Corporate Profile: Your move, Mr Chow

Outperforming the FTSE is not enough, according to the City. Two and a half years into his tenure at GKN, the engineering group, CK Chow must now come up with a big, strategic move that will stamp his mark on the company without upsetting its successful formula
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Chung Kong Chow - affectionately known as CK - has much to lose. Two and a half years ago he took over the top job at GKN, a company dating back to 1759 which inspires a loyal following in the City and country alike. As a businessman at the helm of a healthy and growing company, he has a reputation as one of the world's finest chief executives.

He was fortunate to inherit one of the pillars of the UK engineering sector at a time when the going was good. Order books were healthy and the balance sheet was strong. The share price has continued its steady rise, almost doubling since his arrival, and he has been able to spend pounds 1bn on acquisitions. But strategically GKN still looks very much the same as when he arrived, still focused on three established core businesses. How then can this ambitious chief executive start to put his own mark on the company, without jeopardising what he already has?

In person, Mr Chow comes across as a man with both authority and enthusiasm. Born and brought up in Hong Kong, but educated in the US, his accent has echoes of North America, Hong Kong and Britain. He remembers how things looked in 1997 when he joined GKN: "The company had come out of an industry downturn in the late Eighties and early Nineties well, but it lacked a growth culture. My remit was twofold - to develop that growth culture and to make the business more global," he says.

No one would criticise the 48-year-old for not tinkering with a successful formula, but the City is now keen for a big strategic move, though not one that risks the handsome rewards that GKN has served up for shareholders. Mr Chow's task is to make the share price rise as a result of an initiative for which he can take the credit. With GKN's shares already highly rated, that's not going to be easy, and straying from the well-trodden path could certainly be risky.

The company remains an engineering conglomerate with four very different sets of customers: governments, retailers and the aerospace and automotive industries. Most familiar to the general public are its Apache military helicopters. It also supplies parts for aeroplane engines. Most car engines contain small, precision-engineered parts made by GKN, as do tractors and construction vehicles. But the group's fastest growing business is Chep, in which it has a 50 per cent stake. Chep manages the chain connecting the manufacturers of fast-moving consumer goods, in particular groceries, to supermarkets. The company ensures supermarkets can keep their commitments to offer fresh goods. It hires out versatile storage devices, better known as pallets - it has around 100 million of them - in 16 countries.

"He inherited a tremendous hand," says Tim Bennett, an analyst at Morgan Stanley Dean Witter. "Helicopter orders were rising and there was Chep. There was much to look forward to." Another analyst adds: "The entire valuation of GKN is driven by Chep, a business that was there when Mr Chow arrived and which he doesn't entirely control." Indeed, Industrial Services, the division dominated by Chep and which also includes waste management services, has consistently been the fastest growing part of the group. It now accounts for a quarter of group profits.

Having spent 22 years in various international positions at industrial gases group BOC, Mr Chow was seen as the ideal candidate to make GKN a global entity because of his experience running operations in Hong Kong, Australia, Japan, the UK and the US. To this day, however, all but three per cent of GKN's sales are still to the UK, US and Continental Europe. The helicopter orders are coming through but are set to tail off in 2002. There is less good news immediately on the horizon than there was in 1997.

Mr Chow insists that turning GKN into a growth company is about more than just doing deals. It's about leadership. "Leadership is inseparable from successful management, and as global consolidation tightens its grip, the power of leadership has never been in greater demand."

This was one of the lessons he learnt at BOC. "A lot of managerial capabilities are the same across companies, but leadership is the key element."

Unsurprisingly, Mr Chow is big on mission statements and lists. "It's all based on three things: growth, entrepreneurship and wanting to excel in our markets. And entrepreneurship is about four things: innovation, initiative, the management of risk, and speed," he says.

If it all sounds like US management speak, that is because Mr Chow took an advanced management programme at Harvard just after turning 40, having taken an MBA at the Chinese University of Hong Kong 10 years earlier. GKN is currently in the middle of Mr Chow's "Way Forward" programme, and has already sent 500 of his executives to Columbia University in the US to study the significant changes in the industry. The programme has seen 40 per cent of the top 200 people in the organisation change.

