CK Chow is in an enviable position. The work of his predecessor as chief executive of GKN, Sir David Lees, knocked the company into shape, selling off unprofitable businesses so that it now turns in profits in all its divisions. It also means Chow has a large cash pile at his disposal.
But it leaves him with a problem: how does he meet expectations to do even better?
‘The great advantage of taking over a successful company like GKN is that it is a robust company with a robust portfolio, with a leading position in most of our products and markets,’ agrees Chow.
‘The disadvantage is that the investors, and all the stakeholders – employees, management, bankers – expect us to do better and achieve better results. To meet their expectations is certainly a challenge.’
Chow has set ambitious targets, with a six-point strategy to increase revenue by 40% in the next five years. ‘The areas we have identified for growth are all within the business portfolio we have today in products, markets and technology that we know well.’
Chow gives an affable and lucid exposition of the strategy, with all its subsections and business drivers, without ever losing his thread. The impression he gives is of a man who knows precisely where he wants to go and how to get there.
Chow’s strategy has identified three areas of organic growth: automotive drivelines, helicopters, and the Chep pallet and reusable packaging business; and three ‘growth platforms’, which he defines as ‘businesses we can grow organically and through acquisition of products, technologies and companies’: powder metallurgy, off-highway vehicle components, and composite structures for the aerospace industries.
Driveline components, notably constant velocity driveshafts for front wheel drive cars, have been the foundation of GKN’s success since the 1960s. The company has a 36% global market share in CV joints, but some analysts have suggested it is overdependent on this product.
Chow says: ‘People have been arguing that CVJs are a mature product for many years. In fact they’re not.’ Though the market in the US and Western Europe is only likely to grow long-term at 2-3% a year, ‘we still see growth opportunities in three areas’.
First is in improving profitability through increased efficiency. Second is through contracting out opportunities. About a third of the market is supplied by in-house production by the big car makers, including GM’s Delphi and Ford’s Visteon subsidiary. But much of this is likely to be contracted out in future, reversing the trend by which car makers produced CVJs under licence from GKN.
The model for this was the takeover two years ago of Fiat’s CVJ production. Since then GKN has built a new factory and expects to return the operation to profit this year. ‘Fiat got a better, more flexible supplier of CVJs. And with our global capability we can supply them on a global basis wherever they go.’
Third is the emerging markets of South-East Asia, of which Chow says: ‘In the medium to long-term they will continue to grow even if they decline in the short-term.’
Meanwhile, following Canada’s recent decision to buy the EH101 helicopter, GKN Westland Helicopters has total orders worth £3.8bn. Spares, logistics and service are expected to bring in as much again over the 15-20 year life of the aircraft. Chow says critics of the 1994 takeover of Westland have been confounded.
‘Westland has flourished under GKN. The financial resources of GKN has enabled Westland to take on the major integrator role where before, as a standalone company, defence ministries would have some serious doubts about its ability to fund development. That has contributed significantly to the success in winning orders.’
Also, a number of initiatives, each headed by a main board director, are examining ways to transfer skills across the business boundaries. ‘One is promoting continuous improvement techniques from automotive operations to aerospace and defence; another is sharing the systems integration and programme skills of Westland to the automotive sector, where we are moving more into system design and supply. Another is looking at strategic procurement issues and supply chain management, an important aspect for all our businesses.’
Will even GKN’s resources be equal to the likely development costs of new helicopters in the future? ‘I think it would be prudent to say that there is a possibility for alliances either for product development or even deeper, so that you lighten the burden of development costs.’
The Chep pallet business, pioneered by GKN 25 years ago, manages a pool of 62 million pallets for customers in the UK, US and Europe, and has shown double-digit growth in recent years. Chow expects it to continue to grow through greater market penetration, developing new markets and products.
One of these is Autocrate, a returnable container for automotive parts aimed at manufacturers in Europe that manage hundreds of thousands of containers on assembly lines. Returnable transit packaging aims to replace cardboard boxes for carrying fresh produce for the food industry, driven by laws to limit packaging waste and a need for better product protection. Chep is working on developing regional standard products. The Asda supermarket chain is a big customer.
Turning to GKN’s growth platforms, the most significant recent acquisition was last year’s purchase of Sinter Metals of the US: this made GKN the world’s largest producer of powder metallurgy components, more than twice as big as its nearest competitor. ‘We’ve identified the technology as a high growth area,’ says Chow. Seventy per cent of its products go to the automotive sector, the remainder being used in products such as power tools, lawn mowers and computer printers. ‘All are growing markets.’
The main driver is product substitution: ‘Where we can produce a powder metal component with the precision and strength of a solid steel machined part they are normally 25% lower in cost and weight.’ Moreover, even now GKN has only 13% of the world market: ‘There’s a considerable way to go,’ says Chow.
The second growth platform is driveline components for off-highway vehicles, mostly for ‘agritechnical’ equipment such as tractors but also construction equipment. The aim is to become one of the largest first-tier suppliers.
The third growth platform is aerospace structures. Westland Aerospace supplies composite structures such as engine nacelles and tail cones to a range of aircraft makers.
‘The OEMs in aerospace have consolidated, but there are still a lot of small first-tier suppliers. The OEMs are talking exactly the same language that the automotive sector has been talking for the past decade – about a smaller number of bigger suppliers which have engineering capabilities and financial resources to supply them on a global basis. Second, they are reviewing their core capabilities and outsourcing what they regard as peripheral. We are in a very good position to take advantage of both.’
Amid these ambitious plans for growth and acquisition, are any disposals likely? Some analysts have cited the Special Vehicles division -included in a consortium bidding for the £2bn Anglo-German MRAV project – as part of the group lacking in synergy with other divisions.
Chow says: ‘We have no plans for major disposals. Most of the unprofitable businesses were divested over the past decade.
‘The armoured vehicle business dates from before the Second World War and it’s a very good business unit,’ he continues. ‘On the other hand, the consolidation drivers for armoured vehicles are quite strong in the sense that there is more capacity than demand, so we would look into the possibilities for consolidation. A logical consequence of that is that if we win MRAV then we already have a European consortium where consolidation can occur. If there is a consolidation trend then the MRAV will provide a good platform for consolidation.’
How has Chow tried to change GKN’s culture?
‘Culture must be linked to strategy: a good culture is one that will help to deliver a strategy. The strategy going forward is a growth strategy so we must develop a culture that will help us achieve growth.
‘There are a lot of values long held in GKN which will work successfully for us under all circumstances and we will preserve them very jealously. To achieve the growth strategy we need to add something else. What we are trying to introduce is a sense of entrepreneurship, dynamics and speed of achievement.
‘Corporate entrepreneurs are managers who create profits and wealth through using initiative, being innovative and managing risk. That doesn’t mean taking risks blindly. It means understanding the potential risks and assumptions of the business and taking managerial actions to mitigate it. That’s the culture we want to add to GKN.’
CK Chow: at a glance
Born: 9 September 1950, Hong Kong
Education: BSc in Chemical Engineering, University of Wisconsin; MSc in Chemical Engineering, University of California; MBA, the Chinese University of Hong Kong
First job: 1974, Research engineer, Climax Chemical Company, New Mexico. Then 20 years with BOC, rising to divisional director
Current job: chief executive, GKN plc