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.

But Tsuha wasn't interested in merely surviving. The company he designed--from the key components that follow--was built specifically to navigate the rough terrain that has wiped out so many fellow auto suppliers.

Doing that required that he look into the future and try to make sense of it. But what Tsuha couldn't have foreseen back when he began building Saturn was that so many CEOs, in industry after industry, would find themselves threatened by the same economic forces.


Product Development: Meeting Unspoken Needs

In days gone by, auto suppliers were contract manufacturers. Now, says Mike Tsou, Saturn's chief technical officer, "we want to create products that are unknown to the customer, products that fulfill unspoken needs."

A supplier like Saturn must be not only a state-of-the-art manufacturer but also a crack engineering and design consultant. "Today suppliers are expected to lead and manage the development process," says Jim Gillette, vice-president of Internation-al Resources Network, an automotive consultant based in Grand Rapids.

Tsou says Saturn plays that role--and maximizes its opportunities--by "integrating technology with marketing," which in turn "gives us a chance to drive the market." To create the necessary sense of surprise, Saturn must get as close to its key customers as possible.

Tsou joined Saturn after retiring from General Motors, where he had worked for 30 years. He understands the culture and thinking at GM, one of Saturn's largest customers. Similarly, Nick Najmolhoda, now Saturn's executive vice-president of engineering, worked for many years with Chrysler, Saturn's largest customer. Tsuha, meanwhile, has cultivated close contacts at Ford. So for each of Saturn's three largest customers, which together account for 80% of sales, the company has a "point man" with close ties. As Tsou puts it: "We like to be able to talk to people at high levels in those companies."

But Tsuha hasn't left it at that. He's also built in redundancy at the plant-manager level. Says Rainwater, "We see our customers as often as three times a week." Adds Pete Grim, who manages Saturn's plant in Rochester Hills, Mich., "We have to have a lot of on-site visibility at our customers' plants. Otherwise, they don't think we're serious about having an impact on their business."

Saturn showed it was serious two years ago, when the automakers promulgated quality standards, dubbed QS 9000, that they expected their suppliers to meet by the end of 1997. Saturn has already qualified three of its plants, and Tsuha wants all eight to be in compliance by the end of 1996--a year ahead of schedule. Tsuha says that by being so close to its customers, Saturn knows what's "on their wish list" and from that can seize the design initiative.

One proprietary product made real from a customer's wish list rests on the conference-room table in front of Rainwater. It's a small mechanical device called a direct-drive vent-window actuator. In plain English, it opens the rear window on a minivan. Alongside Saturn's actuator sits the Japanese part it recently displaced, which comes as two pieces connected by a cable. "Our actuator is a third the weight and half the cost. It's also easier to install, which saves money," notes Rainwater.

Less apparent is the fact that Saturn's actuator represents two years of research and development and a significant investment--with no guarantee that the customer would buy the product. To close the sale, Rainwater's division went the final mile by developing--at an additional cost of $100,000--a computerized "sound map" that tests parts for quietness, ensuring that they fall below a certain noise threshold. "We initiated that on our own," says Rainwater.

Saturn had met the customer's unspoken need. Rainwater says the customer (which wants to remain anonymous for competitive reasons) saw not just the elegance and the economy of the part but also the value added by the sound map. No other supplier had taken the initiative to test for noise to that extent. But as Rainwater explains, "Noise is a big issue with our customers. They tell us that all the time." The company is already at work on the next-generation product, while the customer is now interested in having Saturn design other parts it can test on the sound map.


Global Expansion: Going Far to Stay Close

saturn is a global supplier, with joint ventures in China and Europe. It has five plants in Michigan, one in Mississippi, one in North Carolina, and a maquilladora operation in Mexico. It has a technology agreement with an Italian company. And soon it is likely to have capacity in Southeast Asia, ready to feed parts to the Big Three in that booming corner of the world.

Despite Saturn's geographic sprawl, Tsuha's genius is his ability to narrow his scope of concern. According to Tsou, "Wally has an uncanny ability to see what is important for his business and what it takes to get where he needs to go. He doesn't compromise." Tsuha holds every plan to one ironbound standard: Will it increase Saturn's value in the eyes of its tough carmaking customers?

