The importance of investment in technology.

Kolbenschmidt Pierburg (www.usa.kolbenschmidt-pierburg.com; Southfield, MI; Dusseldorf, Germany), a supplier of powertrain components including pistons, pumps, bearings, and blocks, has sales of [euro]2,050 million in FY 2005, which is up from [euro]1,941 million in FY 2004. It's earnings before interest and tax (EBIT) was [euro]146 million in '05, up from [euro]139 million in '04. Which is to say that the company did well in an environment that might seem to be less than conducive to reporting such positive numbers. The question is, however: How did they do it? And so we asked Dr. Gerd Kleinert, chairman of the executive board of Kolbenschmidt Pierburg AG. The answer is somewhat surprising.

First of all, there is the pretty-much expected thing: restructuring. Kleinert says that they've closed a piston plant in Canada and adjusted the production in plants in the U.S. and Mexico. Plants in Europe have also undergone adjustments. They've decided to concentrate on core competencies and products. "Our goal is to be in the number 1, 2 or 3 position in each of our businesses. We're not there yet, but we are getting closer," he says. This has led the company to sell its fuel pump business, as well as its mass air sensor business. Kleinert explains that in each of those cases there are companies with solid positions and that it would consequently require sizable investments in order to gain the position that they're seeking.

But here's the surprising--and important--factor. While some companies are reducing their investments wherever they can, Kleinert says that in FY 2005 they increased their investment in research and development. "We spent more than [euro]100 million on R & D"--[euro]104 million, to be specific--"which is 5.1% of sales." That was up from [euro]97 million in FY '04. "Eighty percent of our business," he explains, "is driven by innovation." As there are increased demands from the world's vehicle manufacturers for improvements in fuel economy and performance, and increased regulations regarding emissions, Kolbenschmidt Pierburg finds itself in the position of having to regularly improve its products. Additionally, he says, there is on-going work to continually redesign and improve products for quality, performance and cost, what he calls "key factors for profitability." Kleinert, who holds a doctorate in engineering, says, "We continuously improve our returns where we are investing in engineering." (He also notes that as an engineer, he knows that engineers must be "managed" lest they take their eye off the important business aspects of what they're doing.)

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Kleinert acknowledges that some of the company's products are becoming commodities, and so it is important to shift production operations to low-labor-cost countries. But he maintains that it is through the investment in engineering and innovation that they are putting themselves "in a good position for the future."--GSV