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STRATEGY

The Accidental Lender

A Texas businesss-owner salvages old engine parts and sells them abroad.
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'If I can export, anyone can' -- Bill Rucker

There's a guy down in Texas who does half of his $3-million business abroad. Forget market research, consultants, or expensive lawyers -- his first overseas sale came from placing an ad in a local magazine. Now, he uses nothing more sophisticated than an industry directory. And, most surprising of all, what he sells is junk. -- S.D.S.

* * *

This was the kind of moment that Bill Rucker lives for. Spread out before him, under the two-story-high ceiling of a corrugated metal warehouse, were piles of parts from old truck engines, parts coated with the grime of half a million miles on the road. Over there were half a dozen big engine blocks, over here a box of fuel pumps. Rucker didn't know where to turn first, a museum curator who had stumbled upon a room full of lost Cézannes.

Rucker, 32, is the founder and chief executive officer of Tracom Inc., a Fort Worth company that buys used diesel engines and sells the engines and parts to remanufacturers. His "bird dog," Tim Jordan, a parts dealer who works from the back of his Chevy pickup, had brought Rucker to this trucking company in Ennis, Tex., hoping for a finder's fee from any deal Rucker worked out.

But as the minutes passed Jordan sensed that Rucker's initial enthusiasm was waning. There's junk and there's "juuunnk!" -- the latter an inflection that signifies good stuff -- and this place had too little of that. Rucker was sparring now with the owner, pointing to a gaping hole in the side of one engine. He normally pays $500 for an engine and makes his money in a reversal of the usual economic logic: in the junk business, the sum of the parts is worth more than the whole. After he has broken down the engine, he knows he can get $800 for the cylinder block, $500 for the crankshaft, $200 for the blower, $60 for the gear train, $40 for the water pump, $2 each for the valves -- in all, $1,500 if all the parts are in decent shape. But they rarely are. The average engine brings him $1,000. These would bring less.

"I'll give you $7,500 to take this junk off your hands."

"You're about $7,500 short."

The owner came down to $12,000, but Rucker stood firm. If these parts had been here five years, chances are they would stay a while longer -- a good sign that he would eventually get his lower price.

Minutes later Rucker is back on the road, headed to Dallas. "Ain't no way we're just talking about blown-up engines back there, that guy and me," he says. "To this guy, the engines are like his children -- each comes with a story. I'll bet he could tell you what truck each engine came from, who was driving the truck, where the engine blew up. It'll take him a while to get used to the idea of selling them. But he will."

An hour later Rucker is in a skyscraper suite in downtown Dallas. No junkyard dogs here. Just four bankers dressed in dark wool suits. Rucker is wearing gray pants and a plaid sport shirt and hasn't bothered to check his pants for black grease marks picked up in Ennis. But the bankers don't seem to care. The talk centers on the markets where Rucker sells his engines, and nobody here is interested in northern Texas. The meeting focuses on Belize, Mexico, and Australia, and Rucker knows what he's talking about. Tracom derives 40% of its sales from exports, unusually high for a company that is just four years old, with sales in 1989 of $3 million and only 14 employees.

The bankers, principals in Bristol International Ltd., a trade merchant bank, have made Rucker's export growth possible, financing about 100 separate deals to date. In starting their own company two years ago, they had identified the same opportunity Rucker had: the widening window for small companies to expand overseas.

* * *

Every bend in the road can bring another junkyard, so Bill Rucker is a man accustomed by now to unexpected pleasures.

"America is a giant scrap yard," he says. "Look at how much junk this country has generated in 200 years. We throw off so much excess that it can't be accounted for. So if a trucking guy in Philadelphia puts aside five old engines a year in a warehouse, what's the economic value?"

None, of course, unless someone like Rucker can link the supply of junk to the demand. And the demand, Rucker has found, is worldwide. Last year he shipped about a million dollars' worth of product overseas. It takes a lot of old crankshafts and cylinder blocks to make an export order that anyone notices, yet it is small companies such as Rucker's that hold much of the promise of helping to narrow the yawning U.S. trade gap. Trade experts see these companies as a resource that has barely been tapped.