Tsuha recognized the need to do business on a global scale some years back, when he discerned the coming devolution of the auto business. The industry was rapidly junking the vertical-integration model championed by Alfred P. Sloan and made real by Henry Ford. Today the Big Three are outsourcing work they once controlled in-house. Design, engineering, testing, and quality assurance have fallen ever more on the shoulders of suppliers that have to be everywhere the customer is--or plans to be.

Automakers pay hourly labor rates in the United States that are as much as 20 times greater than those paid in Mexico. Their primary access to low-cost labor is through their suppliers. Meanwhile, developing countries with burgeoning populations have a single concern--creating jobs. If they're going to open their markets to foreign manufacturers, they insist that a certain percentage of each car comprise "local content"--parts that are made in the country where the car is assembled.

Tsuha grasped those trends back when Saturn had less than $20 million in revenues and had only recently turned from selling engineering services to manufacturing. In 1991 he made a first modest move, acquiring Beta Manufacturing, an ailing manufacturer of electromechanical switches. Beta was a turnaround, with just $8 million in annual sales. But Tsuha saw leverage in the deal: Beta had plants in Mississippi and Mexico. "That gave us low-cost labor," he recalls.

By then Tsuha was already thinking well beyond his own hemisphere. In the old days, when American companies ruled the world market, they could afford to manufacture in the United States and ship anywhere. That model had been turned on its head by global just-in-time competition, which has rendered shipping, stocking, and replacing inventories over great distances inefficient. To sell at a profit in a local market, you have to be there. Learning that his biggest customer, Chrysler, was entering China, and knowing that Asian economies would continue to grow at a rapid clip, Tsuha knew he had to have his hand in China too.

It took him three years to find the right deal, but in 1994 Saturn formed Beijing Saturn, a joint venture with the Beinei Group, China's largest engine manufacturer. When Tsuha talks about China, it's hard at first to understand his sense of urgency. "There's no infrastructure there," he says. "People can't afford cars. They buy appliances first."

But later he ticks off the less obvious upside to landing in China early. "Beinei is a captive customer," Tsuha explains. "And we have early access to the Chinese market, so we should be able to broaden our customer base in Asia. We can source additional products to the Big Three in China. And we can export back to the United States."

A similar fly-in-the-face-of-the-odds dynamic occurred when it came to setting up a factory in China. In 1995 Tsuha invested in a new, state-of-the-art plant run by local managers who had previous experience in the U.S. auto business. There was plenty of capacity available that could have been had for a song. But Tsuha saw the $2.5-million, Western-style plant as a long-range investment--a loss leader that would run below breakeven for the next five years. Its $750,000 assembly line was built and tested in the United States and then taken apart, shipped, and reassembled in China. "The plant is going to attract Western customers because all the other factories in China are 25 years behind the times," he says.

He's sure it will increase his business with the Big Three.


Making Acquisitions: Growth with a Clear Goal

Wally Tsuha not only has to expand Saturn's global presence; he also has to conquer more of the car.

Not long ago, the auto-supply industry consisted of a sprawling constellation of factories, each turning out items as incidental as ashtrays, doorknobs, and rearview mirrors. The disappearance of those suppliers reflects the fact that carmakers aren't interested in parts anymore; they want systems. Jim Gillette of Inter-national Resources Network says that suppliers are rapidly consolidating to meet that need. Dashboard manufacturers have bought up glove-box, console, and ashtray manufacturers, only to be swallowed up themselves by seat makers, which in turn have been acquired by corporations that can supply a car's entire interior. "The bet these companies are making is that they can capture enough of the geography of the car to gain market share," says Gillette.

The industry has lately seen a raft of megamergers, creating multibillion-dollar behemoths such as Lear Seating, Johnson Controls, Nippon-denso, and Bosch. Those hardy survivors ship "modules," preassembled combinations of parts that can be installed rapidly. With fewer, better-qualified, and more-efficient suppliers making more parts, quality rises and the time spent building a car falls.

When Tsuha makes an acquisition--internal growth would take too long--he looks at the benefits through the eyes of his ever-demanding customers: who can supply the best subsystem at low cost? "You always have to assume that there's someone out there who's better than you," says Tsou. "Saturn's job is to either beat them or buy them."

The 1991 acquisition of Beta gave Saturn low-cost labor. It also offered two other elements that Tsuha figured would enable Saturn to claim more car territory. Before the purchase, Saturn was making electronic assemblies in low volume. Beta made electromechanical assemblies in greater volume. By expanding both the product line and the company's volume, Tsuha expected to attract larger customers and to increase Saturn's business with existing customers.

