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Jack Perkowski gave up a successful Wall Street banking career to try something more audacious -- building a world-class auto-parts maker in China. More than ten years and millions of dollars in losses later, is he motoring in the right direction?
Jack Perkowski loves a challenge. In college the Pittsburgh, Pennsylvania, native ran extra wind sprints, intensified his weight-lifting regimen and pushed himself through seemingly endless drills to improve his blocking techniques to win the starting right guard position on Yale University's undefeated 1968 football team. Just 5-foot-11 and 190 pounds, Perkowski regularly tussled with much bigger opponents, among them Princeton University's 6-foot-5, 250-pound lineman, Bob Hews, a future pro footballer, who fell on him in a game, nearly knocking him unconscious. The tough-as-nails Perkowski didn't miss a play and went on to receive honorable mention as an AllIvy League lineman. "Jack is probably the most dedicated athlete I've ever seen," an assistant coach told the Yale Daily News that season.
For the past decade Perkowski has shown the same mix of grit, zeal and ambition on one of the world's most crowded and competitive playing fields. The former PaineWebber investment banking chief today runs Asimco Technologies, an investment company he set up in 1994 to inject foreign capital, technology and management skill into China's sprawling, fragmented and mostly state-owned auto-components business.
Since its founding, Asimco has overcome a string of operating losses, a severe mid-1990s credit crunch and bouts of nasty infighting with local joint venture partners to combine 13 auto-parts makers in nine Chinese provinces into the country's seventh-biggest auto-components maker, with $360 million in revenues and about $40 million in earnings before interest, taxes, depreciation and amortization. Its 13,000 employees turn out piston rings, diesel-engine fuel injection systems, compressors, castings and chassis parts for a blue-chip customer list that includes the local operations of Caterpillar, Citroën, Cummins Engine Co., DaimlerChrysler, Ford Motor Co., General Motors Corp. and Volkswagen, as well as such Chinese manufacturers as China Yuchai International, Dalian Diesel Engine Co., Jiangling Chassis Co. and Wuxi Diesel Engine Works.
So is this flamboyant, cigar-smoking former Wall Street deal maker on the verge of success? Maybe -- maybe not. On the plus side, Asimco operates in the world's fastest-growing and most promising automotive vehicles market. Sales of vehicles have nearly doubled in the past four years; in 2009 the country is expected to make 9 million, up from an estimated 5.2 million last year. Asimco's own sales are keeping pace, rising at a 16 percent annual clip since 1998. Figures supplied by Asimco show 12-month rolling ebitda quadrupling from 1997 through early 2003. (Perkowski declines to provide more detailed profit-and-loss numbers.)
"Jack's ten years of effort have paved a new road in China," says An Qingheng, chairman of Beijing Automotive Industry Holding Co., which has a successful carmaking joint venture with DaimlerChrysler; he has known Perkowski since the early 1990s. "I think his next ten years will be much smoother."
But how smooth? Some observers and former associates think that Asimco still must avoid potholes better than it did in its colorful, even picaresque, beginnings. At that time, executives say, they had to contend with everything from dodgy local partners to employees' barricading the company president in a hotel room to try to force him to overturn a board decision. These tales have been woven into a book entitled Mr. China: A Memoir, due out this month, written by former Asimco president Tim Clissold, the executive who was locked in the hotel.
As much as he has accomplished, Perkowski still faces an uphill battle. His two closest colleagues have decamped: The Briton Clissold, a onetime consultant at Arthur Andersen in Hong Kong, bolted in early 2001, shortly after Perkowski asked him to assume a narrower role, and China native Ai Jian, a former managing director, left last September.
Asimco's initial backers have also exited. Last spring Key Principal Partners, the private equity investment arm of Cleveland, Ohiobased banking company KeyCorp., led several other investors, including insurer American International Group, in buying 90 percent of the company for $85 million. That price represented a loss of roughly 50 percent for Asimco's remaining original investors. At the outset TCW Capital Investment Corp. and Dean Witter Capital Corp. had led a group of 150 investors, but Dean Witter sold its interest in 1998 after its brokerage parent acquired Morgan Stanley, and General Electric Pension Trust came in as a new lead investor. Perkowski upped his stake in the recapitalized Asimco, from an indirect holding of about 4 percent -- through a general partnership -- to a direct 7.5 percent.