Bill Rucker agrees with that assessment, and adds that exporting isn't as formidable an exercise as it might appear. "If I can export," he says, "anyone can. Can you imagine going into a bank and asking to borrow $3 million to buy junk for export?" For Rucker, finding customers abroad was surprisingly easy; obtaining the capital to finance those deals was the hard part.

Rucker doesn't know exactly when he fell in love with junk, but it probably started on summer weekends when, as many kids do, he worked on cars with his dad. A mechanic when he graduated from high school, he wasn't satisfied staying one; he had bigger things in mind. In 1976, at the age of 19, he opened his own repair shop, then bought a gas station two years later. In 1982 he gave up the station and started a new company to buy and sell used school-bus transmissions made by what is now Detroit Diesel Allison Division of General Motors. The transmissions cost about $150 each from scrap yards, and within days he sold them for $300 to Allison dealers, who rebuilt them.

That year Rucker placed an ad in a local magazine offering Allison transmissions for sale. Somehow a copy of the magazine landed on the desk of Leon Will, who ran a Ford truck salvage yard in Australia.

"I got a call one day from Adelaide," says Rucker. "There was a lot of scratchiness on the phone. He said, 'How you doin', mate?' I was very surprised. What's this guy calling me for? Well, he needed some used Ford steering boxes, and I said I'd try to get them. I called up a guy I knew who had 100 steering boxes and wanted $5 apiece for them. So I called Leon back and said I wanted $25 apiece. He said that was the greatest thing he'd ever heard. He sent me $2,500, and in the end we shipped him $10,000 worth of Ford parts like fenders and hoods. I'd never done anything outside of Fort Worth before. It was exciting. That's what made me want to do more exporting. I didn't know where it would lead at that point."

Rucker continued to supply parts to Adelaide from time to time, but his business didn't take its next big turn until 1986, when he received a call from an Allison dealer in California. Instead of transmissions for school buses, this dealer wanted Rucker to find him some much larger transmissions used in trucks and industrial equipment.

It wasn't more than a week before he found a salvage yard in Waxahachie, down the road from Fort Worth, that had four of the large transmissions. "I tore my butt down there in an hour and loaded them onto my truck," says Rucker. He paid $6,000 for the four transmissions and sold them to the California dealer the same day for $10,000 -- an instant profit of $4,000, or about as much as the business had been clearing in a single month.

That was all Rucker had to see. Within a few months he had started up a new company, Tracom, to buy and sell big-truck transmissions and engine parts. The truck parts aftermarket is a lively $11-billion business, and the parts portion of it is about $1 billion. But it is not very efficient. Trucking companies typically return used engines to the manufacturers and dealers, who either rebuild the engines and transmissions or scavenge the parts. But many valuable parts remain in junkyards and salvage yards or on the grounds of small trucking companies. It was those parts, in a sense lost to the stream of commerce, that Rucker aimed to acquire and resell.

He began to think about selling overseas. What he had learned from Leon Will was that foreign customers, who generally are not as well off as Americans, tend to rebuild engines again and again rather than buy new ones. The poorer the country, the more they scrounge for parts.

Using nothing more sophisticated than an industry directory of truck dealers, Rucker began placing calls to Australia. One contact, Detco Australia, was among the largest distributors and rebuilders of Detroit Diesel engines in the world; the company told him it needed as many of the engines as he could find. "I'd never seen a Detroit Diesel engine up to that time," says Rucker. "So I bought some manuals and started studying up."

Rucker located the engines in Springfield, Mo., and sold them to Detco for $50,000, a 100% markup. Detco secured a letter of credit from its bank to guarantee payment and asked for three separate shipments of the engines. After sending out the first group, Rucker left for a week's vacation. "I called the office and they said we had a major problem," he says. The bank had released the entire $50,000 instead of a partial payment for the first shipment. "Detco was in a panic because they didn't know me and I had their money and still most of the engines. So I wired $30,000 back to them, which put me at risk since the letter of credit was gone for the last two shipments I had to make. But from then on, they trusted me."

