, we paid a fair price, but I’m sure these other businesses were willing to pay a good price as well.

S+B: Is there a cadre of other family members who are working in the business?
HASENFRATZ:
Only a few at the moment. My brother-in-law is a member of my team, and I have a cousin who plays a role for us in Europe. I do have four children, so I’m hoping with any luck one of them, or more than one of them, might be interested in coming into our business.

S+B: You mentioned your 100-year plan. The typical tenure of a CEO of an S&P 500 company is something like five or six years.
HASENFRATZ:
Roughly 3.2 years.

S+B: What is the rationale behind having a 100-year plan? What gives you the confidence that you can guess at what the world might be like in 2119?
HASENFRATZ:
I don’t think we can accurately predict the future 100 years out. But what we were trying to do was identify markets that would be important over the long term. We looked at forces like a growing global population that is aging and urbanizing. And from all of that research we came up with our six markets that we want to focus on. That may very well change. Thirty years from now there could be something totally new that nobody’s ever thought of that comes up as an opportunity. The key is obviously to stay abreast of what is happening in markets and of these mega-trends that are impacting markets. And above all, continue to innovate so that you’re constantly developing new technologies and applying them in new areas and new markets. And it’s not a 100-year financial plan. I do have a sort of back-of-the-envelope idea of what we’re trying to do growth-wise over the next 25 years. And I do have a financial model that goes out to 2040, just as a starting point. It’s good to have a little bit of a framework. And then you just keep adjusting and ensuring it continues to make sense and that you continue to grow.

S+B. You’ve spoken about innovation. What is the focus or definition of innovation at Linamar?
HASENFRATZ:
The design of products, process innovation, and material development are the key channels of innovation for us. We now have investments in light metal casting and forging, and material development’s an important part of innovation for those businesses in particular. For instance, we make a hydro-formed camshaft. That’s a product innovation in the sense that the design of the cam is totally different, but it is a process innovation because it’s a way to make the camshaft that’s different as well.

S+B. Do you break down internally or externally your amount of R&D investment?
HASENFRATZ:
If we look at the combination of product and process, we would say it’s between 3 and 5 percent of sales. It’s been growing as a percentage of sales over the last decade.

S+B: Manufacturing as an industry has not always been on the leading edge of diversity. How do you personally and Linamar as a company work to promote greater participation, particularly of women, in STEM fields?
HASENFRATZ:
Let me just talk a little bit first broadly about diversity. One thing that I think is very much characteristic of Linamar is that people advance on merit. If you’re doing a great job, you’re going to get an opportunity to advance and be promoted and run a business. Canada is a country that has many immigrants, so we have a lot of people working for us who are new Canadians. These are smart, great people, and if they are doing a great job, they are going to get a chance to get promoted. With respect to women, we are representative proportionally at every level in the business to our levels of overall women. The bad news is we’re only about 20 percent women overall. It’s all well and good that we’ve got 20 percent women in management at every level. But in order to increase diversity more, we need to just have more women in the business to begin with. A great way to do that is by attracting more women into STEM and the trades.

 
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For the last seven or eight years, we have run a summer camp for girls in grades seven and eight that is trades-focused with Skills Ontario and Skills Canada. We also host an event for young women in high school who can hear from women mentors who are already in a whole variety of trades. At last year’s dinner, I think we had 200 attendees, which is amazing. We have an apprenticeship program specifically for women, and we’re sitting at around 20 female apprentices here in Guelph right now.

S+B: How else can you help build the pipeline?
HASENFRATZ:
With respect to STEM more broadly and engineering specifically, we set up a scholarship program with Western University [in Ontario] for women in the dual-degree program of engineering and Ivey Business. We support 10 women per year. We pay half their tuition for the three years of the dual degree, and we give them a job in the summers of years three and four and a job offer upon graduation. We have our first cohort of scholarship students in place this year. And we’ve spearheaded a program which we’re really proud of called See It, Be It, STEM It. It is a website and social media platform, as well as a calendar to attract young women into STEM. We wanted to break this stereotypical image of who’s going to be in STEM with this calendar. We printed 10,000 of them, and we tried to bring in a variety of areas: chemistry, math, biology, engineering, agricultural science. I think it will be great to have young women look at that and think, “Oh, I would love to do that job.” Or, “I can relate to this woman who plays volleyball; I play volleyball.” They can be inspired by it.

