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Six in six: Terex sets its sights s even higher


Terex believes it can raise its turnover by 50 per cent in two years - and that's without acquisitions.Chief executive Ron de Feo gives Paul Howard the lowdown on his audacious plan

THE CONSTRUCTION world is used to Ron de Feo being a bit, well, bullish, but his announcement of achieving sales of $6 billion (£3.3 billion) by 2006 - or 'six in six'- is ambitious even by his standards.

Some brave souls might even suggest it is a foolhardy aspiration for the Terex chief executive officer, given that sales at the beginning of the year had not hit $4 billion (£2.2 billion).

'It's the classic 'stretch goal', ' says Mr de Feo.'Fifty per cent growth in three years is seemingly a bit remarkable but frankly there are lots of opportunities, and we are very positive about the opportunity to achieve our goals.'

But the company doesn't want to reach these targets through another tranche of acquisitions. Rather, its new modus operandi is to seek out organic and operational improvements.Out goes the 'buy at all costs' (but not at any cost) mentality, and in come moves to consolidate what the group has.

'We're changing from an acquisitions company to an operating company, ' says Mr de Feo.'The purpose of the company in the past was to make acquisitions to get to the point where there was enough critical mass to take advantage of.Now it will be to focus on customers.

'We always had it in mind that we wanted to become an operating company but first we needed the scale to be able to invest to get the return we needed. If you make trucks, you've only got trucks to sell - it's a vicious circle.'

Not that this means acquisitions are off the agenda - far from it.'We'll always be looking for acquisitions.They are part of our history, part of our culture, part of our competence, and there's no reason for them not to be.We have lots of product and geographical gaps, it just depends how you define the world, ' he says.

The change will come in the reasons for making such purchases.

'Further acquisitions will be to support our operating plan, no longer in and of themselves, 'Mr de Feo explains.

Then he says something even more audacious.'Without being too critical of the rest of the industry, we could have a business plan to be worth $10 billion in 2006.You have to ask yourself, how come Terex is now worth $4 billion, when the rest of industry is struggling?'

Mr de Feo does not disagree with the notion that such a pronounced change in direction is rather risky for such a successful acquirer.

'Business is about risk, ' says Mr de Feo simply.'Thoughtful risk, balancing the risks with the rewards. But we're certainly not averse to it.'

He likens the company's situation to changing schools.'It's about the maturing of Terex. Elementary school has been completed and we're in middle school; we now aspire to high school and university.'

Mr de Feo is candid about the institutional and cultural changes that must take place at Terex, not least when it comes to staff.'It requires a change in our business approach.We used to see people as costs, not as assets, ' he admits.

With cost (and staff ) reduction long seen as one of Terex's core policies, such language may seem incongruous, but he sees acknowledging the past as an essential part of encouraging the necessary change in the future.

'Currently there is the instinct of working for the brand first, not Terex, ' he points out.'To overcome this we need to build bridges internally, then brand externally.Our product breadth is special, but it's only special if we pull it all together.'

Other changes he highlights include the perception of the after-market ('We want to change it from being an afterthought to a forethought, ') and the policy of out-sourcing, once one of Terex's biggest boasts. Instead, this will now be best-sourcing: choosing the best supplier, regardless of where it is.'We will consider in-sourcing, but not just to justify the costs of production, 'Mr de Feo explains.

What are the chances of success when it comes to implementing these changes, as opposed to simply defining what is necessary? So far Mr de Feo has proven to be a very able pupil. In his 10 years at the helm, he has charted a course from the obscure backwaters of truck production to the high seas of full-line construction equipment manufacturing.

'Ten years ago, we were broke, we couldn't pay the bills, ' he admits.

'Who would have expected being where we are today? Not me.'

And where exactly is the company today? Mr de Feo claims Terex is now the third biggest manufacturer of construction equipment, coming in behind Caterpillar and Komatsu, but ahead of more established names such as CNH, Volvo, Liebherr and JCB.

Not that being number three in the world is a goal in itself.'It looks good in the press, and it's good for getting the competitors annoyed, but it's not good as a goal, ' he says.'The goal is to provide value for our three constituents: customers, investors and employees.My duty as a CEO is to keep a balance between the needs of these three groups of people. For this reason, we're playing our own game, we're playing golf against the course rather than the competitors, but we'll need excellence in performance to achieve our targets.'

