GKN has become an example of what can be achieved when companies get their priorities right. Chief executive Nigel Stein talks about how the engineering components supplier has arrived at this enviable position and what the future holds. By Pip Brooking.
Who would have thought a British manufacturing firm could become so de rigueur? Yet since Nigel Stein became chief executive of GKN in January 2012, the engineering components supplier has found itself in something of a sweet spot. Against the backdrop of the government’s efforts to rebalance the economy, GKN has been held up as a good British example of what can be achieved when you focus on the right things.
Almost two-thirds of the company’s revenues come from the aerospace and automotive sectors, which have both been declared as areas of UK strength and deemed worthy of inclusion in a new industrial strategy. It’s a global business, with 45 manufacturing plants in more than 20 countries; it’s investing in new technology; and it’s taking on more apprentices.
And, yes, the company is growing. In 2012 GKN posted a six per cent rise in organic sales, with revenues of £6.9bn, and a 19 per cent increase in pre-tax profits to £497m. That’s despite warnings that conditions in Europe – which accounts for almost half of all revenues – would undermine performance in its automotive division. “It’s tough over there, there’s no doubt about it,” says Stein. “We don’t expect it to change radically in the near future. And when the car industry does recover, it will probably not even be to the levels of production seen as recently as 2007.”
Strength in diversity
In response, GKN has announced steps to take some fixed cost out of the business, with job losses in Germany in particular. But the business has also been buffered by contrasting fortunes in North America, Brazil and China – and by its aerospace division, which has held up well in Europe.
“Although diversity has not always been fashionable, our divisions are similar in what they do, they sit well together, and the diversity in customer base and markets is a strength for us,” says Stein.
Looking at aerospace and automotive, for example, clients have three demands in common (apart from cost): making their vehicles more lightweight, making them more fuel-efficient, and moving towards electrification.
The same applies for GKN’s £1bn land systems division, where orders are being fuelled by global population growth and urbanisation: its agricultural vehicles and construction and mining equipment use a lot of the same driveline technology that is developed in the automotive division. And there is a clear overlap between the company’s powder metallurgy business and the automotive sector, as the 75 per cent of sales of small parts it makes go into the automotive supply chain.
Although the common observer is less aware of GKN’s success in this area, Stein claims it is the biggest powder metallurgy manufacturer in the world. And he’s excited by the division’s growth prospects and its good margins, which have improved thanks to the lean manufacturing principles that have been adopted across the group.
But it is the leadership position that Stein emphasises most. The firm has almost doubled its sales over the past six years, and the chief executive puts it down to a simple and consistent strategy – which he inherited from his predecessor Sir Kevin Smith and has refined since – of outgrowing its markets by focusing on being the leader in each.
GKN’s automotive business, for example, concentrates on making driveshafts for all-wheel drive systems, in which it has a 40 per cent global market share. And although demand for cars worldwide is expected to rise 23 per cent over the next five years, the company isn’t simply relying on that. It is also looking at increasing the amount of “content per vehicle” – or, in other words, the amount of GKN technology integrated with the driveshaft and used by each car.
In aerospace, last year’s acquisition of Volvo Aero has made GKN the number two in engine components. In fact, Stein prefers pursuing the “less risky” organic growth – but says the company looks to use targeted acquisitions “to enhance our technology or our global footprint, and to make us bigger in an area we think that GKN can do well in”.
The firm has also developed its global footprint by working closely with the biggest companies in each of its divisions: Volkswagen and Ford in automotive, Airbus, Boeing and GE in aerospace, and John Deere in land systems. “About ten customers make up half our sales, so they’re important to us,” says Stein. “But, actually, we’re pretty important to them too. Without us, they couldn’t make the products they make and supply them around the world.”
He doesn’t see that concentration of clients as a risk, either, arguing that none of the ten constitute more than five per cent of sales each, and that GKN has 10,000 other customers it is looking to grow.
Adapt to grow
GKN has already proved its ability to adapt when clients’ budgets are challenged. Ten years ago, almost 70 per cent of its revenues in aerospace came from military customers. If that was the case today, the company would be under severe pressure from governments’ austerity budgets.