Most crucially, Asimco faces ever-growing competition from increasingly aggressive low-cost local firms as well as from a raft of overseas suppliers following their customers to China. The world's biggest and most technologically advanced auto-parts maker, deep-pocketed German giant Bosch Group, last August announced a joint venture in China to make diesel fuel injection systems that will compete in one of Asimco's most profitable product areas. Other leading manufacturers from Germany and Japan have arrived in China, joining a cast that already includes U.S. heavyweights Delphi Technologies and TRW Automotive.
Perkowski, who at 56 says he retains the bench-press record (551 pounds) at the Hilton Beijing health club, isn't one to duck competition. He has hired about 50 new managers during the past five years to smooth over Asimco's relations with its partners and to upgrade operations. He has also shifted gears strategically. In April 2003, Asimco bought Federal Mogul's U.S.-based camshaft manufacturing unit for $28 million. The new goal: to become the globally recognized leader in its most important products rather than focus so much attention on China, where it sells 70 percent of its components (most of the rest go to the U.S.). Key Principal promises to help Asimco fund its expansion through acquisitions, as needed.
How realistic is it to aspire to be a world leader when your company has come up short in your region of choice? Perkowski, grandly comparing Asimco's efforts to the difficult early years of Ford Motor Co., asserts, "It's supposed to be a real stretch."
PERKOWSKI COMES BY HIS WORK ETHIC NATURALLY. His father, John Casmir Perkowski, a Polish immigrant, labored for a machining company in Pittsburgh until he was laid off, then took a job maintaining and repairing roads for the Pennsylvania State Highway Department. With money tight, young Jack and his four siblings pitched in. Through high school Jack worked 20 hours a week -- from 6:00 p.m. to 10:00 p.m. Monday through Friday -- stocking shelves and manning the cash register at a local supermarket.
A football star at North Catholic High School, Perkowski was a good student whose coach, together with a couple of local Yale alumni, encouraged him to apply to the Ivy League college. His application was well timed: Yale had begun a new admissions policy to diversify its student body beyond its traditional pool of mostly well-to-do East Coast boarding school graduates.
Though Yale was worlds apart from working-class Pittsburgh -- future U.S. President George W. Bush was two classes ahead of Perkowski -- the rugged football player fit in well. "It really did not make a bit of difference where you were from or what your father did. What mattered was what you did, both in and outside the classroom," he says. Perkowski mastered the rigorous academics. In 1969 he won the university's Gordon Brown Prize, given annually to a junior who excels in intellectual pursuits, athletics and college service. The following year he graduated with a degree in American studies.
After a short stint at Morgan Guaranty Trust Co. (now J.P. Morgan Chase & Co.) and two years at Harvard Business School getting an MBA, Perkowski landed at PaineWebber as a banker arranging private placements. In 1981 his bosses gave him a chance to run the firm's small but profitable real estate banking unit -- which had just lost all but one of its professionals to rival Dean Witter Reynolds. Perkowski's heartfelt appeals persuaded all of PaineWebber's clients to stay put while he hired a new banking team. Real estate revenues took off, fueled by the arrival of important new clients like Amoco, Pacific Gas & Electric Co. and tycoon John Kluge's Metromedia Co.
By 1985, Perkowski, just 36, was running PaineWebber's investment banking department, long mired in Wall Street's second tier. Within a year the team met Perkowski's ambitious goal of doubling its modest revenues, to $100 million, and began taking mandates away from bulge-bracket firms -- "a minor miracle," according to Bruce Foerster, who ran the firm's syndicate department under Perkowski. "Huge is the only word I can think of that truly describes what Jack accomplished at PaineWebber." Foerster is now CFO of Aurora Capital, a Florida money management firm.
The highlight came in 1987, when Perkowski led the negotiations to sell 18 percent of PaineWebber to Japan's Yasuda Mutual Life Insurance Co. He managed to get the $300 million deal done in October in the midst of the stock market crash that cut the value of PaineWebber shares in half.
Perkowski, whose heroes were junk bond king Michael Milken and leveraged-buyout pioneer Henry Kravis, had bigger ambitions. He left PaineWebber (now part of UBS) in 1989 to run Kluge Subotnick Perkowski & Co., a $100 million LBO fund backed by former client Kluge and one of Kluge's key executives. But Perkowski wasn't completely satisfied.
