Modine Asia to grow 220% in the next five years

On October 23, 2013, Modine held its China Annual Supplier Meeting in Changzhou, Jiangsu province of China. Specialized in thermal management systems and components, Modine provides products used in light, medium and heavy duty vehicles, off-highway and industrial equipment, and heating, ventilation and air conditioning equipment. Modine has two plants in China now, one is in Songjiang, Shanghai, and the other is in Changzhou, Jiangsu.

In the meeting, Modine announced its Asia development plan -- at least 220% growth in the next five years, including 3 million new automotive oil coolers to be launched over the next three years. The company also said its purchasing spending in China would grow from $17 million in FY2014 to $48 million in FY2019, with a compound annual growth rate of 18.88%. The commodity Modine purchases in China include aluminum raw material, steel frame assemblies, aluminum and stainless steel castings, stampings), seals & gaskets, plastic tanks, extrusions, hose connections, and fasteners/hardware.

After the meeting, Modine's global purchasing vice president Brian E. Lee accepted an interview with Gasgoo.com. Here are the edited details.

Development in China

Gasgoo: Could you tell us something about Modine's development in China?

Brian E. Lee: Our history in China dates back to roughly 10 years, when we acquired a division of Mando Machinery in South Korea that had manufacturing operations in China -- one in Songjiang district, Shanghai, and one, a joint venture operation with JAC Truck in Hefei, Anhui province. The Hefei facility was subsequently sold by Modine and the Songjiang facility remains a Modine operation and serves as the foundation of Modine’s business in China.

That was the start of our business in China. It allowed us to grow relationship with Asian customers who were doing business in South Korea and China. These customers included Hyundai Heavy Industries, Hyundai Truck, Volvo Korea, Doosan, and Mitusbishi Fuso.

Over the past 10 years, we’ve expanded our China business with global customers like Caterpillar and John Deere, who were doing business with Modine in North America and Europe. These customers wanted Modine to be in China to support their local business. We opened a greenfield operation in Changzhou Jiangsu in 2009 to produce heat exchangers and cooling systems for the heavy truck and construction markets. The Songjiang operation currently produces oil coolers for automobiles and light vehicles.

Gasgoo: Do you export some products made in China?

Brian E. Lee: Very little. We export some heat exchangers made at our Changzhou plant to South Korea to support our Korean customers. The majority our China production is focused on supporting our local and global customers with operations in China.

Gasgoo: Modine said its Asian business would grow by at least 220% in the next five years. Would your growth in China be higher?

Brian E. Lee: This growth goal applies to all Modine regions in Asia. For Modine, Asia is China, Korea and India. We see tremendous growth opportunities in all these regions as we build relationships with global and local vehicle makers and develop cooling solutions to meet their technical requirements.. Our Korean business is growing through a joint venture relationship in South Korea to provide cooling module assemblies for the South Korean heavy vehicle market. In India, we have a growing business with Daimler Truck, Ashok Leyland and Renault. Here in China, our Songjiang and Changzhou plants support our business with global and local customers.

Gasgoo: How much does your China business account for in your global revenue?

Brian E. Lee: Asia is about four percent of our global business. Of the four percent, about three percent is from China, and one percent is from India. As more auto and truck customers adopt the compact, high performance lightweight heat exchangers, our business in China and India will grow. We’re very excited about our first truck program in China with Volvo truck. Volvo will locally produce its product in China.

Gasgoo: Is that for the joint venture of Volvo and Dongfeng?

Brian E. Lee: I believe so. It's a brand new program.

Sourcing strategy

Gasgoo: Do you face some pressure from your customers, such as cost reduction, or some OEMs is cutting their supplier numbers ?

Brian E. Lee: Certainly cost is a factor everywhere, and cost is a major factor here in China. We have some customers like our global customers who have very high expectation from a quality and technical performance standpoint. They want the same products supplied in China that Modine supplies in the other regions. This means the same technical specifications, the same initial quality and same high mileage durability. Those customers want us to make the exact same products in China as globally.

