| C&D Technologies: Getting the Lead Out |
| Manufacturing | |
| Written by John Zorabedian | |
| Thursday, 31 January 2008 | |
 Jeffrey Graves returned this back-up power company to profitability by focusing on its core business and launching a new manufacturing plant in China.  Dr. Jeffrey Graves, Chief Executive Officer “The power electronics business is becoming a very Asian business—Asian engineering, Asian sales and manufacturing,” Graves said. “That business was very quickly migrating to China and becoming very price driven.” Graves decided the best remedy was not to devote more investment but to get out. In June of last year, C&D sold its power electronics division to a Japanese company, providing its back-up power business with an $85 million infusion of cash. The company also sold its Motive Power business, which made batteries for forklift trucks. Graves was trained as an executive at General Electric’s power systems division, now called GE Energy, where the focus was always on being number one in the world, he said. “In terms of your customer service and market base, you want to focus on what you can be the best at in the world,” he said. “For us, that was clearly standby power. We can distinguish ourselves as the best in the world at that.” Hedging bets With $350 million in revenue in 2007, C&D was the largest manufacturer of lead-acid batteries and back-up power in North America. Yet even with its economies of scale, long-term experience in the business, and enduring relationships with customers, C&D faced a drain on its profits due to one overriding factor: the price of lead. About one-third of C&D’s cost of goods is tied up in lead. But beginning in 2005, the market for lead exploded, and prices soared. By October 2007, lead reached an unheard of $1.80 per pound, gaining more than four times its value in two years. Unfortunately for C&D, many of its contracts with customers were long-term fixed-price contracts, putting a pinch on profits every time lead prices went up. C&D took two approaches to keep from losing profits on the cost of lead. First, it began hedging on the price of lead, allowing it to buy lead at a specified price. Second, it decided to renegotiate its contracts with customers to include an escalator clause attached to lead prices, allowing the company to charge more when prices go up. “We had to go back to our customers and say, look, we’re losing money on making the product,” Graves said. “We’re a known company, a big supplier to them, so it was easy to explain it to them. In their heart of hearts, they want us around. They certainly don’t want to see us get in any financial trouble.” Commodity prices don’t always go up, however, and C&D didn’t want to be exposed by agreeing to buy a volume of lead at certain price and then see the cost go down. “If you just do financial hedges, you can go out as far as 18 months and lock in your price of lead,” Graves explained. “But if lead were to go down, and if your competitors haven’t done that, your costs are a lot higher, and your customers won’t want to pay it.” To avoid such a situation, C&D only hedges on current orders, locking in prices for only a few months at a time. And C&D has found another way to beat the volatile lead market: purchasing recycled lead. “We’ve dramatically increased the amount of recycling we do,” Graves said. “Two years ago, we did none. Today, more than half of our lead purchases are recycled.” Selling off its power electronics and motive power divisions does not mean C&D has given up on the Asian market or given in to competition from Chinese companies. On the contrary, the company has aggressive plans to expand its core back-up power business in Asia. In 2007, the company opened a new manufacturing plant in China that is the most technologically advanced lead-acid battery plant in the world. The plant will allow C&D greater access to blossoming Eastern markets. “We’ve got a great market position in North America, but over the long term, our business generally grows with GDP,” Graves said. “To get more exciting growth rates, you want to position yourself in economies that are growing faster.” Because C&D’s products are big and heavy, with high transportation costs and high engineering content, making their products in China is the best way to sell them throughout the fast-growing Asian economies.“To fully participate in China and other parts of Asia, we need a large production facility in China,” Graves said. “It will serve us for many years to come and should be a $100 million-plus facility in a few years.” And although C&D must still compete against Chinese companies in a price-driven environment, the company’s established reputation for quality provides it with a competitive advantage, he said. As a supplier to telecommunications, utilities, and companies in search of back-up power for their data centers, C&D’s core business is strong, and Graves has no regrets about focusing his company on its strengths. C&D’s investors agree. “Certainly you run the risk of investors saying, ‘Well, I really liked that electronics business,’” Graves said. “In our case, shareholders were very supportive of our direction. Transparency means some people may not like what you’re doing, but at the end of the day, that’s the challenge of being a CEO.” |
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American Executive is a RedCoat Publishing publication.
American Executive is a RedCoat Publishing publication.