"Some find it inspiring and come up the ladder, some are recruited, some don't find it their cup of tea and go," he explains. "You don't change cultures overnight, but changes are coming through after two and half years." Meanwhile, he has changed the remuneration philosophy so people are paid "by results, not according to budgets".

In making any wholesale changes at GKN, Mr Chow has everything to lose. GKN is a stock market darling in the habitually spurned engineering sector. He is one of the most respected members of the Hong Kong business community and the President of the Society of British Aerospace Companies. If he is to feature on headhunters' lists in two and a half year's time again, he will have to show that GKN's continuing delivery of shareholder value is down to more than the strength of the portfolio he inherited.

His defence of his cautious strategy so far is that his options have been limited by outside factors. In 1997, all but one of GKN's markets had already embarked on a merger spree. "All our businesses were undergoing consolidation. In autos, globalisation was putting more and more pressure on suppliers as car manufacturers demanded global platforms. Fiat was already outsourcing some of its production. But there was one area where consolidation hadn't begun and GKN was able to lead consolidation in that business."

Powder metallurgy was the area in question. A company spokesman describes the business as "like making biscuits" because it bakes powdered metal to produce the tiny parts that go into car engines. Mr Chow wasn't going to miss out on the opportunity in this still-fragmented industry. He has grown GKN's powder metallurgy business sixfold since 1997.

There have been other deals too. In automotive drivelines - the systems that transfer power from engine to axle - GKN recently has entered a joint venture with Dana, a US company, to design, engineer and manufacture component systems for cars and trucks.

The City has questioned some of the moves. The hiccups in GKN's continuing outperformance of the FTSE are as much down to suspicions over the acquisitions as they are down to fears about the prospects for the engineering sector. But the continued success of Chep, which now deals with nine retail chains in Europe and has secured the recommendation of US retail giant Wal-Mart, has kept the shares tipping up.

The question facing Mr Chow is where to make the next move. The auto industry does not offer the opportunities he needs. "Constant velocity joints [which dominates GKN's auto business] is as global as it can be, it just can't be taken that far further," says one analyst. "Autos will remain a cyclical business which suffers downturns - there's no escaping that."

Volumes in most car components markets are expected to stay flat, with price pressure an on-going factor. In constant velocity joints, GKN already has 37 per cent of the world market. Attempting to grow that share will pit GKN against motor manufacturers reluctant to see any one supplier dominate the market. Meanwhile, the creation of new suppliers such as Delphi, the components maker which gained its independence from General Motors in May, poses a threat. Delphi will be now competing head-on with GKN for Ford's business.

Significantly, however, the momentum in consolidation in the industry has now shifted from the manufacturing level to the components suppliers. GKN's joint venture with Dana, allows it to exploit the latter's distribution network.

The next big thing, Mr Chow believes, is the replication of these auto industry trends in the aerospace industry. Planes are still assembled in several locations, necessitating the transportation of huge pieces of fuselage. Such inefficiencies have disappeared from automobile manufacturing.

There are signs of approaching consolidation in aerospace components supply. Boeing has already indicated that it wishes to cut the number of its suppliers. Meanwhile, the British Aerospace and GEC Marconi tie- up is expected to put further pressure on suppliers. "To have an efficient aerospace industry, you have to have an efficient supply chain," Mr Chow he points out.

Given that GKN is worth almost pounds 8bn but has debts of just under pounds 400m, Mr Chow has plenty of firepower to lead consolidation in the sector. The value that he will add by doing so is not principally about netting economies of scale from production and eliminating competitors. The strength of Chep and the real value in the constant velocity joints business are in management, not in manufacturing. "Thankfully most of the old metal bashers have realised there's no money in metal bashing anymore," says Tim Bennett, at Morgan Stanley Dean Witter. "GKN has scope to add a new dimension to aerospace, rather than just manufacture pieces of kit."

