The day Linda Hasenfratz’s father, Frank, suggested it was time she took over as CEO of the family business, she told him, “That sounds like a good idea, but what are you going to do?” He replied, “Oh, the same thing I’m doing now.”
The story elicited a laugh when she told it at a recent industry conference, but for Hasenfratz, it was a serious dilemma. She’d undergone a decade-long apprenticeship at Linamar, the auto-parts manufacturing company Frank founded in Guelph, Ont., in the 1960s, starting as a lathe operator and moving through accounting, quality control and factory management, among other functions. She’d then spent five years in the C-suite, working under her dad. If she was going to assume the title of chief executive, she wanted the responsibilities, not just the nameplate. So after much back-and-forth, father and daughter nailed down his tasks as executive chairman while on a business flight. Linda wrote them down on a piece of paper and asked him to sign it. That paper is still in her desk drawer.
That father-daughter agreement helped Frank step back from the company’s daily operations, and enabled Linda to move into the role of CEO in 2002 and build on the sales growth she’d already engineered during her five years as COO. The results have been impressive. Since the younger Hasenfratz took over the wheel, the company has more than tripled its revenues, to $3.6 billion in 2013. It’s tempting to look at Linamar as a family business that escaped an all-too-common fate: The first generation builds it up; the second generation runs it into the ground. But Linda Hasenfratz brought far more to the company than just a clear succession plan. She has diversified its product range and implemented operations, performance management and communications systems that have enabled Linamar to successfully manage rapid global expansion. The company’s balance sheet is one of the strongest in its peer group.
Compounding Linamar’s success is a shift in the market that has favoured Canada’s second-largest auto-parts maker. Linamar manufactures components for passenger and industrial vehicles with a focus on powertrains: engines, transmissions, gears, camshafts—all the stuff that moves a car. Traditionally, automakers produced their own powertrain components, but over the past couple of decades they’ve been increasingly outsourcing the task to suppliers.
That shift, plus the gradual recovery of the auto industry, has helped Linamar stock soar from a low of $2.30 in the depths of the recession to a recent high of $67 (and placed the family at #72 on the Rich 100). It almost doubled in the past year alone on the back of consistent double-digit quarterly revenue growth. And the road ahead is clear. “The sector is still in the early stages of a significant recovery, with another three to five years of growth ahead,” says industry consultant Dennis DesRosiers. He adds that the parts market, whose sales sank to $160 billion in 2009, is now back to $400 billion and heading north at a fast clip. “Get ready for the ride,” he says.
Under Linda Hasenfratz’s leadership, the company is more than ready. “Linda has the MBA, and Frank is the entrepreneur,” sums up Thomas Horvat, general manager of Vehcom Manufacturing, a Linamar machining and assembly plant. “Linda has kept that entrepreneurial edge but married it with professionalism. We’ve all changed under her influence.”
Late last year, Western University’s Ivey Business School held a conference to review its Future of Canadian Manufacturing project. Along with representatives from government and research groups, the school invited a few business leaders, among them Linda Hasenfratz. “She came in and took a seat right at the front of the room, then drove the conversation,” recalls Paul Boothe, director of Ivey’s Lawrence National Centre for Policy and Management. “She’s incredibly passionate about the industry, and she didn’t just talk about her company but about what needed to be done to revive our manufacturing sector.”
Her company could serve as a model for such a revival. Linamar is a precision manufacturer whose products have grown increasingly complex, highly engineered and high margin. Twenty years ago, it made shafts for four-speed transmissions that might sell for $12 to $15. Ten years later, it was making entire clutch models requiring more complicated assembly and machining, which it could sell for $45 or $60. Now the company is producing nine- and 10-speed transmission models that are worth around $150. It was Hasenfratz’s savvy anticipation of where automakers were heading—away from costly in-house component production—that drove the climb upmarket, which has helped shield Linamar from overseas competition. She opted to invest in the necessary equipment and expertise, and the move paid off.
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But sophisticated manufacturing comes with heavy fixed costs that can be tough to scale back when a slump hits. The industry downturn that started in 2007 and eventually put two of the top three automakers in Chapter 11 (along with scores of their suppliers) didn’t spare Linamar. The company’s revenue dropped by a quarter within one year, and its staff shrank by 42%. “Our philosophy at the time was: First, cut costs; second, conserve cash; and number three was grow,” says Hasenfratz. “I knew we couldn’t cut our way out of this—we needed to grow.” So she sought out opportunities among suppliers exiting the sector, took over the work and produced it on Linamar’s equipment, rejigging existing machinery so she didn’t have to spend new capital. The company came through better than many of its peers and cemented its position as a leader in powertrain components.
“In the run-up to the downturn, a lot of us wondered if Linamar would get returns on these capital-intensive investments,” says one analyst (who asked not to named), adding that Hasenfratz deserves credit for anticipating the industry shift toward outsourcing powertrain components. That shift is at the heart of Linamar’s recent growth and future strategy, says Hasenfratz. Analysts project that by 2020, 40% of engines and transmissions will be manufactured by suppliers. Hasenfratz pegs the global powertrain business at more than $450 billion today and sees it growing to $600 billion in three to five years. “I wouldn’t mind a little slice of that, and I don’t think that should be too difficult to do,” she says.
The rising emphasis on improving fuel economy, which Linamar has made a priority, is also proving a boon. Peter Sklar, auto-sector analyst at BMO Capital Markets, sees Linamar as best positioned among the Canadian auto-parts companies to exploit the tightening emission standards. He projects “a superior long-term growth rate” for the company, including a 13% revenue increase this fiscal year, dwarfing Magna and Martinrea, Canada’s other major players.