“Now we’re about 75 per cent civil – and that’s a good place to be,” says Stein. Indeed, Airbus and Boeing are forecasting that around 30,000 new aircraft will be required globally over the next 20 years.
But Stein adds that GKN’s military work should not be discounted. “It’s still a big market, and an important one – there’s a lot of technology in it, and we are a company that likes to develop technology and use it to win customers.”
Across the group, investment in new technology is equivalent to three per cent of revenue each year. Although Stein would like to increase that to four per cent, he points out that the total value has already increased by 25 per cent over the past couple of years because of GKN’s growth. “It’s a healthy step,” he says.
Although the company keeps 20 per cent of that spend to focus on future developments that its clients don’t yet realise they need, 80 per cent is done in partnership with them on live programmes.
GKN also partners with, and receives funding from, various government-funded bodies such as the Technology Strategy Board and the EPSRC (Engineering and Physical Sciences Research Council).
“There’s a lot of funding available,” says Stein. “One would always like more, but you have to recognise what’s affordable.”
But he cautions: “It’s a case of making sure we’re spending what we’ve got to the best effect, and sometimes in the UK things are slightly too fragmented. If you spread the money too widely, then nothing has a chance of keeping up with the competition – and this is all about competition. Other countries are out there, and many of them are trying to do similar things to us.”
A role for government
In the light of international competition, Stein is also positive about the government rekindling an industrial strategy, and, more specifically, its support for aerospace and automotive. “It’s a good thing for the country,” he says.
“Both sectors are large contributors to economic activity in the UK and to the export activity of the UK. It’s encouraging how government and industry are working together to take the agenda forward, and that bodes well for the future.”
But he adds that the support has to remain consistent, and to last well beyond this government. “Manufacturing is more long-term than politics.” He points to the resurgence of the UK car industry, which “didn’t happen overnight”, and argues: “We need to have that commitment to purpose, that drive and willingness to succeed, and be prepared to stick at it for a while.”
He emphasises that it’s not just about the money, but also about making manufacturing and engineering more attractive sectors in which to work. “We are lucky. GKN is a good brand name in the UK, and when we advertise for vacancies or open up apprentice schemes a lot of people apply,” he says.
GKN has 160 apprentices in the UK – and more globally. Its latest open day in Bristol was attended by about 1,000 people (including family) interested in just 40 places.
Jaguar Land Rover, Nissan and Airbus have achieved the same level of attractiveness for potential employees, but Stein remains concerned about the tier-two and tier-three suppliers that feed those businesses. “We still need to do a lot more to encourage it,” he explains.
One area where government policy has the potential to fall down is Europe. Stein is not too worried about the impact of the debate about the UK’s exit from the EU on the automotive business – less than ten per cent of this business is based in the UK and the company is already well-established globally – but the same can’t be said of GKN’s aerospace division.
“We supply components to Airbus, Boeing and others, and they’re sold around the world,” he says. “But gradually the Chinese, the Japanese, the Koreans, the Russians, Brazilians and Canadians are all building their own aeroplanes and their own aerospace industry. Our intention is to get our share of work with them in due course.”
To achieve that goal, having the weight of EU trade agreements behind the company will be important. “One worries if disengagement from Europe causes uncertainty. Uncertainty is the enemy of long-term investors,” adds Stein.
“But we try to say that these things are bigger questions for others – our politicians – to tackle, and we will do our best, whatever is decided.”
Nevertheless, the doubt doesn’t fit with Stein’s belief that companies need to have a “vision for the future and really go for it”, or his own approach to continued growth at GKN. “If you’re not going forwards you’re going backwards, and if you’re not winning you’re losing,” he says.
The Stein CV
January 2012 – present: Chief executive, GKN
2007-12: Chief executive, automotive, GKN
2001-07: Group finance director, GKN
1994: Joins GKN
Previous experience: Senior financial roles at Laird Group and Hestair Duple
Education: BSc in engineering science, University of Edinburgh
Other roles: Director (past president) at Society of Motor Manufacturers and Traders; member of the Automotive Council.