In 1993 Tsuha made a second purchase, buying MCAM Products, in Flint, Mich., which makes the plastic housings Saturn needs for its parts. That acquisition vertically integrated the manufacturing process, stripping out some cost.

In 1995 he moved horizontally, merging Saturn with MascoTech Controls, also in Auburn Hills, Mich. The merger broadened Saturn's portfolio of electromechanical parts and exposed the company to a number of new customers. "There was minimal overlap," says Tsuha. "Now we could offer complete electrical subsystems." Tsuha wanted to buy MascoTech because its plants were more automated than Saturn's. That meant that the company could turn out more and higher-quality work. In 1995, in fact, Saturn introduced 37 new products, largely a result of the MascoTech merger. (The number in a more typical year is 8.)

And Tsuha saw another dividend in the deal: MascoTech had a joint venture with Bitron Inc., a $500-million parts manufacturer based in Italy. Bitron's plants in six European countries would give Saturn access to the European market, while Bitron could source out of the United States. The two companies could also share proprietary technology.

To strengthen the tie, Bitron bought 20% of Saturn.


The CEO's Task: Survival of the Smartest

Keeping a global company like Saturn on track amounts to more than a full-time job. Wally Tsuha knows that, and that's why he's structured Saturn in eight units, each run as an independent business by its general manager. "We want to keep the business units small in size and plan, so they don't exceed the manager's span of control," says Tsuha. Each plant typically employs no more than 300 people.

Tsuha says that his general managers have "total autonomy." But he expects them to know their business. "Wally likes one-liners," notes Tsou. "He says, 'I don't need the details. Just give me the big hit." In return, he gives his managers a lot of support.

An example: Saturn has a director of purchasing, but its general managers are free to do their own buying. Similarly, Saturn has a technology center at corporate headquarters, but 80% of R&D takes place at the business-unit level because Tsuha believes that his subsidiaries are that much closer to the customer. Saturn has a lean corporate staff--experts in areas like human resources, accounting, purchasing, and legal matters --that supports the business units. "It's like having consultants whom anyone in the company can call on," says Tsuha. "The corporate people are there to assist the plants. They're not policemen. The plants don't work for them."

Every weekday morning, Tsuha gets a one-page status report from each of his managers. Once a month Saturn's plant managers meet for half a day with top management "to pull the leadership team together," as Tsuha puts it. Each reports on operations for 10 minutes. The meetings rotate among the business units, so that the managers become familiar with their compatriots' operations. Each meeting ends with one of the plant managers presenting a "best practice" that has been instituted at that plant.

At the monthly meetings, Tsuha assiduously solicits new-product and project ideas from the field. He knows there's no formula for keeping Saturn on its upward trajectory in an industry where most assumptions have been knocked flat. In truth, it's not clear if suppliers like Saturn, no matter how big visionaries like Tsuha grow them, "can keep from cutting one another's throats," says industry consultant Gillette. He notes, for example, that Lear Seating, with sales that now exceed $5 billion, "is lucky to net out 2%." Hansen, the newsletter publisher, notes that Japanese auto suppliers typically earn no more than 1.5% after taxes. That's a low bar to limbo under.

That grim reality only serves to clarify Wally Tsuha's sense of mission. Going forward, he vows to leverage Saturn's technology into nonautomotive markets that are more forgiving on margins.

In the next year, he may well take Saturn public to raise a war chest for acquisitions. And should the secretary of commerce call again, he'll be ready to hop a plane to scout his next foreign alliance.

But it's closer to home that the war may finally be won. Tsuha keeps telling his mangers to talk to customers to uncover new ideas. "If you have a proposal that makes good business sense, bring it in," he tells them, quickly adding that "it has to have been thought through." Tsuha knows that that simple discipline in the end may be what gives Saturn its greatest edge in an industry where consolidation has not yet claimed its final victim. *

Smart Part

Saturn's direct-drive vent-window actuator has just 14 parts, supplied by seven different subcontractors from as far away as China. Compared with the Japanese part it displaced, it weighs a third as much and has half as many parts. It also costs the customer half as much--and that doesn't include the labor savings resulting from easier installation. To produce the cost-cutting part, Saturn made a capital investment of $500,000 over two years--with no guarantee that the customer would actually want to buy the component.