This Year's Model

A close-up look at an Inc. 500 company that has prevailed in an industry gripped by unforgiving consolidation.

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WALLY TSUHA built a company that has prevailed in an industry gripped by the most advanced and unforgiving wave of consolidation ever. Luckily, you've still got time to learn from him

The offices of Saturn Electronics & Engineering, just north of Detroit in Auburn Hills, lie hard along Interstate 75. From Wally Tsuha's office, the rush of cars along the highway has been reduced to a dull roar, offering for now, behind the smoky plateglass windows, the illusion of refuge from a fast-moving world.

Tsuha is founder and chairman of Saturn (#392), a $123-million supplier to the auto industry. Just back from a four-day trade mission to the Far East led by Secretary of Commerce Mickey Kantor, he is composing--aloud--a follow-up letter. "I'd like to see Secretary Kantor help us set up a mechanism for medium-size companies like ours to find joint-venture partners overseas," says Tsuha. "For the big companies, that's not an issue; they already have a global infrastructure. But we can't afford that. I'm trying to push him to come up with a plan."

Tsuha may be a small player in the global marketplace--the chairman of Sprint, after all, was on that trip--but he's not about to ease up on the secretary of commerce. If there's one skill Tsuha has honed from maneuvering his company around the wreckage of the auto-supply industry, it's this: never wait to be told anything. Saturn hasn't thrived simply by meeting one new demand from its customers after another. In the face of furious consolidation, getting out ahead of the market--knowing what customers need before they do--is the only strategy that gives a company builder like Tsuha any measure of control. That strategy drives every aspect of Saturn's operations: where it expands, how it grows, who gets hired, and what products the company offers to customers.

Life in the auto industry used to be a lot simpler. The carmaker would hand the supplier a blueprint and say, "Give me a million of these parts, and make sure you build enough profit into your quote." It's nothing like that now. "Today you have to get in with the customer early, on the front end," says Tsuha, 53. "In the old days you'd design stuff and go out and peddle it. Now, that's very risky." Saturn is currently designing parts for cars that won't appear in the showrooms before the turn of the century.

Forces whose effects are now becoming familiar to CEOs in just about every industry, from pet foods to pharmaceuticals, have already rolled through the auto industry and reordered it. Global-ization, cheaper technology, and tougher customers have hit the car business hard. Twenty years ago the industry had some 10,000 suppliers. Today that number has dwindled to 2,800. And in the next decade, industry observers predict that as few as 300 select "megasuppliers" will exist worldwide, most of them with annual sales of at least $1 billion.

Determined to make the cut, Wally Tsuha has built Saturn with a particular set of strengths that explain the speedy growth the company has registered since its founding on Tsuha's kitchen table, in late 1985. Revenues in 1986 hit $700,000; this year's sales should exceed $160 million. Saturn has grown fast enough to earn a spot on the Inc. 500 for the last half dozen years, just one of four companies to do so since the ranking began, in 1981.

On the surface Saturn could hardly sound less like a "hot" company. It makes obscure but vital electronic and electromechanical components--pulse dampers, diaphragm actuators, and junction boxes--that the average driver never sees. Those intricate parts give a car the finest of edges in a tight market, but that doesn't mean the auto companies are willing to pay a premium for them. In fact, the reverse is true. "Prices in automotive electronics are declining 5% a year," notes Paul Hansen, publisher and editor of the Hansen Report, a newsletter that tracks suppliers of automotive electronics. "The auto companies have too much clout, and there are too many suppliers. They just cave."

Tsuha's predicament boils down to a cruel irony: although the Big Three are relying ever more on crack suppliers like Saturn, they are only going to get tougher on them. Tsuha notes that Saturn has to deliver a better-performing part to displace an existing supplier, but "an auto company won't even look at that part if it doesn't cost less." In fact, Tsuha's customers dictate his profit margins--"They don't want us to earn more than 10% after taxes," he says--and may soon prevent him from sending his invoices until his parts have actually been installed on cars in the factory.

The pressure on suppliers like Saturn isn't going to let up as long as industry costs threaten to spin out of control. New cars now carry price tags of $20,000 and up, and unionized American labor works out to $40 an hour, counting benefits. While consumers scour the lots for lower-priced cars, automakers roam the planet, desperate for cheaper labor. "Those guys go after pennies," says Dennis Rainwater, general manager of a Saturn plant in Oxford, Mich. "It's phenomenal what they do to us."

More phenomenal, though, is how Tsuha has countered. Having joined the industry when it was already under assault, he saw what more-experienced CEOs in other, slower-to-change industries often wish they had sensed sooner: to survive consolidation, a company consistently has to raise productivity, deliver higher quality, and reduce prices.

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