If Mr de Feo did not expect to witness such success when he started out 10 years ago, he is not alone.A lot of other observers have also been sceptical about the company's growth potential, a point Mr de Feo acknowledges when challenged over his ambitious new targets.

'At $500 million in sales, we said we could achieve $1 billion. People laughed.When we achieved this and said we could become a $2 billion company, the reaction was the same.When we did this and said we would be worth $4 billion, they really laughed.Now we're there and we're saying we can go from $4 billion to $6 billion, not through acquisitions but through organic growth.'

It is almost as if Mr de Feo is challenging the investment community to contradict him.What's more, a 50 per cent organic growth in sales is not the only headline-grabbing target.Mr de Feo also wants to virtually double shareholders' return on investment.

'We currently have a 10.8 per cent return on invested capital, which is better than the rest of the industry, but it's not enough - we want to be at 20 per cent. If you're in this range, then you start to attract capital.'

And attracting capital, as opposed to buying ailing rivals, is the new means by which Terex intends to develop and diversify its product offering.

Changing the company's manufacturing footprint will be another area that will come under the de Feo microscope, since it is inherent in the growth plan, but he does not want to speculate where.Yet he is adamant that each facility must stand on its own merits.

'The most expensive decision you can take is to move production; it's always more expensive and more time consuming than you think, ' he says.

One obvious area for potential change is the construction division, which, despite being the firm's largest operation, currently has no manufacturing facility in the US.

'We talk about this a lot, ' says Mr de Feo.'It is very expensive to sell into the US at the moment, although we do have a natural hedge by selling Genie products into Europe.

'You've also got to look at where the competition makes its products: Cat makes its ADTs in the UK and Volvo produces its range in Sweden. I would like us to be big enough to make it logical to develop a construction facility in the US - that's to say selling enough ADTs into the US to justify a new factory there, without affecting production in the UK.'

Then there is the issue of currency prices.He says: 'What you think currency will look like over time does affect business decisions, but to second-guess the markets would be wrong, although I must mitigate risks for my shareholders.'

To this end, Mr de Feo sees the world as split into three economic spheres: Asia, the Americas and Europe/ Africa/Middle East.The aim is to have representation in all three.

What about China? 'You can't bet the ranch on it, but you can't not participate.We have been involved there for 10 years already with our North Hauler joint venture. It's not big, but it is profitable, ' he says.

Is the aim to provide machines for the Chinese domestic market, or to use China as a base for exporting completed products?

'It's both, ' he says.'You can export some things already, such as parts, and we're doing this.You can't export finished equipment yet and be successful, but in 10 years' time production in China will be the same or superior to elsewhere - it's inevitable.'

It may sound unlikely, but given Mr de Feo's past record with the unlikely, it will take a brave person to contradict him.

The Terex brand: from quilt to blanket

MRDE FEO claims Terex has historically been a quilt made up of a multitude of brands.The mission and message now is to turn it into a blanket.

'A company is only as good as its weakest link, ' he says.

'You have to build the brand on core principles and we will do this through the Terex brand, but it will be done through evolution, not revolution.'

At the moment, there are three degrees of branding for Terex-owned products: pure Terex brands; transitional brands, such as Terex Demag and Terex Schaeff; and separate brands, of which there are three - Genie, Powerscreen and Bidwell.

'It's not unreasonable to think there will be more Terex branding and less transitional branding in the future.Genie, however, has tremendous equity in the brand - I can't see it going away.

'Powerscreen also has very good brand equity and it has a unique distribution model.Then again, Schaeff is not known in the US. It would be ridiculous to build that brand.'

What about the core principles on which Mr de Feo would like to base the Terex brand? 'The aim is for the brand to stand for 'high-quality construction equipment for customers to be able to maximise their return on their investment', ' he says.

'We want people to think about Terex not as they do about Cat - when people buy Cat they buy confidence, not necessarily the best product, but confidence.To try to duplicate or emulate this wouldn't work - you'd lose.You've got to respect and understand your competitors, but then try and be yourself.

'Terex wants to be the best-value product in the world for return on capital investment.'