Why France ?!?

Since I don’t have much touristy news to share (spent the last two weekends traveling to and from the US), thought I would write a few comments on why I am in France. Let’s start with a little background on ArvinMeritor, the company I have been working for since last June.

The somewhat clunky name for the business is a result of a misguided merger in 2000 between companies named Arvin and Meritor. Arvin produced light vehicle (light vehicle meaning cars like you drive everyday versus heavy, or commercial vehicles like tractor trailers) components, primarily exhaust related, but also including sunroofs, springs, and shocks. Arvin’s genesis goes back to 1919; you can read a bit more about its evolution at http://www.arvinmeritor.com/about/history.asp. Meritor focused on commercial vehicle parts, such as axles, transmissions, and brakes, but also had light vehicle business in door modules, window regulators, and steel wheels. Meritor was initially a division of Rockwell and was spun off as an independent company in 1997. Aggressive management at Meritor, with the erroneous concept that any growth is good growth, pursued the merger with Arvin a few years later. The idea was that there would be synergies between the light and commercial businesses that could be leveraged to increase profits. In reality there was very little success transferring tangible benefits between the businesses. For example, one would think that knowledge of how to manufacture commercial vehicle brakes could be used to enter the light vehicle brake market, but due to a lack of management cohesion and the dramatic differences between building brakes for large and small vehicles, this never occurred. You could apply this example to each of the other products manufactured by ArvinMeritor. Basically the product line remained separated; the only benefit was combining corporate overhead functions. A basic business principle is that for a company to achieve maximum efficiency (therefore maximizing profits) it must focus on a few things rather than dabbling in many. The broad product line distracted senior management from setting a productive strategic direction.

This past May management announced their intention to spin off the light vehicle business into a standalone company, called Arvin Innovation (about $2 billion in sales). The commercial vehicle business (about $4 billion in sales) would retain the name ArvinMeritor. A significant amount of work is already under way to complete this; the stated goal is to complete the spin within twelve months of the announcement. I will be joining the Arvin Innovation. From a long-term perspective this a good move, the separate companies will be better able to focus on what they do best and investors will be able to choose to buy stock in either a light or commercial vehicle business. In the short-term, particularly considering the current wariness of banks to lend money and the downturn in light vehicle sales, this is a very risky maneuver. Innovation will need to generate sufficient cash flow to maintain the ability to invest in new development and meet financing payments, without the benefit of having a large partner to absorb any hiccups.

One of the reasons why management believes Innovation can succeed is the remarkable global diversity of the business (we’re getting closer to why I am in France). The majority of Innovations products are manufactured outside of the US and new facilities are going up in India and Romania to further lend international weight. The largest sites are located in France, Germany, Czech Republic, Slovakia, China, Mexico, and Brazil.

Now, who can tell me which countries are different from the others in this list? France and Germany are remnants of the period prior to the current globalization of manufacturing. We have the opportunity to witness a great leveling of living standards across the globe as other countries are rising toward the level of the US. In my opinion a fantastic time to be alive, we are seeing something that will be a closed issue within a few generations. Right now there are industries entering countries that have never manufactured the product of that industry. The challenges of producing a component new to a geographic region are complex. Differences between countries, such as cultural expectations (the flexibility and aggressiveness of US workers versus the unfocused and rigid French), and historical conflicts (try asking plant workers in the Czech Republic to cooperate with German engineers) create unique opportunities. Not to mention the roadblocks caused by governments that must be worked around.

At dinner with coworkers a few weeks ago, I asked “What language would be the language of business if the US was not the dominant world economy?” My Czech colleague, who speaks English, Czech, French, German, Russian, and Slovak well, provided a typically flippant response: “English, because it is easiest” and proceeded to point out the difficulties of the Czech and French languages. He may have a point, I am certainly no language expert, but I am not so sure. My unscientific opinion is that if there was another country that dominated economically, the language of that country would be the language of business. Or, if there was no clear world leader, there would be a mishmash of communication without a “language of business”. Considering how strong the ethnic biases are in Europe and Asia this could have been chaos. Maybe I am wrong, and the fact that the British Empire spread English to so many corners of the globe would make this the default communication medium. But it is interesting to think how much more difficult it would be to conduct business without an agreed language.

France and Germany are no longer desirable locations for manufacturing. Not only because they are fully developed with high standards of living, but in some ways the more important cause is the restrictiveness of government regulation. Leaning more toward socialism, both of these countries have instituted rigid rules intended to protect workers and prevent companies from cutting employees. The required severance packages are so exorbitant that companies consider maintaining a production site that is no longer profitable just to avoid paying the large cost of letting go the employees. This also works the other way, when an employee decides to leave a job he must announce this several months in advance (versus two weeks in the US), significantly reducing the mobility of the workforce. Then there are the rigid safety standards; a good idea on first look, but too costly for the benefit achieved. Couple all of this with high taxes, and there is more to the movement of manufacturing to Asia and Eastern Europe than simply lower wage rates. In many cases the lower wages are cancelled out by a lower level of education and therefore lower productivity. If allowed to compete on a level playing field, the well educated German would fare better against his Low Cost Country counterparts.

So, why am I in France? Innovation has three manufacturing plants and an administrative office in France. Going back to its time as a division of Rockwell, there was an office in Paris for the business that produced window regulators and door modules. Over time this grew to the current sites, with the administrative office joining one of the plants in the tiny town of Sully-sur-Loire (the Loire river runs by the town, “Sully by the Loire”). Located in the Loiret region of central France, a beautiful area of farms and forests, the office seems out of place. Well chosen if you intend to keep a low profile.

The Sully office is the headquarters for the largest of Innovations business groups. After spending one year in an assignment in business group finance in Detroit for the light vehicle segment, I will spend the next year a bit closer to the product, but in a similar financial analyst role. I am part of the Body Systems group, which produces sunroofs, window regulators, door modules, and door latches. I am looking forward to having a closer view to how industry globalization works and to learn how a Fortune 500 company is split apart.