Bill Rucker was in the export business.

In the back of Rucker's plant, inside an open-air metal shed, three men are working on Detroit Diesel engine blocks. By now they are as black with oil as the engines themselves. They inspect each piece quickly and toss the rocker arms in one box, bolts in another, valves in a third. One man can strip an engine to its skeleton in a few hours.

Tim Jordan arrives in his Chevy pickup. Rucker had asked him to look around for Detroit Diesel injectors; he figured it would take even the best of bird dogs like Jordan a couple weeks to come up with them. But Jordan called a few junkers he knew and now here he was, three days later, with 191 injectors in the back of his truck.

He had paid $6 apiece for them -- cash, on the spot, as most of these transactions are -- and would get $10 apiece from Rucker, who would cut him a check within half an hour. Rucker himself would ship the injectors the next day for $15 apiece and would get paid within 10 days. So thin is the veneer of trust in this business that receivables are not allowed to age very long; there are reasons, after all, that dealers have a junkyard dog straining at the collar nearby.

Rucker's business cannot function without an intelligence network to help him find engines and engine parts. They are scattered in thousands of sheds and scrap yards around the country, and no national inventory system exists that can tell you, say, where to find a 740-D Allison transmission, vintage 1982. Rucker has a growing business because he, more than most dealers, knows where the junk is. "We've taken an industry that was disorganized and disjointed and brought a little organization to it," he says.

Half of Tracom's supply comes from calls its employees make to salvage yards, trucking companies, and truck dealers. If they find an especially rich cache in a salvage yard in Morgantown, W. Va., for example, someone from the company, perhaps Rucker himself, will fly there to take a look. Another third or so of the supply comes from people calling and offering their junk for sale.

The balance of Rucker's supply comes from 15 or so people like Jordan, guys who buy and sell from the back of their trucks. Untouched by computer systems, marketing vice-presidents, or any other accoutrements of modern business, they live by their ability to spot the hot parts and to strike a good price on both ends. They are masters at inventory turns, starting on Monday mornings with perhaps $5,000 cash in their pockets and trading that up to maybe $7,000 or $8,000 by week's end.

From the time he started the company, Rucker has focused on ways to track both his own inventory as well as parts available in salvage yards around the country. At first he filed all the information on color-coded paper; although the system worked, more or less, it was tedious and time-consuming. Then last year he converted all his files to a computer system tailored to his own needs.

The inventory detailed in the computer system consists of about 100,000 items, only about a third of which Rucker actually owns and holds on his property. The rest is "extended inventory," or items he knows that dealers and salvage yards have for sale. The extended inventory grows weekly as his sources check in with lists of the latest junk they've found.

When a customer calls asking for a particular item, Rucker queries his computer to see if he has it. "It takes about four keystrokes," he says. If the item sits in extended inventory, he calls the owner and negotiates a deal, already knowing what price it will fetch when he resells it. What the computer has enabled him to do is match supply with demand and complete his own buy-and-sell transactions within days, which puts his capital to work efficiently.

This year he will offer customers the ability to tap into his computer system from remote locations to check on parts availability -- an especially valuable feature for foreign customers whose workday overlaps Rucker's by only a few hours.

* * *

Just after Christmas in 1986, Rucker packed for his first trip abroad, a full month in Australia searching for business. At the time, Tracom had annual sales of just $500,000, and had barely started uncovering potential business close to home. But Rucker felt, based on his limited experience, that he could get good prices abroad and that the individual orders could be quite large compared with the average back home.

Only months earlier he had completed that first deal with Detco Australia. The company had five branches in Australia, and Rucker made appointments to stop at each one. At the end of his trip, he met over sandwiches with the president of the company in his private office. For the head of a such a tiny company, Rucker wasn't bashful. "I just sat back and told him that I wanted all their business," says Rucker. "He said, 'If you only do business with us in Australia, we'll only do business with you in the United States.' We shook on it." Since then, Tracom has shipped more than $1.5 million worth of engines to Detco.