Mr Chow wants to apply GKN's expertise in managing the supply of automotive components and fast moving consumer goods in as many areas as possible. And in the longer term, he sees the boundaries between GKN's activities breaking down. "GKN has certain core competencies. We understand retailers," he says. "And we are good at manufacturing. The task now is to promote processes that cross business boundaries. Consolidation is changing our industries, but changes in product boundaries that are creating opportunities."

Those fans of GKN wedded to the idea it is principally in the business of tanks and helicopters will be disappointed. Some observers have suggested that GKN will cease to be an engineering company altogether, and switch to the support services sector. Mr Chow has in mind something even more radical.

"In 10 years people won't be classifying companies as defence, automotive or support services. The distinctions will disappear and there'll be one sector. But don't ask me what it'll be called." Whether Mr Chow is running GKN in 10 years' time will depend on the success of his forthcoming actions in the aerospace industry.

Does he think he'll be there? "Oh, I'm not answering that," he says, the authoritative voice returning. Of course, like all chief executives, Mr Chow does not make forecasts.

Fact File

Market Capitalisation: pounds 7.59bn

Turnover: pounds 3.7bn in 1998

Pre-tax profit: pounds 462m

Main business: GKN has three divisions: automotive, aerospace and industrial services. The GKN Automotive product range includes driveshafts, joints, propeller shafts and couplings, as well as chassis assemblies, components for catalytic converters, and precision-pressed powder metal parts. Its OffHighway Systems division makes transmission systems, agricultural components and wheels for off-road vehicles. GKN Aerospace consists of two major divisions, GKN Westland Helicopters, and GKN Westland Aerospace. The Industrial Services arm comprises the Chep pallet and container pool, the Cleanaway waste management companies, Meineke automotive services (a US-based exhaust business), and the Interlake Material Handling businesses.

Key executives: CK Chow, chief executive; Sir David Lees, chairman and former chief executive; Marcus Beresford, chief executive of industrial services; David Turner, finance director.

Employees: 35,517

Steeling A March On History

1759: Dowlais Iron Company established near Merthyr Tydfil in South Wales.

1851: Sir Josiah Guest, grandson of the former managing director, becomes sole owner. Dowlais becomes the world's largest iron works, operating 18 blast furnaces and employing 7,300 people.

1865: First production of Bessemer steel.

1900: Guest, Keen and Co Ltd incorporated after merger of Dowlais with the Arthur Keen (left) Patent Nut and Bolt Company, a business, established in 1856, which had gone public in 1864 and which required steel-making technology.

1902: Dowlais acquires Nettlefolds Ltd, one of the world's leading manufacturers of screws and fasteners. It becomes one of the world's largest manufacturing businesses, involved in coal and ore extraction, iron and steel making, and nuts, bolts, screws and fasteners. Changes its name to Guest, Keen and Nettlefolds Ltd (GKN).

1920: GKN enters the motor industry with the acquisition of Lysaght/Sankey.

1945: Commonwealth Handling Equipment Pool (Chep) established in Australia to distribute food and equipment around the South Pacific after the Second World War.

1967: Steel, then 20 per cent of GKN sales, is nationalised. GKN receives pounds 42m compensation.

1974: GKN takes a 70 per cent stake in Chep, later reducing it to 50 per cent.

1980: GKN is hit by the worst recession for 50 years; plunges into loss for the first time in its history. Major restructuring ensues. Trevor Holdsworth becomes chairman. Roy Roberts is appointed managing director.

1985: GKN wins contract to supply British Army with Warrior armoured personnel carriers.

1986: Company changes name to GKN plc.

1988: David Lees is appointed chief executive. Purchases 29.9 per cent stake in Westland, the helicopter manufacturer.

1990: Chep opens first US operations.

1993: Wins contract to supply Kuwaiti army with Warriors.

1994: Acquires remaining interest in Westland for pounds 284m.

1997: CK Chow appointed chief executive.

1997: Acquires Sinter Metals, a powder metallurgy business making components for engines.

1998: Sells armoured personnel vehicles business to UK-based Alvis, but retains a 29.9 per cent stake.

1999: Acquires the US-based Interlake Corp, another powder metallurgy business.

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