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Executive Interview With Kevin Freeland, Co-CEO Of Federal-Mogul And CEO, Vehicle Components Segment

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Counterman sat down with Freeland to discuss his extensive retail background, his thoughts on Federal-Mogul’s position today in the aftermarket and opportunities and challenges ahead in the global marketplace.

 

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AuthorMarkPhill_00000058065Before joining Federal-Mogul in 2013, Freeland was COO of Advance Auto Parts, a position he held after serving as executive vice president of merchandising, information technology and supply chain from 2008-2009. Previously, he was president of Optimal Advantage from 2004-2008. Freeland served in senior leadership positions with Best Buy Co. for eight years, beginning in 1995 as vice president of inventory management and then as senior vice president of inventory management from 1997 to 2001. He later was president of Musicland Stores Corp. from 2001 until 2003. Prior to joining Best Buy, Freeland held various positions of increasing responsibility for more than eight years with Payless Shoe Source, including his final position as vice president of merchandise distribution.

Freeland earned a bachelor’s degree in economics from the University of Florida, Gainesville, Fla.

You have a great deal of experience in retail. Can you speak to what you learned from that experience and tell us how you plan to apply that in your new role?

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My background is very different, I presume, from CEOs of other aftermarket manufacturers. I spent a number of years at Best Buy. When I arrived there, Best Buy was in a desperate condition. The problem they had was that the vending community had become incredibly powerful. Their vendors included Microsoft, IBM, Sony, Panasonic and they were just massive in size relative to the distribution channel. It was essential for Best Buy to do three things: be extremely well connected with the end consumer, be the most effective distributor for its vendors and lower its overall cost structure. Over my last five years there, Best Buy was the No. 1 performing stock in the S&P 500.

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121038FreelandL_00000070472After that, I spent five years at a consulting firm, which was essentially anchored on the relationship between the channel partners: examples included PetSmart with its channel partners, which included Procter & Gamble, Colgate, Mars, etc., and Dell with its channel partners, which included Walmart, Staples, Sam’s Club, Best Buy, etc. Through the eyes of Procter & Gamble, I was able to see what was it was like for them as one of their distributors (Walmart) grew to become the largest company on Earth. It was during the engagement with Advance Auto when I realized the similarities between these past experiences and the automotive aftermarket.

When I arrived at Advance Auto in 2008, it was described as a “turnaround situation.” The company needed to build new capabilities. One example is that there was essentially no global sourcing function. By the time I left, it had grown to be a material part of their business, predominantly coming in from China. One key competitor had successfully moved the ownership of inventory to the vendors, giving them a significant competitive advantage. In response, Advance pursued a similar strategy. Many changes were needed to enable a shift from a predominantly DIY customer base to a more DIFM customer base. The results of these and more changes resulted in a stock price that’s three times what it was five years ago. It was a wonderful opportunity to see the automotive aftermarket industry and to learn through it.

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Today, in the North American aftermarket, there is a consolidation of one particular part of the supply chain with the announcement of the Advance acquisition of CARQUEST. More than 50 percent of all aftermarket parts are now going through the top four players. Those top four players have built broad private label lines, which has resulted in a corresponding shrinking of branded products.

In one sense, I’m new in this role, and new on this side of the supply chain, but I have seen these situations before and have seen successful ways to address them. Quite frankly, one of the reasons I took on this role is that this disruptive moment happening in the aftermarket industry today is giving Federal-Mogul the opportunity to think in ways that it has not in years past.

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Federal-Mogul’s Vehicle Components Segment (VCS) is one of the largest global suppliers of premium-branded auto parts. What challenges does VCS face in today’s marketplace, both domestically and globally?

Roughly two-thirds of our aftermarket business is in North America, a little less than a third in Europe and a single-digit percentage in the rest of the world. Asia manufactures more vehicles than any other part of the world, and it’s the smallest part of our business. You could describe this as a crisis of opportunity. What we need to do is to grow disproportionately in the BRIC countries, and most notably, within China, I think there’s a significant opportunity for us.

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Europe is currently our fastest-growing part of the world. It’s not a fast-growing aftermarket industry in general, but we’re gaining share there. We have good growth in both the Ferodo brand and the MOOG brand, and we’re also growing disproportionately there through acquisition and distribution agreements.

In North America, there’s an increasing concentration at the distribution level and an increased propensity to utilize private label programs, predominately backed by manufacturing in best-cost countries. We’re fortunate to have some of the best-known brands in the industry, and for 85 percent of the products we sell in North America, the person who throws the box away is a professional installer.

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I’ve reviewed the brand imagery for each of our brands in the categories where we compete, and we have an absolutely wonderful beginning point. But we have to – every day continue to build our brands. We have all sorts of activities under way to do that, both in traditional ways — we have a traditional sales force that meets with countermen and the distributed sales force, as well as directly with installers — and in new ways. We developed a fleet of training vans that take our centralized technical training center on the road to installers throughout the United States. We use traditional methods, not the least of which is your publication, but also new electronic methods. We have a website with a significant amount of product content, and we’re partnered with our distributors to utilize our product content on their websites. Our new Smart Choice Mobile app enables shop owners and professional technicians to access the latest parts information and applications for any passenger car or light truck – and communicate vehicle inspection findings and a repair estimate directly to the customer in real time. This makes a technician’s job easier.

