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Published: Sunday, 4/10/2005

Expanding its global presence: Conservative manufacturer strives to be more nimble

BY GARY T. PAKULSKI
BLADE BUSINESS WRITER
Small engines, for machinery such as lawn mowers, snow blowers, and garden tillers, like this one, make up one unit of the Michigan company. Small engines, for machinery such as lawn mowers, snow blowers, and garden tillers, like this one, make up one unit of the Michigan company.
KING / BLADE Enlarge

TECUMSEH - There was an unusual arrival at a Chinese air conditioner factory last fall.

A shipment of compressors - a key component of the appliance - produced in India came into the plant of Gree Electric Appliance, which is more accustomed to exporting its inexpensive goods, not receiving products from abroad.

The compressors were manufactured by the Indian subsidiary of Tecumseh Products Co., of Tecumseh. "That would be unusual," said Bill Primosch, director of international business policy for the National Association of Manufacturers. "I haven't heard of that much."

It is one way that the historically conservative firm, in Lenawee County 50 miles north of Toledo, is attempting to become more nimble.

Challenged by domestic competitors such as Briggs & Stratton as well as by foreign firms with inexpensive labor pools, the $2 billion-a-year supplier of pumps and components to manufacturers of refrigeration equipment, cars, lawn mowers, and snow blowers has increasingly gone global. Growing numbers of its products are produced and sold outside the United States.

But even with these changes, Tecumseh, which trades on the Nasdaq stock market, has been hurt by skyrocketing prices for steel, copper, and aluminum used in production.

Officials of the firm, whose corporate logo depicts the profile of the revered native American leader and corporate and community namesake, declined to comment for this story. They cited a U.S. Securities and Exchange Commission-mandated "quiet period" that began March 31 when the firm completed its first quarter and will last until its financial results are announced.

But securities filings show that foreign buyers accounted for 44 percent of sales last year.

On the production end, nearly 40 percent of Tecumseh compressors - a product line that brings in nearly half of its revenue - are made in Brazil. Those operations also accounted for a "disproportionate share" of the compressor unit's operating income in 2004, executives said in an annual financial statement filed with the SEC this year.

And 66 percent of its 22,000 workers are outside the United States.

The shift has been painful for the firm's U.S. workforce. In Tecumseh, where founder Ray Herrick began making compressors in 1934, production of the company's signature product ended last year when work was moved elsewhere. A distribution facility was moved to the vacated Tecumseh factory from nearby Clinton, Mich. Still, 300 workers in southeast Michigan lost their jobs.

More than 1,300 Tecumseh workers nationwide are jobless with the closure over the past three years of factories in St. Clair, Mo.; Grafton and Sheboygan Falls, Wis.; and Douglas, Ga.

Executives have called the changes painful but necessary responses to developments like the wholesale transfer of production of room air-conditioning units offshore.

But, with 15 plants remaining in the United States and Canada, the bloodletting appears to be ending. "Most of what is going to happen in North America has happened," James Nicholson, the firm's finance chief, told financial analysts Feb. 3.

The changes are beginning to yield results, he added.

Closure of factories by Tecumseh and other manufacturers has reduced the supply, and thus improved the market, for quiet, high-efficiency compressors used in refrigerators and air conditions, Mr. Nicholson said. "We have been able to expand our share," he said.

This contributed to a 10 percent increase in compressor sales in 2004 to $880 million. (Compressor-unit sales peaked in 1995 at $1.1 billion.)

Operating profits in that unit, however, declined by $1 million last year to $61 million. Key reasons: currency issues resulting from a weakened dollar along with rising prices for steel and other commodities.

Given heavy demand for raw materials in the United States, China, and elsewhere, Tecumseh had little leverage with suppliers. "It was 'If you want the steel, you're going to pay this price increase,' " Tecumseh's finance chief told analysts. "It was hard to get the product from other sources. We had no choice whatsoever in steel."

And the firm was often unable to pass the increases on to its customers.

It's a familiar story to Darren McKinney, spokesman for the National Association of Manufacturers. "It's not just in metals," he said. "Fuel costs have been rising too. With globalization, manufacturers have been under tremendous pressure to keep prices down even though their costs have been rising steadily for many years."

Overall, however, Tecumseh improved sales and profit in 2004. Sales rose to $2 billion from $1.8 billion in 2003. Profit rose to $10 million from $100,000.

Still, the company faces a number of challenges, especially in its unit which supplies small engines and transmissions to manufacturers of mowers and other lawn and garden equipment. Factors include declining market share in Europe, currency issues, and raw-materials costs.

The unit recorded an operating loss last year of $21 million, or about four times the loss in 2003.

Sales rose $6 million to $481 million, primarily as a result of strong U.S. demand for lawn mowers, snow blowers, and - in the aftermath of hurricanes in the South - generators.

"During 2004, the company experienced dramatic increases in the cost of certain commodities including steel, copper, and aluminum, particularly in the latter half of the year," executives wrote in a securities filing. "The company also experienced rapidly increasing freight costs and U.S. dollar weakness.

"The company does not expect these factors to improve in 2005."

Also last year, an unidentified large retail customer, which accounts for 70 percent of water-gardening sales in Tecumseh's Little Giant pump unit, informed the firm that is switching to a China-based supplier.

The product line continues to command a loyal customer base, however. Said John Bombrys, who has used the pumps in fountains produced by his family's Bombrys Ornamental Concrete, of Toledo:

"My father began dealing with Little Giant in 1940. I stay away from foreign pumps. We like American products. They're better quality, longer life. The price isn't that different."

On the bright side, Tecumseh Products expects to introduce a line of compressors this year to better compete for the business of manufacturers of household central air-conditioning units and light commercial units. Over the past seven years, it has had limited success with the endeavor.

The family of founder Ray Herrick continues to exercise strong influence over the firm. The family, whose name is also associated with a philanthropic foundation that is a major supporter of public television and other causes, is Tecumseh's largest shareholder.

Todd Herrick, the founder's 62-year-old grandson, has been chief executive officer since 1986 and chairman since 2003.

In a note to shareholders last year, the chief executive signaled a change in the family's historic low-profile approach to marketing.

"We realize we have not done enough to market Tecumseh," he wrote. " We have always believed that maintaining a strong balance sheet and a consistent dividend would result in a fair stock valuation. However, brand [identity] is needed in this market as well, and we must do better at telling our story. "

The company redesigned its Web sites, but there is little evidence that it has actively sought publicity on products or other ventures.

And a year later, the firm's stock has fallen about $2 from $42.57 then to $38.95 at the end of last week.

Although management refrains from issuing guidance on its earnings to Wall Street, analysts project $2.29 a share this year and $2.75 in 2006, according to Thomson Financial.

Michael Schneider, of Robert W. Baird & Co. Inc., rates the stock "underperform."

While praising the firm's strong balance sheet that includes $228 million in cash, he wrote in a research report that "Tecumseh still faces hefty pressure from commodities inflation, market share losses, and foreign competition within multiple segments."

The situation will improve if the company is able to boost prices without losing sales to competitors, Mr. Schneider wrote.

Michael Hamilton, of RBC Dain Rauscher, rates Tecumseh's stock as average. "We believe the company faces intense competition in all segments," he wrote.

Contact Gary Pakulski at: gpakulski@theblade.com or 419-724-6082.



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