The challenge when we start to work with the local customers in China, is that they do not have the same high mileage durability expectations. Therefore, we’re competing with other suppliers who make lower durability, and lower performance products. We’re working hard to educate our local customers on the value of high durability and performance to their end customers. We’re also evaluating ways to reduce the cost of our products in a way that minimizes the impact on performance and durability. This involves Value Analysis/Value Engineering studies by our engineers, in cooperation with our suppliers. We’re doing this very cautiously so that we don’t damage our 97 year reputation for producing the highest performance and quality heat transfer solutions.

Gasgoo: Is there any differences between the standards that you choosing a supplier here in China and in other regions?

Brian E. Lee: The standards are the same and are defined in our Modine Global Supplier Manual available at www.modine.com. What is different in China is that we may not have suppliers who can initially meet those standards. We’ve made a commitment to work with suppliers who have a desire to improve. We look for supplier business leaders who have this desire and then build relationships to enable us to help them to improve to support our business, and to grow their business. We have some great success stories with suppliers here in China. We have several suppliers who had sub-standard capabilities when we started. We put a supplier development engineer from US or Europe in their facility for several months to work with them to improve their capabilities. The suppliers performance improved to the point where they became an approved supplier to Modine globally. The suppliers now support Modine in China and also export products to Modine operations in the US, Europe and Brazil.

This has been a significant investment of time and resources for Modine that has proven successful in developing qualified global suppliers for the future. It's also a big commitment by the supplier.

Our annual supplier meeting is an important event for Modine and our supply base. It provides an opportunity to tell our suppliers about the status of our business and to recognize the outstanding performance of the suppliers who have demonstrated the best quality and delivery performance. At this year’s conference we had approximately 140 representatives from 65 suppliers in attendance. 58 of them have been at the conference for thelast three years. We’re very proud of the relationships we’ve built with our long term supplier partners. We recognized the excellent performance of Alcoa Kunshan and Dejia Automobile Parts Company, a division of Q.S. Control Corporation.

It doesn't mean we don't have problems with our suppliers, because we do. We’ve made a commitment to work through the challenges because it's important that we build a high quality supply base to get the high quality products we need to support our customers. We are committed to helping our suppliers improve. This is good for Modine and good for the supplier as they grow their business.

Gasgoo: How do you define your relationship with your suppliers?

Brian E. Lee: We have a system that we use called our "approved supplier list" or ASL. The ASL identifies suppliers that our purchasing and supplier quality team have judged as being acceptable for new business sourcing. Within that group of approved suppliers, there are that we call “strategic suppliers”, who have demonstrated the long term commitment to our business. These strategic suppliers are given first opportunity on new business.

The ASL also includes suppliers who may have some quality concerns, we identify those suppliers as being on “quality hold". While on quality hold, we restricted the supplier from new business sourcing. Our purchasing and supplier quality engineering teams work with the Quality Hold supplier to resolve the quality issues and to incorporate corrective actions to prevent recurrence. When resolved, we remove the quality hold so the supplier can compete for new business. Most quality hold suppliers are successful in improving their quality issues, but some of them are not and they will not be suppliers to Modine for the long term. Our experience has been that most of the suppliers take the quality hold very seriously and aggressively work to improve. We recognize that quality issues may occur from time to time. The important thing is to see how the suppliers react to those problems, and how they work to improve and prevent them from happening again.

Gasgoo: Could you tell us more about how you help your suppliers? Especially for the "quality hold" suppliers.

Brian E. Lee: We have supplier quality engineers that are in our quality group. We have about five supplier quality engineers in China. On a regular basis, they visit their assigned suppliers, to check on how they doing on their improvement plans and to check out their quality systems. Each one of them has a work plan that they are working on with the suppliers to improve their capabilities to support Modine. Some are critical and mandatory actions, some are capabilities that need to be addressed over the long term. Our supplier quality engineers visit a lot of suppliers and observe industry best practices. They bring the knowledge of these industry best practices to their suppliers and suggest ways to improve. It is then the supplier's responsibility to take action.

Gasgoo: You help your suppliers to become more lean?

Brian E. Lee: Lean production is certainly one aspect of capability improvement. More fundamentally, we assist suppliers in developing a basic quality plan, and to monitor that the supplier is abiding by that quality plan. If the quality plan says that the supplier is going to inspect something, we need to see evidence that the supplier is doing the specified inspection. Basically, we work with the supplier to document what they are going to do, and then follow-up to make sure they do it. Some of these actions could fit in the “Lean” category. Most are fundamental activities to having a robust quality system as defined in ISO9001 and our Modine Global Supplier Manual.

