One to watch: Linda Hasenfratz accelerates Linamar’s diversification strategy as auto industry skids
The Financial Post takes a look at 11 people and companies we’ll be watching closely in the new year.
A robotically controlled digital microscope that can shave 20 minutes off a surgeon’s time in the operating room and an MRI machine that weighs as little as one tenth of previous iterations and can fit easily into critical care rooms might not seem like products even remotely related to the automotive industry.
Yet it is auto-parts maker Linamar Corp. that plans to build both after signing a manufacturing deal and buying US$5-million worth of equity in Synaptive Medical Inc., a Toronto-based medical equipment startup that came up with the products.
As unusual as the pairing may seem, exploring new industries could be one answer for automotive manufacturers facing slowing sales, labour action and free-trade troubles, not to mention a variety of sombre predictions that auto sales have plateaued and could erode even further due to automation, ride sharing and electrification.
Anybody who had uncertainty about investing here, about growing their businesses, can set those uncertainties aside
Linamar CEO Linda Hasenfratz
Guelph-based Linamar, traditionally a builder of the engines, transmissions and other components that make up a car’s powertrain, is one company embracing a diversification strategy that applies its metallic manufacturing, assembly, design, purchasing and logistics skills in other industries.
The federal government spent 2019 encouraging businesses to embrace diversification, at the very least when it comes to trading partners. Only about 12 per cent of small and medium-sized businesses export, with the vast majority relying on the United States, according to federal statistics. But even the country’s largest companies often depend on one industry and have limited geographic reach, with the U.S. being the destination for 75 per cent of exports in 2018.
Linamar, however, is notable for its pursuit of diversification across both industries and geographically. Chief executive Linda Hasenfratz, who had a front row seat to trade discussions as a member of the North American Free Trade Agreement advisory council, believes it’s important to nurture the relationship with the U.S. and Mexico, but said Canada should “absolutely” develop its other trade relationships.
She’s done as much with her business. Under her leadership, Linamar has grown to 61 manufacturing locations and operates in 17 countries. Sales hit $7.6 billion in 2018, up from $1.4 billion when Hasenfratz took on the top job in 2002.
Hasenfratz sees a future where half of Linamar’s revenue comes from outside the auto sector, up from roughly 30 per cent today.
“I love the idea of not having all our eggs in one basket,” she said. “We have lots of baskets that all have lots of opportunities to grow.”
But that doesn’t mean Hasenfratz buys into the doom-and-gloom outlooks for the auto sector.
“We are not at all trying to scale down our automotive business,” she said, adding she sees the potential market growing to $300 billion by 2030 from $120 billion today. “But I quite like the idea of diversifying into other industries so we have even more avenues in which to grow the company.”
Dipping into the medical device industry isn’t Linamar’s first time wading outside the auto sector. That process started nearly 20 years ago when it bought Skyjack Inc., a manufacturer of scissor lifts and booms.
Linamar had previously expanded from consumer automobiles to commercial and off-highway vehicles, but the Skyjack deal was its first foray into a completely different industry in terms of customers and types of products. Even then, the machines still had wheels, axles and engines.
About two years ago, though, Linamar continued its horizontal expansion with a $1.2-billion deal for the MacDon Group of Companies, a harvesting equipment manufacturer.
“That was based on this assessment of what’s happening in the world around us, which included a growing global population,” Hasenfratz said. “How we grow and harvest food to feed that growing population we think is going to be a continuing issue.”
Such thinking is also what prompted Linamar to get into medical device industry in December.
The deal with Synaptive Medical comes about six years into Linamar’s 100-year business plan that involves chasing industries it anticipates will grow in the long haul, one of which is equipment that supports an aging population (eventually, that could mean building orthopedic replacements such as knees and hips).
Hasenfratz is excited by the thriving biotech industry in Toronto, which she said doesn’t get enough attention. “It’s a whole industry and sector that has developed and is thriving that we don’t talk about enough,” she said.
Other areas for future-focused investments include water and power. Linamar already builds parts for water systems and wind power, though these only account for a small portion of overall sales.
Linamar plans to build Synaptive’s trademarked medical devices at an incubator-style innovation centre currently under construction in Guelph, where it will start experimenting with future products when it opens in late winter/early spring 2020. The centre will initially employ about 50 to 60 people.