Looking for a pathbreaking business idea, he kept coming back to Asia, where he saw a young, increasingly mercantile population promising decades of economic growth. Perkowski, who had never visited mainland China and didn't speak a word of Mandarin, made an audacious decision in late 1991: He chucked the private equity business and moved to Hong Kong.
"The businessmen I met talked about their own businesses for five minutes and then China for the next hour," Perkowski says. "That's when I decided the research was over."
It didn't take him too much longer to home in on the auto-parts business. In early 1992, Perkowski attended a conference in San Francisco on Pacific Rim investment opportunities. A Volkswagen executive, waxing enthusiastic about China, complained that VW's biggest problem there was getting high-quality parts. Perkowski decided he would try to create China's biggest auto-parts maker.
PERKOWSKI SOON SET UP SHOP IN BEIJING'S modest Kunlun Hotel with two partners: Clissold, whom he had met in Hong Kong, where the Mandarin-speaking consultant was helping Andersen clients identify Chinese investments, and Ai, a onetime member of Mao Tse-tung's Red Guard who had more recently held a government job promoting foreign investment. They and a coterie of aides began searching for potential auto-parts manufacturers in which to invest.
Over nine months in 1993, they conducted what Perkowski calls the group's "Long March," visiting an average of two factories a day in approximately 40 cities across China -- from Beijing in the northeast to Zhuhai in the south -- looking for viable joint venture partners among the country's many state-owned factories. In some places Perkowski and Clissold were the first foreign investors locals had ever encountered. Even today in cities like Yizheng near Nanjing or Hengyang in Hunan province, Asimco remains the only overseas investor apart from a handful of Hong Kong and Taiwanese firms.
Much of the early work was a grand adventure. "Taxis would blow up, or planes would be delayed for a whole day," recalls Michael Cronin, who was part of the original scout team and is now CFO and head of human resources at Asimco. "There was no book to follow. Neither Tim or I had done a deal in China before, and neither had the accountants or lawyers. We were feeling our way in the dark." At most meetings local government and business dignitaries rolled out the red carpet, offering lavish meals and repeated toasts with baijiu, a fiery Chinese liquor. Visiting two factories a day was "the equivalent of two New Year's Eve celebrations a day," Perkowski recalls.
The exhausting tour, during which Perkowski and co. promised money, technology and better management to local manufacturers, eventually began to pay off. Business proposals and invitations rolled in. Asimco became an official entity in February 1994 with $158 million in backing from its large group of investors. By the end of the year, Perkowski had invested nearly all of his initial fund. Within two years Asimco had grown from its three original employees to 2,500 workers. It had also become one of the country's biggest financial investors. Asimco added an additional $158 million in a second fundraising in 1995.
Early on, however, strains developed between Asimco and some of its manufacturing partners. In one case, Asimco ended up filing a claim with a Beijing arbitrator against a local partner in a rubber-making factory. Asimco officials contended that the partner, from whom they had bought a controlling interest for millions of dollars, had surreptitiously set up a rival operation, according to Perkowski and to Clissold's new book. The arbitrator ruled in Asimco's favor and gave it the former partner's remaining 20 percent interest in the plant. But the former partner's competing plant, according to a source who prefers to remain anonymous, now generates more revenues than Asimco does from its plant. Another headache for Asimco: After being forced out, the partner recruited several of its top local managers.
Clissold's book suggests that this was hardly an isolated event. In another instance, Asimco found itself in repeated disputes about management control at an electric motor joint venture -- where, Clissold relates, an Asimco employee had been shot in the leg by an unknown assailant. Eventually, Asimco demanded that the factory's general manager, who was splitting his time between the joint venture and the business of its partner, work full-time on Asimco projects. The manager agreed, but shortly thereafter started working for both again, according to Clissold's book. At a board meeting Asimco forced the manager out, but angry workers barricaded Clissold in a meeting room at a nearby hotel and demanded that he sign a letter revoking the firing. Clissold refused; eventually, he says, the workers lost interest and left, allowing him to escape.
The partnership disputes came as business fundamentals soured because of then-premier Zhu Rongji's austerity program. In 1994, worried about double-digit growth and a soaring inflation rate, Zhu forced banks to cut back on lending to help prevent the country's economy from overheating. The slowdown hit Asimco's Chinese customers, many of them state-owned companies dependent on bank credit, particularly hard over the next three years. Many couldn't get loans to back their purchases and in some cases didn't cut back on their orders. As a result, Asimco sales plummeted, even as its bad receivables jumped. "It was a double whammy," Perkowski says. "I got all my gray hair, and it was the one time I thought this whole adventure might have been a terrible idea." By the first half of 1997, he says, Asimco seemed to be "in a death spiral."
