Strategy for business is developing an approach to “run a different race” from the competition. The key is to create sustainable competitive advantage. As a private company that competes against much larger public companies, it is crucially important we develop sustainable competitive advantage. I would like to review in this article some strategic initiatives we have undertaken which I believe will help HUSCO compete effectively for many years to come.
In the mid-nineties we identified the automotive market as a marketplace where the use of electro-hydraulics would increase. Our initial focus was suspension system applications, and the first success was the active ride control system for Mercedes Benz. The resources acquired and developed for the Mercedes program have also been used to penetrate a completely new market segment for HUSCO, engine management systems. We now have a variety of programs in production and coming into production shortly in this new market segment which will drive the growth in the Automotive Division during the next five years.
What are some of the benefits of this effort? The most important is we diversified our business by penetrating new markets which provide substantial growth opportunities. We invested in the automotive business for six years before we turned a profit, but the profitability of the Automotive Division will be a substantial contributor to HUSCO’s future financial success. During the severe recession in 2001, the profitability of the automotive business allowed HUSCO to be profitable during the most difficult year for our traditional business in over a decade.
Another by-product of our automotive R&D investment is the use of the technology and know-how developed for automotive applications in our traditional business. Today, we are the only company able to provide integrated work function and suspension system controls for off-highway equipment, and packaging these two technologies results in synergies that provide significant value to the customer and competitive differentiation for HUSCO.
About the same time we started our diversification efforts in the automotive market, we seriously evaluated the China market. We felt initially that any investment in China would require significant patience and that returns would be a long time in coming. We viewed China to be a significant future market, but a small current one which would be expensive to serve locally. Nevertheless, the decision made was to aggressively pursue this market, ultimately resulting in a new manufacturing facility which opened in 2001. What we did not fully anticipate when we decided to go to China was that having Chinese manufacturing would provide global sourcing associates in Asia that would better develop local suppliers. This has allowed HUSCO to more effectively compete in a strong USA dollar environment. We are currently competing for major forklift truck applications, where our position has been substantially strengthened by our capability to manufacture in China and by sourcing componentry in Asia and other non-traditional markets for use by our USA and UK facilities. The savings accruing from our global sourcing strategy is helping HUSCO reach its financial and growth goals by allowing us to be far more competitive.
Over three years ago, we made an investment in a small company in Germany called IWA. IWA produced pilot pressure controls, i.e., hydraulic joysticks, which we viewed as a transitory technology. Although it is a transitory technology, we felt it was important to have world class products in this area, and the IWA acquisition was a short cut to achieve this objective. We are now starting to achieve major penetration of this technology at existing and new customers, and it is providing a bridge between our current technology and INCOVA™ electro-hydraulic technology. There are several major customers who would have been threatened by the competition if we had not had the IWA technology in place. It not only allowed us to grow our PPC business, it has provided us a means to protect the control valves being provided in conjunction with hydraulic joysticks.
A fourth major strategic initiative is our new INCOVA™ technology which I believe represents the biggest improvement in the hydraulics industry in the last twenty five years. Through the use of distributed electro-hydraulic controls and unique electronics and software, we are able to deliver productivity and functional improvements for many machine configurations which are otherwise impossible to achieve. These unique HUSCO products required many years of development to achieve technological breakthroughs which we have been able to patent. We are continuing major investment in this technology which will not come into production for several years. Ultimately, I believe INCOVA™ technology will provide the single greatest source of future growth for our traditional business.
The combination of our automotive market penetration and the use of the INCOVA™ technology in our traditional off-highway markets will result in HUSCO being far and away the largest and most capable supplier of electro-hydraulics in our industry. Each of the above strategic initiatives has involved taking substantial risk, but by taking this risk we are running a far different race than our competition. I believe this strategy will produce growth and opportunities the magnitude of which we do not fully comprehend today.
A good strategy and great execution are and will continue to be the key to HUSCO’s success.