Magna Force

Exclusive report // Two years ago, when the global automotive industry was up against a global economic storm, Frank Stronach and Magna International emerged from the turmoil stronger than ever. Here, for the first time, is the secret behind Stronach’s success, his unique management philosophy, his drive to design and engineer electric vehicle components in metro Detroit, and what he’s doing for an encore.

Frank Stronach has gone home for the holidays. Home as in Austria, that is — the once war-tattered country where he was raised before setting sail as a teenager, bound for a new country and a new life that, six decades later, he admits he couldn’t have imagined.

In his early years in his adopted homeland of Canada, Stronach took on the usual assortment of menial jobs that immigrants always seem to land. But an innate drive — a strict work ethic mixed with the ability to, as he says, “make your own luck” — has substantially paid off. The small machine shop he founded has grown into one of the largest automotive suppliers in the world. Magna International Inc. is today generating more than $17 billion (U.S.) a year in revenue and, having emerged from the industry’s worst recession in half a century stronger than ever, is aiming to more than double that figure by mid-decade.

Although he has occasionally let his interest in other ventures — from politics to horse racing — pull him away from the helm, Stronach has generally maintained a tight grip on the reigns of the suburban Toronto-based firm. But this fall, after some precarious negotiations and a series of legal battles, he has largely pulled back from day-to-day management duties. “It was time,” the 78-year-old entrepreneur philosophizes in an exclusive interview with DBusiness.

“Sometimes you have to step back,” he says. “I can’t run Magna from the grave.” But anyone foolish enough to believe that Frank Stronach is simply slipping into quiet retirement would be yet again underestimating a man who has routinely surprised the skeptics.

A few years back, when Stronach decided to prepare for the time he might relinquish control of Magna, he took over a former monastery near where he grew up (a reporter dubbed it a castle and the classification stuck, much to Stronach’s dismay). Today, he quickly points out, he has settled into something more modest — a custom-built four-bedroom home about 20 minutes outside Vienna.

It’s a cozy place for his four-week getaway, and provides the septuagenarian with a chance to finally chat about his life, his business, and his philosophy. Still, ringing phones repeatedly interrupt the conversation. “I’m sorry,” he says, “but this is the time of day when they start calling me from North America with questions.” On one call after another, he responds either in English or in the distinctively accented German of his native land. “I guess I’m busier than ever,” he finally concedes.

Not that being busy is something new to Stronach. But even among the field of successful entrepreneurs, few have had a more dynamic, hands-on approach to business. The company he created is more than just a maker of automotive parts and components; it is, as Stronach envisioned it, a  remarkable experiment blending his very personal business and social philosophies.

A successful company, he explains, is one that will “make a better product at a better price.” Yet, while Stronach’s underlying values may have much in common with those of Adam Smith, the man who defined the concept of the free market, the Austrian entrepreneur prefers a different term. “Fair enterprise,” is what he calls the distinctive approach which has defined not only a corporate “constitution,” but has ensured that workers share in the spoils of Magna’s growing success.

The question is: What happens now? While Stronach maintains that very hands-on attitude toward two key ventures — one based in Auburn Hills and aimed at capitalizing on the auto industry’s push into battery power, the other involving his passion for horses — Magna is now untethered from its founder. And, as it pushes to double its already significant revenue stream, sources inside and out question just how much of the Stronach philosophy will be maintained. Can a more conventionally managed Magna remain a force to reckon with, or will it lose the edge that Stronach personally honed for much of the last half century?

The answer is especially critical to Detroit’s Big Three automakers, which have given Magna the lion’s share of their business over the years. For his part, Stronach says those are the customers who he’d prefer to focus on. But his successors clearly recognize that the world is changing.

While the domestic automakers have shown an unexpected resilience this past year, they clearly can’t fuel Magna’s ambitions all alone. Nor can the North American market. While recent sales trends suggest the U.S. could once again see volumes in excess of 17 million by mid-decade, according to a forecast by the consulting firm IHS, analyst Michael Robinet stresses that Brazil, Russia, India, and China — the so-called BRIC nations — will soon account for more than half of the world’s motor vehicle production. Magna can’t afford to be left behind.