Sums up CFO Cronin, "The results were tanking; we were having riots at factories and people being held hostage and lawsuits and arbitration."
As he struggled through the brutal business climate, Perkowski tried to find the right management formula. His original partnerships mostly retained managers from state-owned enterprises who didn't know how to compete effectively or resisted directives from senior managers in Beijing. Perkowski briefly tried to bring in Chinese managers with private market experience, but they didn't fare much better. Finally, he devised what he called his "New China" management strategy, recruiting top executives with both state and multinational corporate experience. The idea was to blend local knowledge with multinational management skills. Over the next five years, Perkowski hired more than 50 new executives, many of them from global automotive companies like General Motors and Delphi. The number of disruptive incidents dropped, and financial performance has steadily improved.
The new leaders on his team imported such concepts as General Electric's vaunted Six Sigma Lean Manufacturing program designed to improve quality and efficiency, which was adopted in mid-2003. The results have been impressive. At one factory in Langfang, near Beijing, that produces, among other items, 500,000 machined brake hubs per year, Asimco has been able to reduce the work-in-process inventory from more than 8,000 pieces to fewer than 1,000, the head count from 75 workers to 41 and the distance each part travels through assembly from 311.5 meters to 127.5 meters. The efficiency gains have allowed Asimco to consolidate production from two workshops to one.
Perkowski points out that annual sales and ebitda have gotten on track since the New China strategy was launched. "My personal watershed is to get revenues to the $1 billion mark, because $1 billion is significant anywhere," he says. "At that point I'd feel I had achieved something, though it doesn't mean I'd stop there." With $360 million in annual revenues, Asimco still is a long way from Perkowski's goal.
But China's surging demand for autos helps considerably. By 2000 the world's ten leading carmakers had set up shop in the country. Volkswagen holds a 26 percent market share through joint ventures with Shanghai Automotive Industry Corp. and First Auto Works; Honda Motor Co. is second, with about 16 percent through two of its own joint ventures. China produced 4.6 million vehicles in 2003, nearly twice the number made in 2000 (all but 100,000 to 150,000 are sold in the country). It's expected that when the 2004 figures are tallied, the country will have manufactured 5.2 million -- compared with about 16 million in the U.S. and 9 million in Japan -- on its way to 9 million vehicles annually by 2009 and 16 million by 2020. This growth is obviously critical to auto-parts makers like Asimco: In 2003, China imported $9.47 billion of auto components, more than triple 2001's $2.98 billion, to meet local demand. Total Chinese auto components sales for 2003, the most recent year for which numbers are available, hit $38.9 billion.
Yet improvements in both the market and Asimco's performance didn't come fast enough for Perkowski's original investors. When Key Principal Partners recapitalized the company last February, virtually all of Asimco's 150 early investors, including TCW, decided they'd had enough. Representatives of the two lead investors declined to talk.
WILL ASIMCO'S NEW INVESTORS FARE ANY BETTER? KPP partner Leland Lewis believes Asimco and its backers were simply too early getting into China. After ten tough years "the old investors were just tired," he says. They were "ahead of their time" and had no choice but to pay a premium for their stakes in local businesses, he adds. "We have a different starting point, and we believe in where we're getting in." KPP believes it got a good price on an operation in which "all the heavy lifting has now taken place," Lewis says.
Skeptics think there is still plenty of heavy lifting to do because of the mounting competition from local parts makers and newly arrived foreigners. Today half a dozen Chinese competitors are bigger than Asimco: No. 1 Wanxiang Group Co., which makes universal joints and bearings, had pretax profits of $165 million last year on sales of $1.8 billion, according to a McKinsey & Co. study. At the same time, notes Michael Dunne, a Shanghai-based analyst with Automotive Resources Asia, a market research firm, "there are companies from all over the world -- Japanese, European, Korean, American, even Mexican -- with similar ambitions and notions about how cheaply they will be able to make things in China."
