Linamar and being entrepreneurial

As Linamar was one of Meryl Witmer's picks for the 2017 Barron's Roundtable, I thought I'd post another of the excerpts I have saved from the excellent book on the company and its founder, Driven to Succeed: How Frank Hasenfratz Grew Linamar from Guelph to Global: 

If there is one word that captures the corporate culture of Linamar, that word would be “entrepreneurial.” The 1994 annual report featured a short essay on the topic. “An entrepreneur is defined as someone who runs a business at his own financial risk.” 

...Frank has his own definition. “To be an entrepreneur, you’ve got to believe, follow through, and never give up. A lot of entrepreneurs fail because they don’t recognize when it’s time to change,” he said. “You can teach someone to be an entrepreneur by teaching them to truly believe in themselves. But the problem is when you believe in yourself so much you come across as being cocky. If you ask me what did I do wrong in my life, I’d have to think about it. I can find it in the archives somewhere, but I don’t harp on it, it happened, it’s done, let’s move on. I don’t get headaches, I give headaches.”

And here was Witmer's thoughts on the company and its valuation: 

Witmer: My next pick is Linamar [LNR.Canada]. It is a global auto-parts supplier, based about an hour from Toronto. The stock price is 60 Canadian dollars [$45]. There are 66 million shares outstanding, and the market cap is C$3.9 billion. Linamar has two segments: powertrain/driveline and industrial. The former generates about 80% of operating income. The company utilizes precision machining, casting, and forging technology to make powertrain and driveline components for automotive OEMs [original equipment manufacturers]. Linamar focuses on sophisticated components that are lightweight and fuel-efficient. 

What does the industrial division do? 

Witmer: It makes aerial work platforms, such as scissor lifts, under the Skyjack brand. There are two major competitors: Terex [TEX] and OshKosh [OSK]. Linamar purchased Skyjack in 2001-’02 for $32 million. Skyjack is on track to earn $140 million, pre-tax, in 2016, so it was a good buy. Linamar was founded by Frank Hasenfratz, a remarkable man. An ethnic German, he was born in Hungary and fled to Canada in the 1950s after the Hungarian uprising against the Soviets failed. The Canadian government gave him $5 and sent him on his way. Frank had an advanced skill set as a machinist from an apprenticeship in Hungary, and started a predecessor to Linamar in 1964 in his basement. 

In 2002, his capable daughter Linda took over as CEO. She has a chemistry degree and an M.B.A., and started on the shop floor. Together, they own about a third of the stock. They think long-term about growing the business and achieving 20% pre-tax returns on capital. The company is relentless about keeping costs low through process efficiency and product innovation. Every plant manager at its more than 50 plants worldwide is responsible for his or her own P&L [profit and loss]. Despite its growth, Linamar has retained an entrepreneurial culture. 

Linamar is benefiting from the trend toward outsourcing powertrain and driveline manufacturing, the last major area of automotive production that is still done partly in-house. OEMs realize they can achieve better and more cost-effective results by outsourcing. Linamar is well-positioned to garner new business as a trusted supplier. It often has sole-source status as a supplier on these critical elements. It can grow through a downturn. If North American vehicle sales fell by one million units, Linamar would lose only about $150 million of revenue. While it is valued like a run-of-the-mill auto supplier, it deserves a higher valuation. 

What would you give it? 

Witmer: The company projects that with flat automotive production, revenue will grow by about 30%, from C$6 billion to more than C$7.8 billion over the next four years, based solely on new business wins it has already signed. Past projections have been conservative by about C$500 million. We estimate that Linamar will earn more than C$7 a share in 2016, growing to more than C$9 a share by 2020. The stock could trade north of C$90 a share in a few years, based on a pricing/earnings multiple of 10. We’d argue a multiple of 12 is more appropriate, producing a target price of C$110 a share.

While mistakes teach, they should never tether...

From Driven to Succeed: How Frank Hasenfratz Grew Linamar from Guelph to Global:

While mistakes teach, they should never tether. “Entrepreneurs like me are all oddballs. We see things, we want to do things, and sometimes it’s hard to get us off that. The big danger is you get an idea and you think ‘I’m going to get into that.’ We get carried away and we think we’re good at everything and that isn’t the case,” said Frank. “It always brings you back — stick to what you know. It’s good to learn from your mistakes but it’s better to learn from your competitors’ mistakes. That doesn’t cost you anything. I made many mistakes but I can forget about them. They’re not in my mind. Don’t try to manage from yesterday. Don’t look back all the time, remember what happened back there, but look forward. If you look back all the time, you’re going to trip going forward.”

Manufacturing plant incentives...

The below excerpt is from Driven to Succeed: How Frank Hasenfratz Grew Linamar from Guelph to Global, and given the incentive system that was copied, may also make the book The Magna Man an interesting read.

Each plant operated as an independent profit centre headed by a general manager aided by a small management team — called a plant operating committee — that included corporate finance, cash management, material, and marketing. That independence allowed each plant to book new orders, pare costs, and run incentive programs to reward quality work and productivity gains. As part of their compensation, general managers received a salary plus a portion of the plant’s annual profits so they would feel and act like entrepreneurs with a stake in Linamar’s success. “If a general manager of any one plant doesn’t know every employee personally, and any work-related or personal problems that employee may have, then he’s not going to be with us very long,” said Frank. 

Frank copied the plant size and management incentive plan from another immigrant in the auto parts business, Frank Stronach. Like Frank Hasenfratz, Stronach was a tool-and-die maker who came to Canada, in his case from Austria, in 1954. He started Magna in 1957 and by 1986 had 11,000 employees at ninety plants. “I’ve always been a big admirer of Frank Stronach. He’s a genius the way he set up his plants as stand-alone profit centres. We have duplicated that all the way,” said Frank. “I like his business model and he attracts a lot of good people. The best come from the bottom up.”

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Related excerpt, and mental model, from the gold standard of books on mental models and wisdom, Peter Bevelin's Seeking Wisdom: From Darwin to Munger:

“We increased production volume but employee focus, service, and motivation went down.” 

At some point the disadvantages of business size may eat into the advantages. For example, increased costs and investments, per-unit cost increases, systems become too complicated, bureaucracy and inefficiency, etc.

People’s behavior may change when we change the scale of a group. What works well in a group of one size may not work at all in a group of another size. Garrett Hardin illustrates this as he examines the religious Hutterite communities in the northwestern U.S.:

As a colony grows in size, the propensity of the individual to claim a share of production “according to his needs” increases, while his eagerness to work “according to his ability” diminishes. The effectiveness of the overseers (preachers or bosses) also diminishes. Then, as shrinking increases, those less inclined to “goof off” begin to envy the brotherhood of drones, whom they presently join. 

The Hutterites learned that scale or the number of people in each decision unit is important. Up to 150 people per colony, the system can be managed by the force of shame. Above this size an appeal to conscience loses its effectiveness and individuals begin to need more than they contribute. Studies show that groups of about 150 individuals are common in clans of hunter-gatherers, and military units.