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We also have to manage our distribution quite thoughtfully. In a changing world, how should a supplier think through their customer relationships? As the customers are changing, the relationships are changing as well.

As private label programs coming in from best-cost countries are growing, we have to keep an eye on the price premiums that are commanded by our products. We still have more plants in the U.S. than in Mexico, but there’s a shift to a cost structure that allows us to be able to continue to put marquee, branded products on the shelves of our distributors while narrowing the gap in what our historic prices had been and the offers they’re receiving for their private label programs.

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As an executive with a deep understanding of merchandising, marketing and procurement, can you speak to Federal-Mogul’s positioning in the automotive aftermarket?

We actually have a number of different types of relationships. Three-quarters of our Vehicle Components business today is in the aftermarket, and one-quarter is on the OE side, where we also supply braking products, wipers and chassis components. We are also the manufacturer behind many private label programs. The installer may not know that, but the item that sits in a private label box may well be ours. The bulk of our business is branded aftermarket products, but clearly we’re more than that.

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We recently announced that we divested the Carter fuel business. Most of the products actually had been migrated to private label and only a minority of our share of the market was branded. The fuel delivery market is increasingly sourcing complete systems, which further diminished our ability to compete without significant investment to expand our portfolio. Considering our relative niche position in the market, we decided that the business would be better positioned inside another company that has a strategy to invest in its growth. Divesting the fuel business was not a material change to our volume or our profitability.

On the other hand, if you look at Fel-Pro, it is the market share leader in its category. Fel-Pro just celebrated its 95th anniversary. I was recently in our Skokie (Illinois) plant, where Fel-Pro seals and gaskets are produced. It’s an amazing testament of our people focusing on a particular problem for an installer so intently to create something truly unique. It’s the result of listening to the installer on instability issues and comeback issues and creating a line that is genuinely for the repair channel and superior to its OE counterpart.

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Another good example is with Wagner ThermoQuiet, where the innovation has come from our OE braking pedigree. This product line addresses significant issues that the channel had in terms of noise, vibration and related problems that the installer had with the shim. So, we created brake pad with an integrated shim. And now we have a low-copper pad within the line called OE21 that also stems from a similar product that we developed for OEMs.

We will continue to provide private label programs, but our emphasis and our investment will be on our brands.

What are a few global issues looming on the horizon, or already here, that may cause Federal-Mogul to adjust course?

Globally, there’s going to be a dramatic shift over the next 10 years or so. The car parc in Asia is growing substantially, significantly increasing in both the OE opportunity in Asia, and as those cars age, in the aftermarket, especially in China. The aftermarket there is very embryonic at this point and will change markedly over the next 10 years.

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I don’t know what will happen over the next 10 years in terms of the industry’s manufacturing footprint. During the last 10 years, there’s been an abundance of automotive aftermarket parts going into Asia but some of the reasons for that have changed over time. For example, wage rates in China have grown, their currency has appreciated, and shipping rates are higher today than they were at the beginning of the recession.

In terms of Western Europe, I’d say the climate is changing much more slowly there. The concentration of the distribution channel is occurring but from a much smaller base. For us, we see that as an opportunity to gain share. MOOG’s share of that market is growing well.

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Federal-Mogul is a leader in low-copper, zero-copper friction. It’s obvious that many companies will follow your lead. In what way is Federal-Mogul a steward and/or trendsetter in the global automotive aftermarket?

This is part of our advantage in having a balance between OE and the aftermarket and, in this case, sharing knowledge between the engineers who work on our OE products and those that develop products for the aftermarket. Our low-copper and zero-copper formulations were driven by the regulations that are changing the braking material requirements for the OEs. We have strong relationships with many OE customers and many braking contracts that we want to maintain and grow. These products are better for the environment and they meet our customers’ needs. This is just one example of bringing our comprehensive understanding of OE product needs to our aftermarket products.

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What are some future growth opportunities, either in a particular product area or marketplace globally, where Federal-Mogul may decide to turn its attention to?

There are several classic ways a company like us could grow. We could grow geographically, and we will. The regions outside of North America will change the most, and there are multiple reasons why. There’s a market share opportunity in Europe, and there’s just natural growth in the rest of the world.

The second point is, we see changes in the markets we already serve. In North America, our customers are changing, and I don’t know, quite frankly, if we have any customers that are standing still. It’s a very competitive market and a very dynamic market. We certainly know who our target end consumer was (the professional installer), and we have to constantly know at any given moment what our customer base is in the future.

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Finally, if you look at the history of Federal-Mogul, it has grown product lines, it has acquired product lines and it has divested product lines. As we look at the products we have today, if we can offer a differentiated product line that’s concentrated on the professional installer, and through differentiation command a price premium and a significant share of the market, then it is a core part of our portfolio. If there are other businesses that we can enter and achieve that same success, we will.

 

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