Consider the steady rise of Red capitalism and you'd think Magna International Inc. would have been among the first North American businesses to develop a China strategy. After all, with a corporate culture based on the entrepreneurial spirit of founder Frank Stronach, the Canadian auto parts giant doesn't miss many emerging opportunities–or threats. And since Magna's philosophy revolves around a controlling party with a social contract (the $20-billion-plus outfit has a constitution that predetermines how to distribute its wealth), China seems like a natural fit. But chairman Stronach took his time warming up to the land of chairman Mao, which is why China and its 1.3 billion people managed to stay in Magna's blind spot as the nation transformed into the next big thing for everything money can buy.
Although Magna, which has virtually no debt and roughly one dollar in the bank for every person in China, stands out in a sector with few other strong players (not to mention plenty of unionized dogs like Delphi), it neglected–until recently–the rapid emergence of China as the potential future sweet spot for all things automotive. As Stronach himself pointed out at the company's annual meeting in May, Magna is dangerously tied to a few key customers. Indeed, General Motors, Ford and DaimlerChrysler accounted for 61% of its revenue last year. Volkswagen and BMW supplied 26% of 2004 sales, while all other auto manufacturers, including booming Japanese and Korean companies, accounted for just 7%. While servicing Detroit has served Magna well, Asian and European auto manufacturers have been steadily growing into North American players and eating the former Big Three's lunch along the way. (In Canada, the Detroit trio's combined slice of sales dropped below 50% for the first time ever, in October.) And that has industry watchers wondering if Stronach's empire can keep growing at its typically impressive pace. “Magna needs to diversify its customer base if it hopes to sustain its long-term growth of 10%,” says Youssef Abboud, a senior analyst at Westwind Partners. But building a larger pool of customers that feed the all-important U.S. market is just part of what Magna needs to do to stay on top, since North America's share of global vehicle production is expected to decline over the next five years. In that period, according to Magna's own projections, 49% of industry growth will come from the Asia-Pacific region.
Look at China alone. The national economy is growing at a 9.4% annual rate, with an output already two-thirds that of the United States. Vehicle sales jumped to 3.26 million in 2002 from 1.43 million in 1995. In 2003, sedan sales increased 70%, to 1.9 million units. By 2010, the nation's light-vehicles market could reach seven million units, surpassing Japan, the world's second-largest automotive battleground. Local auto parts operations are inefficient and lack expertise to produce sophisticated product modules. Help is wanted. But the window for Canadian auto-parts companies to get in on the party is closing fast. Within the next three years, the Automotive Parts Manufacturers' Association reports–for better or worse–automakers in China will be sourcing 70% of components locally.
Magna knows it has work to do outside North America if it wants to remain a leading global player. After deciding to simplify a confusing corporate structure that hindered relationships with Asian automakers last year, the company went looking for an industry heavyweight to fill the role of president vacated by Belinda Stronach's political ambitions. Enter Mark Hogan, who personifies Magna's China strategy. He clocked more than 30 years at GM, most recently as group vice-president of advanced vehicle development. The Harvard MBA is considered a visionary, which is why he was a potential successor to Bob Lutz, GM's legendary product czar, before defecting to Magna in August 2004. At GM, Hogan managed everything from public affairs to finance. He also ran various markets, ranging from Brazil to cyberspace (he was head of eGM back in the day).
At Magna, Hogan's job is no less challenging. Simply put, he was hired to prepare the world's most diversified Tier 1 supplier of automotive systems for the new global order. “The best way to characterize Magna,” he says, “is as a Canadian company that grew its North American business in the '70s and '80s. In the '90s, it then focused its attention on growth in Europe, which it did quite successfully. This decade is devoted to making sure we stay competitive in North America and Europe, but to also grow our base of business in Asia–both from a manufacturing standpoint and a customer standpoint.”
Magna–which operates in more than 20 countries–learned a lesson from Japan, where it has engineering operations to support new product development relationships with local manufacturers, but has no parts plants because, as Hogan says, “the supply base is pretty much spoken for.” As a result, the company is actively seeking all the Chinese business it can get as part of plans to increase Asian-based sales to 15% of total revenue by 2010, up from 4% last year. (Although that target may not appear aggressive, analysts point out it represents significant growth given that Magna's revenue base–now about US$22.4 billion–should grow at least 10% per year.) And China is apparently open to the Magna culture. Local managers now run 15 facilities that support most foreign automakers, as well as a few key Chinese auto manufacturers expected to survive looming consolidation wars. “We started slow, but we're feeling pretty good about our China footprint,” Hogan says, noting the company actually controls 70% of the Chinese automotive mirror business. “There is no hocus-pocus to our strategy. This is straightforward supply business in a different culture.”
In 2000, Magna's new president delivered a commencement speech at Northwestern University. The Chicago native advised graduates to learn from Oscar Hammerstein, who noted the perfectly carved braids and curls that adorn the top of America's Statue of Liberty, which was built in 1886 by people who had no idea anyone would ever be able to fly over its head. After dealing with China, Hogan is taking that respect-your-blind-spots approach to sculpting Magna's future. Indeed, after addressing China, Magna is now building a presence in Thailand and India, which–in case you didn't know–should also surpass Japan in vehicle sales by 2015.