The twin problems of a mature home market and the need to compete internationally are familiar to many UK engineering companies. One US-based group wrestling with the same difficulties is bearings and steel manufacturer Timken. It has responded by going for international expansion and product and plant innovation.
Timken’s willingness to move away from its home market may seem perverse, given that it enjoys profit margins of 8-9% in North America, compared with 3% in the rest of the world. But chairman, president and chief executive WR Timken Jr believes increases in scale will reap benefits. `Our businesses are a collection – some are more profitable than others. In the long term, growth in international markets will allow us to achieve the margins we have achieved in the US,’ he says.
Some might doubt whether a company with global sales of $2.7bn (£1.7bn) can survive against much bigger rivals such as SKF in Sweden, FAG in Germany and NSK in Japan. Timken says the key is a focus on particular products: `Timken is one of the biggest producers of bearings in the world. We are a major player where we choose to compete.’
Timken entered the UK market as a bearings manufacturer in 1909, then moved into steel tube piercing and steel production to secure materials for its bearings. The two strategies of international expansion and expanding into materials were combined when Desford Steel Tubes, with a turnover of about £50m, was bought from Hay Hall last year. Timken now has 1,200 employees at Desford and at Duston in Northamptonshire.
Timken has an established brand identity in the UK, France, Germany and Italy, and has recently bought companies in Poland and Romania. John Elsasser, vice-president for Europe, says it is moving into Eastern Europe to exploit market opportunities rather than for cheap labour. `Compensation costs are low, but so is productivity. Their skills are very strong, except management skills, which are something they are working on,’ he says.
Timken also manufactures in China and has recently taken control of a former joint venture in India. This strategy fits with a study by market research specialist Frost & Sullivan, which suggests that sales of bearings tend to expand particularly fast in developing countries.
One problem the company faces is global overcapacity in the bearings market. This has allowed customers to force prices down. Bearings have yet to reach commodity status, however, because they are continually being improved.
The result of customer demand for ever-increasing quality, according to Timken, is that the bearings industry has reached higher levels of performance than many others. `The precision in a bearing is equal to the precision in a watch. We might sell it to an auto producer for $3, and it will last for 300,000 kilometres,’ he says.
The roller bearing is still Timken’s mainstay, with the automotive industry a big customer. Although most lighter vehicles now use ball bearings, other markets are opening. `Though taper roller bearings are no longer the king of the wheel, there is a move towards using them in transmissions,’ says Bob Leibensperger, head of Timken’s bearings division. They are also used in the fast-growing sport utility vehicle sector, trucks and in applications from dental drills to rolling mills.
The firm is trying to add value to its products, for example with the Sensor Pac `smart bearing’, which uses an integrated sensor to feed information to anti- lock braking and traction control systems.
The need to secure a reliable supply of materials led Timken to start producing steel in 1917. It still uses this for 91% of its US production. Shipping costs means only about 15% of bearings in the rest of the world use this steel. Instead, the firm shares technology with suppliers such as British Steel to ensure consistency. `Where we don’t find a source which is satisfactory, we export from the US,’ says Bill Bowling, head of Timken’ steel division.
The company’s 1980s Faircrest plant in Canton, Ohio, which makes steel from scrap cars, produced 810,000 ingot tonnes of 5-12in steel bar in 1998.
Timken says its most recent US plant, the bearings-to-order factory at Asheboro, North Carolina, completed in 1994, is the world’s most modern bearing plant. The contrast with some of its older plants, for example Bucyrus, Ohio, is dramatic. There is little dirt, heat or noise; the atmosphere is more like a supermarket than a metal-basher. All staff are salaried, unlike the other hourly workers in the group.
Asheboro’s product is more customer-focused. Each is made to the customer’s order: the average order is for just 30 bearings.
The objective was to make small batches of bearings as cheaply at Asheboro as big batches are made at Bucyrus. The solution lay in a computer system which can use records of past orders in the design process, set-up times which have been cut to 10 minutes and an emphasis on getting the first piece right. Asheboro plant manager Rory Lubic says: `We are trying to get the cost curve flatter so that we can make one bearing for the same unit price as 100.’
Like many engineers, Timken is trying to become more of a service provider and less of a manufacturer. It looks after large, expensive rail bearings at its renovating facility at Northampton, and at the other end of the size scale has started repairing dental handpiece drills. As well as providing a source of profits, these services can feed back information on how products are used and how they wear down.
Such revenue from new services, new products and new markets will all be required if Timken is to satisfy its investors. Only 18% of shares are still owned by the Timken family, with a further 15% owned by the company’s employees. Most belong to institutional investors, who were not pleased when the company projected a poor set of results last year – its share price fell from over $40 to $13 in a few days. It has recovered a little, but analysts are cautious about increased profitability while demand for bearings is weak. In the long term, the company is expected to recover.