Bound for Glory

If there were a Canadian equivalent of the Horatio Alger story, Frank Stronach would certainly qualify. (Or, if you prefer, Franz Strohsack, the name he was born with in Kleinsemmering, Austria, on Sept. 6, 1932.) Surviving the Great Depression and the Second World War was doubly difficult, considering his Jewish roots, but Stronach managed to avoid the concentration camps.  In the rubble of the war, he left school at 14, to apprentice to a tool and die maker. In 1954, with a one-way ticket in hand, Stronach left his homeland and settled in Montreal. Later, he moved to Toronto.

He worked odd jobs at first — rounding up golf balls, washing dishes, grinding out car parts. After the owner of the machine shop he was working at failed to follow through on an agreed-upon partnership, Stronach struck out on his own — renting a small garage and proceeding to work 14-hour days (he slept on a cot in the corner of the garage).

Two years later, he had 20 people working for him. But it wasn’t until 1959 when his modest firm, Multimatic Investments Ltd., landed its first automotive contract. In 1969, Multimatic merged with Magna Electronics. Four years later, it rechristened itself Magna International Ltd., and launched a series of mergers and acquisitions — along with a strategy of organic growth — that put his company on the auto industry’s radar screen.

It was, of course, an era of rapid growth in the auto industry, and Magna emerged alongside a variety of other companies that have come to dominate the supplier side of the business, whether Germany’s Bosch, Japan’s Denso, or domestic powerhouses like Dana and Eaton.

The Great Depression, the second world war, and the immigrant experience had a powerful impact on Stronach, and he was determined to embed his views about society, as well as business, in the fast-growing firm. That became apparent when he put in place a corporate “constitution” — his own answer to the U.N.’s Charter of Human Rights, he explains, adding, “Magna is more than just a company. Magna is a culture and we call it the ‘Fair Enterprise System.’ ” Among other things, the document sets out specific guidelines for distributing corporate profits. Ten percent goes to employees, 20 percent to shareholders, 6 percent to management, 7 percent for R&D, and 2 percent to charity and other social programs. The balance is paid in taxes or reinvested into the business.

The approach might appear to pigeonhole Stronach as a classic Liberal, in the Canadian sense, and he started out as an active member of the party. But his politics sheared away from the main body politic with what most would describe as a militant resistance to organized labor. For his part, the Austrian immigrant insists, in the third person, “Frank Stronach has never said there shouldn’t be unions, but there has to be change (or) we won’t be competitive because, in the future, it will be all about efficiency, efficiency, efficiency.” In practice, early efforts to organize some of Magna’s plants were met with fierce resistance. But eventually, Stronach and former Canadian Auto Workers chief Buzz Hargrove reached a tentative peace treaty, and today the union flag waves outside of some Magna plants.

Creative Chaos

Magna’s basic structure is distinct from the typical supplier in the way its numerous divisions are organized. Internally, it’s referred to as “creative chaos,” says a longtime company insider, although some of Stronach’s critics contend a “feudal kingdom” might be a better description. It’s not unusual for corporations to divide into distinct business units, but Stronach set up an enterprise that takes things to the next step. There’s as much competition between, say, his own companies like Cosma, Decoma, and Magna Powertrain as there is between Magna and outside rivals like Eaton, especially when it comes to distributing cash — both to fund operations and to put into the pockets of company managers. “Frank,” that source notes, “has made dozens of millionaires over the last decade.” But the bonuses don’t come easily; they require a deft handling of the corporate switchblade.

Day-to-day management is largely decentralized, but if a division has a quality issue or develops a problem with a customer, the operation “lights up immediately,” says Stronach, “and, like doctors, we decide immediately whether it needs an aspirin or surgery.” There isn’t much tolerance for those who don’t fit into the system, as Mark Hogan discovered. Although his transition was polite and orderly, the one-time General Motors wunderkind lasted just three years as president of Magna, from 2004 to 2007.

From an outsider’s point of view, says one GM source who asked not to be identified without getting approval to talk, Magna is “a can-do company. What they say they can do, they will do.” Competitive pricing is part of the strategy, though Magna is likely to walk away from business if it doesn’t think it can generate a reasonable return, analyst Robinet says. “They make sure that when they take on new business it isn’t only in the best interest of the customer, but in their own best interest, as well. A lot of times, suppliers take on business to fill up facilities and hope (to find a way to make a profit). That’s not how Magna does it.”