Gasgoo：can you tell us the Advantage of e-sourcing system?

Brian E. Lee: There are two aspects to our e-sourcing application, the first deals with supplier relationship management (SRM) and the second deals with quoting on new business. The SRM application is used to allow suppliers to communicate their desire to become a supplier to Modine, and for Modine to collect important information on the suppliers’ capabilities. We obtain valuable information on the suppliers products, manufacturing processes, quality systems, and organization. If we have a sales person at the supplier who does all of the customer quotations and this individual is on vacation or sick, we want that suppliers to have a backup contact in the SRM system. The supplier relationship application is also the place where we store the supplier certification information, such as their ISO9001 or TS16949 quality certifications and their company business registration certificates.

In the new business quotation application referred to as eSourcing, we have created a system for communicating opportunities to the supplier, and providing an efficient way for suppliers to respond to Modine with their business proposal or quotation. The goal with the eSourcing application is to improve our communication and speed. The eSourcing application provides a standard template to the supplier that explains the detail of the business opportunity, including drawings and technical specifications. The supplier is then able to respond to Modine with their business proposal using a standard quotation template.

The value to the supplier is clear and consistent communication of the opportunity. The value to Modine is business proposals from suppliers that can be efficiently compared with other supplier proposals to enable a best overall value sourcing decision. The eSourcing system is a global application for Modine. It is active in Europe, North America and now in China. We will launch the system in India in early 2014 and then in Brazil. If one of Modine’s buyers in North America wants to source new business from a supplier in China, that Chinese supplier will get the same quotation, same template, and be required to provide the same information as the global competitors. By using a web based system, our suppliers only need to have a computer with internet access to do business with Modine. The system will also allow us to monitor changes in cost as design changes are implemented. Modine and the supplier will have visibility to this quotation history to avoid confusion and disagreements about what Modine specified and what the supplier proposed.

Gasgoo: That’s very useful for your global sourcing practice?

Brian E. Lee: It will be very useful as we grow our business globally, allowing us to understand the capabilities of our global approved suppliers and to provide opportunities for these global suppliers.

Gasgoo: Do you do global sourcing from some low cost countries? What’s your understanding on low cost countries?

Brian E. Lee: Advantaged Cost Country sourcing has been a business practice at Modine for several years. We look beyond the cost or purchased price in our analysis and focus on the delivered cost. We have a calculator that we have developed to look at the total delivered cost of a product. The model factors in the purchase price, the freight cost to get the material or product to our factory, duties that we must pay to import the product and also the costs associated with inventory that may be sitting in ships or warehouses. The model also includes risks associated with currency in cases where we may be buying the product from China in RMB and then selling the end product to our customer in another currency. The delivered cost model allows us to compare competitive proposals from suppliers from multiple regions so that we can make the best value sourcing decision.

Gasgoo: so we can call it "best cost country". which countries do you think are the best cost countries?

Brian E. Lee: China is currently an advantaged cost country when considering purchased price or cost. China also has delivered cost advantages for some commodities that have low shipping costs and where we have established strong relationships and quality supply history. . However, when considering logistic and duty costs, Mexico is very competitive for supply to the United States and Eastern Europe is competitive for supply to Modine’s European operations. Mexico and eastern Europe are becoming advantaged as China's labor cost rises.

We don’t consider Brazil as a low cost country due to the exchange rates and duties between Brazil and other countries. Modine has a significant supply coming from Canada and Mexico which operate under the North American Free Trade Agreement (NAFTA). Eastern Europe is another area with significant supply to Modine’s European operations. This includes Hungary, Poland and the Czech Republic. We're also starting to look at Russia where Modine has recently established a business office.

We don't do a lot of global sourcing out of India yet because we’re in the process of building relationships and trust with the local suppliers to our Modine operation in Chennai India. We expect to see strong growth in our India business and this will give us the opportunity to export product from the Indian suppliers that demonstrate the capabilities and commitment to Modine.