Friday, July 12, 2013

How to succeed in manufacturing

A few months ago Hofmann Engineering in Perth sent the world's largest gear to China – a 13.2 metre diameter, 73.5-tonne King Kong monster of a gear. Here's a picture of the entire day shift sitting on the thing and still not reaching halfway around it.
Not long before that, the then Prime Minister Julia Gillard had toured the factory in Bassendean and declared it a fine example of Australian innovation.
She was right, but Hofmann is also a fine example of Germany's "Mittelstand", the family-run SMEs that form the heart of the German export machine, and contribute more than half of that country's GDP. Fifty-one of Germany's top 100 companies are also family-owned.
The 4500 "Mittelstand" family companies that account for 43 per cent of Germany's exports make decisions quickly, and make them for the long term; they are the reason Germany is Europe's most competitive and most successful economy.
These businesses in Germany are also mostly engineers and manufacturers, and that's what brothers Johann (John) and Erich Hofmann set about creating 10 years after they immigrated to Australia in 1959 from Munich in Bavaria. They had intended to go to Canada, but apparently that cost 20 Deutschmarks while the trip to Australia was 10, so Down Under it was; and they had intended to go to Melbourne, but Chamberlain Tractors in Perth needed toolmakers, so, well, Perth it was.
After working for a while in Perth and Cockatoo Island (the WA iron ore mine, not the one in Sydney Harbour) and saving money, they had enough to set up their own "Mittelstand" business … with a metal lathe in their Perth backyard, of course, like so many family companies.
Within a couple of years they moved the factory to the present site in Bassendean and started producing children as well as parts for the mining industry. John had three, Erich two, and all five of them worked in the business. It's what you do.
Basically the two brothers set up a small outpost of Germany's great industrial complex in Bassendean – a family engineering business that combines ownership and management and focuses on export.
John, now 75, started the company first, so he owns 55 per cent; Erich, now 73, joined him a bit later and owns 45 per cent. John's first son was named after his brother and now, at 48, he is managing director of the firm.
But Erich junior is far from the only family member in the business. Erich senior's daughter Monica is an accountant at Hofmann Engineering, and his son Robert used to work in the business, but now earns a living as a singer. Erich junior's brother Mark is an ultrasonic tester in the company, and his sister Ingrid used to be his secretary before leaving to have children of her own. His wife Jenny is a quality assurance officer, and all of their three children, Alyce, Jarrod and Karl, are engineers working in the business.
So I make that seven Hofmann family members currently working in the business, and it used to be nine, with another two – the two founders – still around and still owning the business 55/45.
The succession plan is clear and well understood: John and Erich believe there needs to be one person in control, so Erich junior, the MD, will inherit 51 per cent – his siblings Mark and Ingrid will share the rest of his 55 per cent stake. The land and buildings are owned in a separate vehicle and will be divided equally.
Erich junior agrees with that philosophy, so one of his three children will also inherit control of the business; he'll decide later which one.
To say that Hofmann Engineering has been successful would be an understatement. It now employs 620 people and turns over $136 million, but times are very tough now and the profit margin is very skinny indeed. Erich would only say it's "lousy", down from a "pretty good" 10 per cent margin at its peak.
In fact he says: "this is the worst we've seen it in our lives" – mainly because of the high Australian dollar, combined with the sharp downturn in the mining business.
As an aside, it's worth pointing out that a big part of Germany's success, apart from the strength of its "Mittelstand" sector, is the weakness of the currency after the euro was created in 2000. I've heard it said that from Germany's point of view the whole monetary union project was really a plan to run a weak currency to boost manufacturing exports. If so, it worked.
Australia, on the other hand, has had Dutch disease, which is where resources exports drive the currency higher, which kills off the manufacturing industry.
Says Erich Hofmann: "Thank goodness the Aussie dollar's coming down now, but we're buckling down for very tough times because of what's going on in the mining industry", he says. They are now concentrating on repairs and maintenance, as well as still exporting more than half of their production. The Hofmanns haven't retrenched any staff yet, and don't intend to.
The good news is that like most, if not all, of their German counterparts, they have no debt, even though they have expanded through acquisition Five years ago they bought Metaltec in Melbourne and then the Thales business in Bendigo. They now run their three factories as one, shifting work between them as required.
Hofmann has also bought factories in Toronto (finally emigrated to Canada!) and in Chile, servicing the copper mining industry there.
So this is now a great Australian family business success story, with German roots. And if families like this were running more of the Australian manufacturing industry as they do in Germany, instead of it being run from Detroit, perhaps it wouldn't be in quite so much trouble.

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