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CEO Interview: Thierry Morin of Valeo: Clutch player

This CEO stepped in after his predecessor quit just ten months into the job. Slashing costs, he restored profits. Now he must rev up sales.

It's a shame that auto-parts maker Valeo was not equipped with one of its lane departure warning systems at the start of this decade: The Paris-based company, which makes everything from wiper blades to electronics, might not have veered so badly off course.

Even as revenues rose -- 18 percent in 2000, to E9.1 billion ($8.6 billion), and 12 percent in 2001, to E10.2 billion -- Valeo's bottom line was hurting. In 2000 net profit fell 35 percent, to E368 million, and that was merely a warm-up to the next year's E591 million loss.

Blame it on management's taking its eyes off the road. Intoxicated by the Web, Valeo embarked on a strategy of shifting all its client and supplier relationships onto the Internet. As farsighted as this may have been, it distracted from fundamental factory management, and costs hurtled out of control.

Valeo's exasperated board decided to change drivers in March 2001. Out after only ten months as chairman and CEO was Andre Navarri, who resigned. He had joined Valeo from conglomerate Alstom in May 1999 to understudy longtime CEO Noel Goutard. To replace Navarri the board tapped the company's veteran finance director, Thierry Morin. The choice has paid off dramatically.

Earnings rebounded to E135 million in 2002 and E181 million in 2003 -- a testament mainly to Morin's aggressive cost-cutting, as Valeo's revenues growth has been lackluster. The CEO has pruned the company's factories from 170 in 2001 to 128 and pared its workers from 77,000 to 68,800. Valeo's operating expenses of E1.2 billion in 2003 were 8 percent below the 2001 level.

But in this age of auto "mechatronics" -- mech-anics combined, not always smoothly, with electronics -- Valeo still has some bugs to work out. In North America, where it earns more than one fifth of its revenues, Valeo mismanaged the 1998 acquisition, for $1.7 billion, of ITT Electrical Systems. The maker of starters and other electronic components was "poorly integrated" with the rest of Valeo, Morin says. Quality control problems at the Michigan company, rechristened Valeo Electrical Systems, put off the Big Three U.S. automakers. Only now, says Morin, is Valeo regaining their trust -- and their business.

Having slashed costs, Morin wants to spur sales. He believes the company's cost structure ensures profitable growth -- that revenue gains will quickly find their way to the bottom line. Growing demand, especially in Europe, drove a 2 percent sales gain, to E4.9 million, in this year's first half. Morin anticipates 5 percent to 6 percent annual growth between 2005 and 2007.

Boosting sales is critical to reviving Valeo's stock price -- E29.51 in late

September. Although that represents a solid recovery from the five-year low of E19.75 in April 2003, it is still well below the E81.90 peak in January 2000.

Morin, 52, has a master's degree in management from the University of Paris IX-Dauphine. He spent a decade as a financial controller at oil giant Schlumberger and three years with Thomson Consumer Electronics in Los Angeles before getting a call in 1989 from Goutard to join Valeo as finance director of its clutches business. Morin became group finance director in 1991 and nine years later was named to the management committee.

He discussed his rise to CEO and the challenges facing Valeo with Institutional Investor Assistant Managing Editor Jeffrey Kutler.

Institutional Investor: What went wrong in the period before you became CEO?

Morin: Valeo was well run in the 1990s, generating strong cash flows and profits. But at the end of the decade, just as Noel Goutard was retiring, dot-com and e-strategies were fashionable, and the idea was for us to move in that direction. We weren't successful, and losses began to appear, which was the result of management's loss of focus on the core business. You could see that in the ITT deal. When you acquire something and do not change the management, systems and processes, results will suffer. We had a plant in Rochester, New York, that lost $70 million in 2001 because of lack of integration.

What has changed?

Within a week after I was appointed chairman and CEO, we had a three-year action plan focused on cost-

competitiveness, quality, globalization and technology.

Have you hit your targets?

We're more cost-competitive for sure. We simply had too many factories; we've closed them at the rate of one per month, divested a few and opened others in low-cost countries. In 2001, 25 percent of the factories were in low-cost countries; now 41 percent are.

Which countries? And how have those moves affected the bottom line?

Low-cost countries include the Czech Republic, Hungary, Poland, Romania, Slovakia as well as Brazil, China, Malaysia, Mexico and Thailand. Of course we also remain very much in high-tech countries like France, Germany, Italy and Spain. My plan always was to be in a mix of geographies and to reorganize the operations to increase return on capital -- which we have done by three to four times over three years. We have also improved gross margins and operating income every quarter since the first quarter of 2001. The productivity gains have allowed us to offset significant increases in the cost of steel, copper and other raw materials. Free cash flow is up to 5 percent of sales from 3.6 percent in the first half of 2003.

How do you measure up on globalization and quality?

You can see our globalization in the reach of our factories, which now include eight in China, 20 in North America and ten in South America. Quality initiatives have included a streamlining of our supplier base -- getting that down to 2,800 from 4,500 improves quality and productivity, and each supplier is happier because it gets more business. Internally, we have to make quality an obsession: Today we have 53 PPM -- problems-per-million products. This is too many, but ten of the factories are at zero PPM. What ten can do, 128 can do.

What do you spend on research?

When I started we were spending 6.5 percent to 7 percent of annual sales on research and development, and if we kept losing money, we would never be able to sustain that. But R&D was one area where productivity was never a priority, and we've changed that.

How so?

We approached it just like we do our factory operations: We sliced it up into short-, medium- and long-term projects; we introduced validation processes; and we improved productivity 15 percent in each of the past two years. We reinvested the savings into R&D, because the objective was not to cut, but to work better. The proof is that Valeo has rolled out more products in the past few months than ever before. Nissan has announced that its Infinity will be equipped with Valeo's lane departure warning system; we have a commercial order from a North American carmaker for our blind spot detection system; and PSA Peugeot Citroën has announced it will use our start-stop system, which reduces emissions up to 8 percent and cuts fuel costs 8 to 10 percent by eliminating engine idling. This has changed Valeo's image: Car and truck manufacturers now perceive us as a high-quality, cost-efficient supplier that can help them differentiate their products.

Did you lower the R&D percentage?

It's running at about 6.1 percent, and

I expect it will remain in that range, but as sales increase 5 percent to 6 percent per year, that will generate more for R&D.

How much of what you do is invention, as opposed to responding to customer demands or requests?

All of what we do is invention. We are one of the largest repositories of patents in France -- this year we'll add 500. We aren't a pure engineering company that comes up with ideas and then sees if a market exists; we are very much market-oriented. We came up with the blind spot detection and lane departure warning systems in direct response to a North American problem -- that nearly half of all accidents were related to drivers changing lanes. To develop those technologies we formed partnerships with Raytheon for radar systems and Iteris for video cameras.

How does Valeo stack up against the competition?

As an independent supplier not linked to any one car company, we are an alternative: If one of the manufacturers can't get its needs filled by its own supplier, it will turn to us rather than to a company owned by a competitor. There are other independent companies in one or a few niches, such as lighting or electrical or cooling. Few companies are like Valeo, which is both independent and in ten or more business lines, ranging from electrical and electronics to thermal systems to transmissions.

What kind of car do you drive?

I have several, including a Renault, PSA, Jaguar and Audi. If I were in the telephone industry, I'd have ten telephones. I can't understand people who say they can manage only through figures. I certainly manage through figures, but I like to understand what is behind them.

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