“It’s for new ideas, it’s for new projects that are a little bit out of the mainstream for us to work on,” Hasenfratz said. “It made sense to house that work in a separate facility where we could nurture it a little bit more.”
The new facility will not have a dedicated manufacturing line. Instead, it will use small, flexible pods of equipment to work on specific projects, which she said would be difficult to do in an existing high-volume facility where employees are consumed with day-to-day tasks.
Linamar in early 2018 announced its plans to build the innovation centre after receiving $49 million from the federal government’s Strategic Innovation Fund and another $50 million from the province of Ontario.
At the time, Ottawa said the grant would help create 1,500 new jobs in advanced manufacturing processes such as artificial intelligence and 3D printing. The cash is part of Ottawa’s push to build what it calls the “car of the future” so that the traditional automotive sector isn’t completely left behind by automation and electrification, although the effects of that transition are already being felt.
On Dec. 18, General Motors Co. shut down vehicle production for good at its Oshawa, Ont., assembly plant where workers have built cars for a century. The closure, part of a wider GM reorganization to spend $6 billion on electrification and automation instead of manufacturing, will eliminate 2,300 unionized jobs.
The majority of workers were eligible for retirement and GM and the government worked to line up jobs for the others at 45 employers in the Greater Toronto Area. GM is also spending $170 million to turn the plant into a parts manufacturer and test-track facility for autonomous technology, saving 300 jobs in the process.
Seven vehicle assembly plants will remain in Canada after the Oshawa closure, which has a trickle-down effect on the smaller suppliers that built parts to serve the facility.
GM wasn’t the only automaker to scale back Canadian operations this year: Fiat Chrysler Automobile eliminated 1,500 jobs in Windsor, Ont., and Ford Motor Co. is planning to cut 650 in Oakville, Ont., by early 2020.
Vehicle production in Canada has declined annually since 2016 and will continue dropping for the next three years, automotive industry consultant Dennis DesRosiers said in a December outlook report.
He predicts overall North American vehicle sales will fall by one million to about 20 million in 2019, with production shifting to Mexico where labour is cheaper.
But DesRosiers said it’s not all bad news for parts suppliers, since he expects they will be responsible for manufacturing more content per vehicle in the future. Car ownership rates are also edging upwards in Canada and he expects it will take at least a decade before automation and ride-sharing trends affect demand for car ownership.
In the meantime, Hasenfratz said the electric-vehicle trend could actually boost Linamar’s sales since automakers across the industry are spending big on research into propulsion, autonomous driving and new mobility solutions, leaving less cash to spend on building powertrains in-house.
Powertrains were one of the last parts of the vehicle to be outsourced, so she expects to see higher volumes even though the number of purely internal combustion engines will decline over the next decade.
The expected growth in the auto-parts market is one reason Linamar isn’t rushing to expand into other industries.
“This is a 100-year plan,” Hasenfratz said. “We’ve got time to sort of pace it and roll it out in a way that allows us to get fully up to speed and knowledgeable about new industries.”
Eventually, once products such as Synaptive’s get traction, Hasenfratz said the company will move to the next idea. She expects revenues to start small, but said it’s reasonable to expect a 50-50 split in the future.
“Even if they’re growing aggressively, it’s going to take a while for them to catch up to the auto side, particularly because there’s so much opportunity on the auto side,” she said.
One thing in the auto sector’s favour overall is that the signing of the United States–Mexico–Canada Agreement to replace NAFTA in December removes some uncertainty in the market.
“Anybody who had uncertainty about investing here, about growing their businesses, can set those uncertainties aside,” Hasenfratz said.
She believes the final deal will be good for Canada, with the higher regional content requirements for vehicles opening up opportunities for parts suppliers.
“It’s a good deal for Canada and I think well negotiated on our part.”
But the new deal won’t stop Hasenfratz from diversifying into global markets.
“It’s good to diversify in general,” she said.
She also called on Canada to be more proactive in attracting business and talent by bragging about the pockets of excellence it has developed in advanced manufacturing and artificial intelligence.
“If you want someone to buy something from you,” she said, “you’ve got to start selling them.”