A year later, again using industry directories, Rucker planned a trip to visit dealers in England. When he arrived at Blackwood Hodge PLC, which uses Detroit Diesel engines in construction equipment, he announced himself at the gate. "I got into a golf cart and was taken to the corporate office," says Rucker. "I went into the boardroom and about 15 people started filing in. I'm wondering, what do these guys do, and why do all of them want to see me? One of them said, 'Mr. Rucker, we want to talk with you about used products. We're going to supply all of Europe with remanufactured products, and we've been looking for the past year and a half for someone reputable to supply us.' " Tracom received orders worth $75,000.

As successful as he was on foreign soil, Rucker was striking out at home in his attempts to finance the deals. Banks frequently lend against assets, and Rucker had no assets left to collateralize. He even found it difficult to finance the original deal with Detco Australia, despite having a letter of credit -- a guarantee from Detco's bank that it would pay the full contract amount once it had proof of shipment. "It didn't make any difference," says Rucker. "The banks didn't want to do it. They didn't understand it."

Rucker managed to finance many of the deals by factoring his domestic receivables, an expensive alternative. He also received a Small Business Administration-guaranteed loan for $250,000. But it wasn't enough, and he had to slow his pursuit of foreign business. "Everyone gives lip service to loaning people money for exports," he says, "but when the rubber meets the road, they don't come up with it.

"I went to banks with letters of credit that were solid. Bankers looked at them and said, 'You've never done it' or 'You don't have enough hard assets.' I went to the biggest bank in Fort Worth. They said a letter of credit didn't guarantee that I would get the goods or ship them. You work so hard to get an order and a document saying you're going to get paid, then you can't get financing to buy the goods. Most people would throw their hands up and say, why bother?"

Rucker says he visited at least 15 banks in the Dallas-Fort Worth area without receiving a single loan to finance his foreign sales. One particular experience rankles him even today. "I spent a week or two putting together the documents," he says. "On Tuesday I called and the guy says it didn't make it to the loan committee, but I should call back on Thursday. On Thursday he says he needs more information. A week later he calls and says they don't do that kind of business, foreign business. I said, 'I thought you said you had an international department.'

" 'Yeah,' he says, 'but all they do is wire money.' "

* * *

Early in 1988, at the international department of one large Dallas bank, Vijay Fozdar and Fred Waldkoetter were preparing to set out on their own. Both had broad experience in foreign trade. Fozdar had spent 14 years with several international trading companies in the Far East, and Waldkoetter had headed foreign trade operations in Europe, Africa, and the Middle East for a Dallas bank. In 1986 the pair had started building a foreign trading company for what was then InterFirst Bank Dallas.

Now, the bank was in deep financial trouble, just months away from a Federal Deposit Insurance Corp. takeover. Even in better times the bank was not a place where smaller companies could get help on foreign sales. In fact, that was true of nearly all financial institutions: small banks lacked the expertise to finance foreign sales, and large banks, which did have the know-how, dealt only with big customers.

"Very few banks," says Fozdar, "have the international capability to help small companies. The returns just are not there for handling them. Banks only get a 2% to 4% spread over the cost of funds per annum. Because of the narrow spread, and the small amount of money a small company gets, it's not worth it. You'd go broke doing those deals." And even if a business secures a 90% loan guarantee from the SBA or the U.S. Export-Import Bank, most banks think that they can easily do without the high administration costs and low yield of such loans.

"We wanted to be the training wheels for small companies," says Fozdar, who with Waldkoetter and two other businessmen formed Bristol International Ltd. in March 1988. As a trade merchant bank, Bristol would provide the financing and expertise needed by small and midsize companies to engage in foreign sales. It would have more flexibility than its cousins in commercial banking. Unlike a typical bank, it would lend against the transaction rather than against the company's balance sheet, taking either outright title to the goods or a security interest in them. For the risks it assumed and for the cost of processing the transaction, it would take a handsome fee -- for example, 2% to 3% per month on the amount it spends for the goods.