If anything, the company will walk away from old business lines that have become commoditized, and today, Stronach says, the focus is on systems and modules. Selling Ford Motor an instrument panel permits the Canadian firm to use its technical know-how — and get a better return than they would by selling the same components individually.

Beyond that, says a competitor, with a mixture of awe and anger, “They are better negotiators than just about anybody else in the business, and it drives us crazy.” He cites one case where GM was demanding that suppliers kick in a 4-percent price reduction. After initially refusing, Magna bargainers ultimately relented — but only after getting a quid pro quo in the form of business taken away from other vendors. Such strategic moves have been especially helpful during the ongoing recession, with Magna gaining a number of contracts forfeited by competitors struggling to stay in business. “Nobody wants to do business with a sick person or a sick company,” Stronach insists.

The last decade hasn’t been kind to the automotive industry, and as bad as things got for GM and Chrysler, leading up to the 2009 U.S. government bailouts, the supply side of the business was whacked even harder. Scores of businesses failed or sold out at a bargain. Dozens, including giants like Delphi, Visteon, and Tower Automotive struggled through Chapter 11. Yet Magna’s bottom line was a textbook example of prosperity in bad times. One of the key reasons was Stronach’s visceral resistance to running up debt. Two decades earlier, his company nearly melted down — in part, he contends, because a young and inexperienced management team let debt rise to $1.2 billion, only to have the banks try to call in the loans. Stronach was barely able to beat them off; he did so by selling the firm’s extensive land holdings. “By 1993,” he recalls, “we paid back the last dollar. And I vowed to myself never to have debt again — which was very useful when this huge economic crisis (in 2008) came down.”

Magna Minus Stronach

Can Magna rely on its own cash coffers to fund the huge growth it has planned? “Not having debt means you don’t become beholden to other people for the wrong reason,” says Jim Hall, principal of 2953 Analytics, an automotive consulting firm in Birmingham. “But it’s a double-edged sword.” Hall believes that in the post-Stronach era, the management team led by CEO Don Walker will have little choice but to hit the debt markets if it really envisions a $50-billion revenue target in the relative near-term.

Observers believe that Walker’s Magna will have to break from the founder’s fundamentals in a variety of other ways, as well. Stronach has traditionally focused on business from the Detroit automakers, and concentrated on generating business in North America and Europe — the latter through the Magna Europa subsidiary, headquartered near his Austrian home in Oberwaltersdorf. But the push is on to crack the so-called transplants. Magna is gaining ground with the Asians and notably has lined up “major” contracts, an insider reports, with Volkswagen, which will launch production of a 2012 model code-named the “New Midsize Sedan” at an all-new plant in Chattanooga, Tenn.

Under Stronach, Magna was unusually cautious about entering the BRIC markets, China in particular. Associates suggest this was the result of several concerns, including the Chinese government’s mandates that foreign businesses find domestic partners. But the real concern has been with the booming nation’s flagrant disregard for intellectual property rights, something Stronach — and his successors — considers perhaps Magna’s single biggest advantage. “They’ve been North American-centric,” says IHS’s Robinet, “but they’re becoming much more interested in China, India, and Thailand.”

No Regrets?

“If we stay with the same management principles, Magna will do good,” Stronach, who retains a role as adviser to the company, counters. “But if we go to a central approach, then I would say Magna could have a problem.” But by his sheer determination, he could prove a powerful force for the status quo. Yet, considering market realities, most who watch the company expect Magna to begin to change direction, at least in subtle steps, over the next few years. The reality, for Stronach, is that he is no longer in position to use what he describes as his “iron hand” to mandate his will.

The Canadian courts, after a long legal battle, officially approved a stock swap last August, eliminating Magna’s dual stock structure. The move, approved by shareholders, ended Stronach’s control of Magna International — but in return, he walked away with $300 million in cash (U.S.), a $120 million consulting fee paid out over four years, nine million shares of the company’s common stock, and control over a new joint venture, Magna E-Car Systems, that is focusing on vehicle electrification.

