AUBURN HILLS, MICH. — Caught in a tight financial vise, automotive supplier Walbro Corp. plans to shift its focus inward instead of continuing its rampant expansion around the globe.
The Cass City, Mich., company made a bold gamble in 1991 that now is exacting its short-term revenge on profitability, said new Chief Executive Officer Frank Bauchiero.
The company decided — well before its carmaking customers did — to invest heavily to make multilayer plastic fuel tanks and systems for fuel storage and delivery. Since the early 1990s, Walbro has spent between $350 million and $400 million worldwide in fuel system plants, said Bauchiero, speaking in an interview at Walbro's automotive headquarters in Auburn Hills.
That set up the supplier as an early leader in the production of the six-layer, permeation-resistant tanks, Bauchiero said. In addition, Walbro is among the only suppliers that also makes integrated fuel-system parts such as pumps, rails and control valves.
While that put Walbro in a good position to manage future business, current business in North America has not kept pace with Walbro's ambitious manufacturing plans, Bauchiero said.
``The business is coming now, but it's a little behind our schedule,'' he said. ``The auto industry was a bit cautious [about moving to plastic fuel tanks] because fuel is so sensitive an area. That delayed the launch of several products and slowed down the parts-approval process.''
Many industry observers expect multilayer blow molded fuel tanks to become dominant soon in North America, and in Europe, where roughly 75 percent are made from high density polyethylene. Less than a quarter of North American tanks use plastics.
For Walbro, the change could not come soon enough. In 1997, the company recorded a loss of $36.6 million on sales of $619.9 million, compared with profit of $11.2 million on sales of $585.3 million the previous year.
The company wrote off $43 million in charges during last year's fourth quarter for restructuring and other costs. Walbro decided to divest several underperforming companies, reorganize operations in Asia and Europe and, with those actions, cut employment by 10 percent, or about 400 people.
In March, New York-based Standard & Poor's downgraded Walbro's outlook from stable to negative, based on its disappointing operating results. Analyst Martin King said Walbro's huge overcapacity and high debt load triggered the outlook.
``The company's performance hasn't deteriorated any further, but we haven't seen a major return to profitability yet,'' King said. ``Long term, we need to keep a close watch on them.''
Then, in April, longtime Chairman and CEO Lambert Althaver retired. He was replaced by Bauchiero, who had been the company's chief operating officer, and John Utley, who became Walbro's chairman.
Utley came to Walbro from London-based supplier LucasVarity plc. Bauchiero had joined Walbro in 1996 after serving as president of the industrial products division of Toledo, Ohio-based Dana Corp.
Bauchiero will concentrate on upgrading plant efficiency. That includes a concerted effort to eliminate waste, cut down on parts-per-million defects and forge leaner manufacturing operations.
The company also has started offering tests of fuel-system parts to outside companies under a joint venture with testing company EG&G of Wellesley, Mass. Walbro's Auburn Hills test facility is one of the first in North America for fuel storage and delivery systems.
``Before we could get business with the auto industry, we needed to have the equipment and plants in place,'' Bauchiero said. ``We had to prove to our customers that we could handle the capacity first. Now that we've done that, we'll focus on operations.''
Recently, the company has spent heavily on new and expanded plants. Last year, Walbro completed a 150,000-square-foot fuel-tank plant in Meriden, Conn., and expanded its 60,000-square-foot facility in Ossian, Ind. New plants also were launched or opened in 1997 in Deeside, Wales; Lockeren, Belgium; Cacapava, Brazil; and South Korea.
In addition, the firm formed a joint venture with two minority-owned suppliers to make fuel tanks at a new, 150,000-square-foot Detroit plant scheduled to open in July. The joint venture, called Vitec, has about $680 million in new contracts with General Motors Corp. and Chrysler Corp.
But several analysts wondered how the company would weather its lean financial times. Walbro's debt-to-equity level approaches 90 percent, leaving it vulnerable during an economic downturn, said analyst Alexander Paris Sr. of Chicago-based Barrington Research Associates Inc.
``Walbro is highly leveraged and has no flexibility,'' Paris said. ``[It] got in the habit of overreaching during the 1991 recession. They couldn't say no and piled one plant on top of another.''
Others say the problem is just a short-term hiccup before multilayer fuel tanks become the auto industry standard.
``I think eventually the market will be there for them because of emission standards,'' said analyst Richard Hilgert of Detroit-based First of Michigan Corp. ``We should see improvement in their performance.''
Multilayer tanks feature outer shells of HDPE buffeting a core of ethylene vinyl alcohol to protect against permeation. Two adhesive skins and a layer of reground HDPE complete the construction.
Most new tanks made in North America have begun using the six-layer configuration, Bauchiero said. In Europe, where Walbro has several plants equipped for multilayer tanks, monolayer tanks still dominate, he said.
The market for plastic tanks continues to grow in North America. By the year 2000, about 50 percent of tanks on North American vehicles should be made of plastic, Bauchiero said.
Future contracts starting in 2000 should give Walbro more than 20 percent of the fuel-tank market, Bauchiero said. Sources said that work will include part of GM's next-generation pickup trucks and Chrysler's Cirrus and Stratus sedans.
But current fuel-tank production is just beginning, and Walbro's fuel-tank market share is in the single digits. The company has started production of a complete fuel system for Chrysler's Dodge Durango sport utility vehicle, one of the first for an automaker. The company also makes tanks for GM's Saturn models and its Chevrolet Tahoe and Yukon light trucks in North America.
Walbro is not expecting profitability to climb dramatically this year, Bauchiero said. Sales are projected to grow to about $650 million in 1998, up about 5 percent.
``They seem to be holding on by a thread,'' said consultant Craig Cather of CSM Corp. in Okemos, Mich. ``The quality and launch problems throws the company's health into question.''
The supplier has room for improvement. First-quarter figures for 1998 showed a profit of $572,000, compared with $2.3 million for the same period last year. Sales grew, though, from $154 million for the first quarter of 1997 to $169.2 million for the same quarter in 1998.
The company also received a commitment for a new, $150 million line of credit with Charlotte, N.C.-based NationsBank. That should help Walbro meet its short-term cash flow needs, Bauchiero said.
``We'll be able to fulfill our obligations to our customers,'' Bauchiero said. ``We've made a substantial commitment to them around the world.''