As Bristol was getting started in the spring of 1988, a frustrated Rucker was still searching for ways to finance his foreign deals. Disgusted by now with commercial banks, he hired a college intern to put together an application for a loan guarantee from the U.S. Export-Import Bank. The intern had read a few articles about the start-up of Bristol International and called for advice. She received a surprisingly warm reception. "A woman from the Department of Commerce had told me about Rucker back in 1986," says Waldkoetter. "She said, 'Here's a guy to be on the lookout for.' "

Waldkoetter proposed to Rucker that they talk. "Ididn't want to talk with these guys," says Rucker. "I had the worst attitude. I wasn't going to Dallas for any meeting and especially not to see any banker. I was collateralized to the hilt and I didn't see what they could do for me." But Bristol wasn't put off. "Rucker was typical," says Fozdar. "He had a need for financing, but he had reached all the dead ends and was frustrated."

What impressed the merchant bankers most about Rucker when they met him at Tracom's offices was his progress in tracking the location of old parts and engines around the country. "He was building access to an inventory of products that he didn't have to buy until he had a sale," says Fozdar. "He knew where the product was. It was the process by which you take what has been a local market and create a national or international market by establishing an information network. He was trying to do that."

A deal with the Export-Import Bank didn't look promising, so the partners proposed that Rucker do a deal with them instead. After a week of due diligence, Waldkoetter called to say that everything looked good. Rucker had heard that line before, so he decided to test the merchant bankers: he asked for $50,000 right away to enable him to buy engines for a deal in Australia. That same day -- before any papers had been signed -- the money appeared in Tracom's account.

At the end of August 1988 Tracom employees packed 25 huge Detroit Diesel engines inside wooden crates. They wrapped the crates in metal bands to hold them together, then hoisted the crates into one big metal container on the top of a flatbed truck. With the shipping papers all completed, the truck pulled out of Tracom's lot.

On October 28, when payment arrived from Detco Australia, Tracom paid back its first loan from Bristol International. The loan cost Tracom $2,775, or about 19% on an annualized basis. A steep price, to be sure, but Rucker gets a better-than-average markup on his foreign deals.

More to the point, Rucker was happy to pay Bristol's price. Finally, he could get serious about growing his business abroad.

* * *

Bill Rucker steps outside the door to his house and surveys the area, a neighborhood of big new homes. He points to a house on his left. "That guy there is a representative to China for Bell Helicopter. That one next to him is the principal of a public school. A stockbroker lives there, and a guy who runs a title company over there. And then here I am, in the biggest house at the top of the hill, and what do I do? I sell junk." Rucker enjoys the possibility that his grimy engines share cargo ships to Europe with IBM computers.

"I'd like to add one big foreign customer each year," says Rucker. "When you're dealing internationally, you're dealing with people a cut above. It tends to raise you to their level. You have to be as professional as the $500-million company you're selling to. It's also helped me focus my business. I saw there was enough demand that I wouldn't have to branch out into anything else."

The export business has also given Rucker experiences he can't measure on a financial statement. "It's made me much more aware of world issues and broadened my horizons," he says. When his foreign customers visit his company in Fort Worth, they stay with Rucker, his wife, Laura, and their eight-year-old daughter, Erin. "I'm trying to learn a lot about the cultures of the countries where I'm doing business."

Rucker has found that demand for American goods is strong. "The biggest complaint I find overseas is that Americans are not responsive. A lot of people do international sales only when business here is in the pits."

An exception is Tim Jordan. He wants to give up his one-man show in five years or so and build a company as Rucker has; his goal is to own a salvage yard for heavy trucks, but before he can do that he has to increase his cash, pursuing business aggressively wherever it is. Last summer, he found it where Rucker has -- overseas.

"I'd heard about some Mexicans staying in a motel on Interstate 35," says Jordan. "They came up here to buy truck parts. I went over there one morning at 7:30 and asked the lady behind the desk, are there any Mexicans or Guatemalans staying here? She says yes and gives me their room number.

"I knocked on their door and talked with them. They turned out to be Guatemalans. And we did a deal."




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