S+B: We’re hearing from CEOs about a growing concern about trade conflicts. You’re a Canada-based auto parts company with plants around the world that does a lot of cross-border business. About half of CEOs are saying they’re already adjusting their supply chain and sourcing strategy to cope with the changing world. How are these trade tensions affecting your business and the types of decisions you are making?
HASENFRATZ:
I feel like what’s been going on in North America over the last year with the renegotiation of NAFTA and the tariffs is short-term noise. I would never change my supply chain or my location of operations because of something as short term as tariffs. I think it’s absurd that we still have them when we’ve just agreed to a revised free trade agreement. We’re going to freely trade with each other, except for this stuff? Like, what the heck? These tariffs are significantly impacting American companies more than anyone else, because those companies are getting hit on cost on the way in, and they’re getting hit on the way out because of the retaliatory tariffs that Europe and other countries are imposing. So how does this make sense? It’s not sustainable. And I don’t make a long-term decision, like I’m going to shift my manufacturing to the U.S., for something that, by definition, can’t continue.

S+B. Do you feel like you’re in the minority on that? Because we see headlines saying, for example, Mercedes used to export all these cars from the U.S. to China, and now that they can’t, they are moving production.
HASENFRATZ:
I think that it depends on the severity of the impact. It’s easy for our company to look past the noise, because the noise is not impacting us that much, right? For some businesses, the severity of the impact will dictate what they’re going to do. Now, some companies may just decide, “You know what? We’ve got this destabilizing force in the American administration for at least two more years, maybe six more years, and I just don’t want to be part of that.” But don’t forget that 80 percent of the world’s automotive production and sales is outside North America. So you’re going to make decisions that make sense for your global business, not just this one slice.

S+B: Discussions around trade are very bound up in politics. Popular faith in free trade as a positive good has eroded, along with a little confidence in CEOs of companies. So how can someone like you and your colleagues play a constructive role in the discussions that we’re having about trade?
HASENFRATZ:
Focusing on facts and not emotions is certainly how I’ve always tried to approach it. The facts are that eight out of 10 American manufacturing jobs that were lost over the last 20 years were lost to automation, not trade. It’s a misconception that trade has somehow eliminated jobs. There are something like 6 or 6.5 million unfilled jobs in the U.S. today.

S+B: It’s 7.1 million, according to the Bureau of Labor Statistics.
HASENFRATZ:
Oh, that’s good to know. So, where are all these jobs that were lost? I think that there’s a real disconnect between the reality of what’s going on and the way people think, the emotional side. In no small part fanned by the rhetoric of Trump and his campaigning that totally blew that stuff out of proportion and didn’t focus on facts and just tapped into emotion. So, I think what is important is to focus on facts and make decisions that are based on facts. Make policy decisions based on facts. Make investment decisions based on facts.

S+B. You have a plant in North Carolina. Are you having difficulty hiring in the U.S. and in Canada? And if so, what type?
HASENFRATZ:
We are having difficulty hiring everywhere — for skilled and unskilled jobs — because unemployment is at 40-year lows. On the one hand, it’s forcing our hand to automate more than we probably would be doing were we able to find people. For sure, the jobs are changing. We have way more indirect jobs than direct jobs. Direct jobs are people loading and unloading machines, and indirect is basically everybody else. We used to have two direct employees for every indirect employee, and today we’re at about one to one and rapidly getting to more indirect than direct jobs. It’s interesting, because over the last seven years here in Canada, our direct head count has risen 36 percent, but the indirect head count is up 62 percent. And wages have increased 76 percent. That’s a reflection, again, that these indirect jobs pay more as well. And sales per employee has also increased significantly over that time frame, by 35 percent.

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