A $200 million fuel injection initiative of German behemoth Bosch will compete directly with Asimco's systems for diesel trucks, one of the company's most profitable products. Bosch has signed a partnership with China's second-biggest auto-components maker, Wuxi Weifu Group, to form Bosch Automotive Diesel System Co. What's more, Bosch is able to make fuel injection systems for the fast-growing passenger car market, too; Asimco, lacking the proper technology, can't. Given its size and technology, says Clissold, "You can't compete with Bosch."
Asimco faces a similar technology challenge in another of its core businesses. Asimco's iron piston rings, which seal the gap in an engine between its pistons and the cylinder walls, are designed for diesel truck engines. However, many analysts believe the most exciting growth prospects lie in making steel piston rings for passenger cars. "The issue for Asimco's piston ring business is getting technology, and there are only three or four companies in the world that have it," says Clissold. These companies aren't about to share their technology, he says; thus he sees the company "being pushed into low-margin business." Two competitors, Germany's Goetze, the world's biggest piston ring maker, and Japan's Teikoku Piston Ring Co., have chosen to set up a local joint venture, Anqing TP Goetze Piston Ring Co., in which they are partnering with Chinese state-owned Anqing Piston Ring Plant.
"How will Asimco get technology?" asks former managing director Ai, who says he was forced out of the company last fall after his role was steadily downgraded over several years. (Perkowski says Ai left by mutual agreement when no appropriate position could be found for him as management duties changed.) "Who would sell its technology, and how could Asimco find so much money to buy it? Could they buy Bosch?" Ai asks skeptically. "There's no small company that has very good technology."
Lewis and Perkowski contend that staying competitive is much less of a challenge for Asimco than was coping with the troubled partnerships or credit crunch problems a decade ago. Auto and component makers in China must still decide between cheap local products of uncertain quality and expensive imports of a higher grade. "Asimco is the only hybrid," says Lewis. "It has the cost and feel of a local China company, and operationally it's on a global standard." A foreign auto-parts maker just arrived in China may want to create a joint venture with Asimco or to use it as a supplier, adds Perkowski, because Asimco offers peace of mind. "We allow them to sleep at night," he says.
Some of Asimco's other competitive pressures aren't as huge as skeptics suggest, says Ted Winterrowd, a longtime Cummins manufacturing expert who became a senior consultant to Asimco in August to oversee its diesel-fuel-related operations. Most engine makers don't want to rely on a single supplier in any market segment, he says. As a result, Asimco will certainly get a shot at new business as more Western companies arrive. And CFO Cronin, a former venture capitalist at the U.K.'s 3i Group and, like Clissold, a onetime Arthur Andersen consultant, argues that Asimco doesn't have to square off with Bosch over fuel injection systems. "A fuel injection system consists of hundreds of different components," he says. Asimco can confine itself to a subsector if it needs to. "Becoming a global leader in fuel injection systems is a stretch," Cronin concedes, "but we could be a global leader in components that go into fuel injection systems."
Becoming a global manufacturing leader, contends Cronin, depends on two basic attributes. "One, a strong position in a good home market; and, two, some cost advantage over global players." In his opinion, Asimco has both. "The competition, which is the multinationals, are the opposite: They have slow-growing domestic markets, and they are located in high-cost countries."
Perkowski's vision of the new Asimco as a global manufacturing leader is on display in Grand Haven, Michigan, home of Federal Mogul's former camshaft division, which Asimco acquired in 2003. Asimco has switched sourcing of raw materials to lower-cost China, where it's also transferring labor-intensive rough machining operations. For camshafts being shipped to customers in the U.S. like GM and Ford, the products' precision machining and final quality testing remain at U.S. factories. For the small but growing number of Chinese customers for camshafts, those final production stages occur at Asimco plants in China, which will adhere to U.S. manufacturing standards. This arrangement keeps the finished product close to the customer while enabling Asimco to capture China's significant cost advantages for its U.S. clients.
"The U.S. customer is delighted because of the cost savings and because this key supplier of theirs has a China strategy," Cronin says. "And they are even more delighted because they see finished product coming off the production line in Grand Haven, one or two hours away from their factories." Chinese customers, which include Wuxi Diesel and Nanjing Auto Works, get the benefit of U.S. manufacturing know-how. "So," says Cronin, "we will be the best camshaft producer in China, plus the best in North America. That's the paradigm we are working on."
It's a lofty goal for Perkowski and his investors. Whether grit and determination will be enough to get there remains to be seen.