The project, which CEO Walker announced last January, is aimed at “developing systems such as electric motors and motor control units, chargers, electric pumps, electric drivetrains, and lithium-ion battery packs,” he says. “Our complete-vehicle expertise and cell-to-pack battery competence, combined with our capabilities in developing lightweight technologies, adds to our overall hybrid and electric vehicle competence.”

Auburn Hills-based E-Car has already scored several early successes. It is providing powertrain controllers for General Motors, has partnered with Volvo on a planned hybrid vehicle, and, perhaps most significantly, the Magna subsidiary is the technology partner for Ford, which plans to launch a battery-powered version of its new Focus model in 2012. Could Magna go and produce a battery car — or a more conventional vehicle — of its own?

That’s something Magna has long considered, and it certainly has the expertise. Its Magna Steyr operation has been providing niche-manufacturing services to a range of makers, including Aston Martin, Daimler, Jeep, and Mini. The facility produces minivans for sale through Chrysler’s European showrooms, for example, as well as a version of the BMW X3. A North American facility has long been under study — but so has the idea of going the next step, putting out a product with a Magna badge. Or so it was, anyway, until the Canadian company got mixed up with Opel.

If Magna made a misstep in recent years, it was the decision to go after control of General Motors’ German-based division, which the Detroit automaker came close to selling off as it struggled with bankruptcy in 2009. Along with a Russian partner, Magna appeared ready to use Opel to become a carmaker in its own right. The supplier’s bid was backed by both the Berlin government and Opel’s powerful union, IG Mettal, and appeared a certainty until late in the year. But, in an unexpected move, the GM board ousted CEO Fritz Henderson — who backed the sale — and pulled the controlling stake in Opel off the market.

Today, Stronach insists he was never really in favor of the plan, suggesting Magna bowed to pressure from Berlin and the union, both of which wanted to get rid of GM. Might a Magna-run Opel have worked better than it would have under GM, which has been in the red for years? “It could have,” says Hall, although he quickly cautions that it just as likely might have become “an incredible miasma,” draining Magna’s coffers. The other risk was that of angering the supplier’s customers, notably GM, who might have preferred to take their business elsewhere rather than work with a new competitor.

Was he surprised the deal fell through? “No, no, no,” insists Stronach, with the benefit of hindsight. And, he quickly insists, “We won’t compete with our customers.”

Stronach’s settlement with Magna left him with another venture that is likely to keep him busy for the foreseeable future. Magna Entertainment became an outgrowth of his longtime — and seemingly boundless — fascination with horses, which he continues to raise on his farm in Aurora, Ontario. Created in 1999, it grew into, based on revenue and holdings, North America’s largest thoroughbred racing company — with the legendary Pimlico Race Course, near Baltimore, among its holdings.

At one time, Magna Entertainment owned Great Lakes Down in Muskegon, but it closed the horse track in late 2007 and sold the land to the Little River Band of Ottawa Indians, which plans to build a casino on the site. Magna Entertainment also tried to build a horse track north of Detroit Metropolitan Airport in Romulus, but when the company failed to get voter approval for slot machines in 2004, the plans fell through.

Overall, Magna Entertainment has been plagued with problems in recent years and filed for Chapter 11 protection in March 2009. The company has since been dissolved, and a separate company, MI Developments, has absorbed some of the racetrack properties. “Racing has some fundamental problems,” Stronach complains. An understatement, perhaps, considering the ponies have steadily lost ground to other forms of gambling, including everything from lotteries to slot machines. The challenge is to ram change — such as allowing slots at tracks — through a heavily regulated industry, and Stronach seems ready to use the same hardball negotiating tactics that made Magna International so successful. As of early December, the Pimlico track in Baltimore was threatening to curtail its season unless state regulators approved some of its demands.

Those who know the man would be loath to bet against him — or MI Developments. In the 55 years since he made his fateful trip across the Atlantic, Stronach has proven himself a man never to be underestimated. He has had his setbacks, but they are few and far between. And as his settlement with Magna shareholders made clear, he’ll usually find a way to profit, anyway.