Many of the outsourcing opportunities lie outside the North American market, and Linamar has been growing its presence in Asia and Europe. “In Europe, we have business in hand that will ramp up over the next several years that will almost triple our sales there,” says Hasenfratz. The company has two plants in China and is opening one in India, and recently added a majority stake in a German manufacturer.
As the company grows, it draws on a strength of Frank’s that was outlined in that father-daughter contract. Although he’s now approaching 80, Frank is Linamar’s designated efficiency guru, tapping a career-long knack for identifying waste. As such, he heads the company’s Cost Attack Teams, or CATs, in which he and a plant general manager select a project; collect all the information about tooling, process and equipment; and then go operation by operation, looking for waste and improvements, in sessions that can last entire days. “He has 50 years of manufacturing knowledge, and when he does a CAT with one of our plants, he teaches [managers] not just technical ideas but about urgency,” says Linda. “I’ve learned an immense amount from him about moving quickly, focusing on small costs as well as larger issues, and the importance of managing from a cash perspective.” Plant GM Horvat has worked on numerous CATs with Frank over his 18 years with Linamar. “This year’s target for savings was around $20 million,” he says. “And we have already saved more than that.”
Thinking lean is a necessity in the modern auto industry, and the best way to foster it is by motivating staff to make it a target. For example, a program Hasenfratz created pits its facilities in a friendly contest for best scores in meeting deadlines, reducing absenteeism and lowering costs.
Even as she introduces processes and programs, Hasenfratz has been wary of engendering bureaucracy. The pressure for consistency and regulation—from automaker clients, shareholders and financiers—intended to mitigate risk and cut down on errors poses dangers of other kinds. “How can we formulate new ideas if we’re always focused on conformity?” she asks. “In striking the right balance, it’s crucial to minimize risk but leave discretion to encourage ingenuity.”
Hence, she has worked to retain the entrepreneurial DNA her father bred into Linamar. “That’s my dad’s entire spirit: Don’t get bogged down with rules and procedures,” she says, calling him “the biggest bureaucracy fighter you’ll ever find.” The company’s 44 plants around the world operate as largely autonomous entities, and are limited in head count and footprint to retain agility and collegiality. Each plant is a separate profit centre, with GMs having final sign-off. “They’re not just responsible for quality and controlling cost but looking for new business and thinking of new things the plant could do,” says Ivey’s Boothe, who has studied Linamar’s management practices. Horvat recalls a colleague once telling him, “Think of Linamar like a big bank. You have a job, you go to the bank, you justify the need for a capital expenditure and you borrow money.”
Hasenfratz admits the managers’ freedom isn’t complete. “We can’t have a bunch of cowboys doing whatever they want.” To provide central guidance, Linamar has developed a Global Operating System (GOS), which comprises roughly 40 procedures that dictate certain aspects of operation. For example, high-stakes functions like estimating and launching new manufacturing programs follow GOS processes. But Hasenfratz would like to see the number of procedures cut down. “It’s something I’m grappling with,” she says. “You can crush an entrepreneur if the rule book is too big, but you can also erupt in flames without a few guidelines to go by.”
The key for her is to make each plant manager fully accountable. “There is nobody behind [you so you can] say, ‘Oh, that wasn’t my decision.’ No. It is your plant. It is your business. It is your decision. Own that decision.”
Then there’s the question of finding the right people to run those plants. Feeding double-digit annual growth at a high-tech manufacturer requires skilled employees, and finding them has long been a challenge in the sector. Over the past decade, Hasenfratz has put in place measures aimed at boosting the company’s bench strength. For example, she introduced a five-year management-training program that grooms promising employees to become plant GMs by exposing them to various areas of the business—a process loosely based on what she herself went through.
During a lecture at Ivey earlier this year, she explained that the program aims to mirror an entrepreneur’s experience. “As an entrepreneur, you initially have to do everything: You are the salesperson, the person running the machine, the delivery person. As a consequence, you become very familiar with the company.” At Linamar, trainees spend two years travelling among the different departments, then another three years in mid-level management positions that expose them to materials, accounting and quality management. Program candidates first undergo a rigorous screening process, which includes an exercise that simulates the experience of being a plant GM forced to deal with a series of issues. “We try to see how they react, because in many ways, leadership is instinctual,” says Hasenfratz.
Those who enter the Linamar world have an edge for senior positions. Horvat estimates that about 80% of his GM colleagues are Linamar-grown. Hasenfratz believes preparing others for leadership is the greatest sign of a good leader. “The success of your successor is the best test of your leadership, because you are responsible for developing somebody to take your job.”
At 48, Hasenfratz is in no rush to find that successor just yet. Her goal is to build Linamar into a $10-billion company by 2024—a personal ambition as much as a corporate one. She believes the global growth in powertrain outsourcing alone will enable Linamar to reach that target. “We have lots of runway on this strategy,” she says. “Shifting manufacturing of engines, transmissions and drivelines out into the supply base will be a 20-year process.”
A continuing strong automotive market will no doubt prove helpful, as will a shift toward making more sophisticated components. BMO’s Sklar believes Linamar in particular will benefit from the coming move to nine- and 10-speed transmissions, which should boost the company’s revenues to $5 billion by 2018. That will take Linamar halfway to its goal. It’s Hasenfratz’s job to make it a smooth ride.