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Hurco retools.

Things haven't always looked as good as they do now for Hurco Companies, Inc., a 20-year-old Indianapolis-based manufacturer of computer numerical-controlled machine-tool devices. From 1982 through 1986, Hurco lost money as the bottom fell out of the U.S. machine-tool industry. In four of those years, it lost $22 million.

A major reorganization plan, enormous cost-cutting measures and development of a new product line, however, have turned Hurco's fortunes around. That, coupled with the rising value of the Japanese yen compared with the U.S. dollar, has helped make Hurco's products more competitive abroad. At home the Voluntary Restraint Agreements with Japan and Taiwan (signed in December 1986) have helped improve the company's share of the domestic machine-tool market.

Now, Brian D. McLaughlin, the company's new president and chief executive officer, says the company has a strategy for dealing with the future shifts in the market. And, while the company is competitive today, McLaughlin says it can't stop to rest on its laurels.

"The Japanese are coming. There are three new Japanese machine-tool plants being built in the United States. Followed by that will be (the arrival of the component suppliers," says McLaughlin. "In three or four years, the Japanese will be back into our market segment. We need to be thinking through our strategies to compete with that. But we're in a position now where we have proactive control to develop those strategies."

Hurco was founded in June 1968 by Gerald V. Roch and Edward L. Humston. (Hurco is an acronym for HUmston, Roch and COmpany.) It became a public corporation in 1971. From its inception, Hurco's target market has been the short-run segment of the metalworking industry. Hurco has built its reputation on its CNC control devices. Each year, Hurco sells 3,000 to 4,000 of these controllers to the roughly 300,000 machine-tool users in the United States. The machine tools, in turn, are used to make just about anything that can be made in metal forms. A few examples of the applications include: automotive parts, construction materials, electronics and defense equipment.

Hurco accounts for about 11 percent of th CNC sales to the machine-tool industry in the United States. The huge Japanese firm, Fanuc, controls about 57 percent of the U.S. market.

McLaughlin believes that with the changes that Hurco has made in the last few years, his company stands ready to seize a bigger chunk of the market. One way he expects to do it is through greater market penetration, selling machine-tool devices for new applications. He also hopes to sell machines to U.S. firms that bought from Japanese machine-tool suppliers in the past when foreign machines were cheaper.

McLaughlin's office is not the plush CEO suite you might expect. It is, in fact, a rather Spartan facility with a modest wooden desk and credenza, two black metal file cabinets, a small, round conference table and a few chairs. On the credenza are photos of his two children. On the walls are pictures of the company's products.

Perhaps he sees a flashy office as a non-essential. He is, after all, the kind of executive who spends roughly half his time on the road or in the air. He travels extensively throughout the United States, Europe and Asia.

"I believe in spending time with the customers and the employees," he says. "They're out there, so that's where I have to go to see them."

The 46-year-old Canadian-born and-reared McLaughlin went to Michigan Technological University in Houghton, Mich., where he earned a degree in electrical engineering. Following his graduation, he took a job with Cutler-Hammer, a half-billion-dollar firm that made electrical control products. He first served as a sales engineer, selling and specifying electrical and electronic products for the industrial markets. Then he worked in sales, sales management, marketing management and general management.

After Eaton Corporation bought Cutler-Hammer, McLaughlin spent the next few years as a planning manager. He was responsible for about $700 million worth of Eaton's business--everything from semiconductors to capital equipment to defense electronics to programmable controllers.

In 1982 McLaughlin became president and general manager at Indianapolis-based Ransburg Corporation. There, he ran the Ransburg Gama operation, the corporation's electrostatic automated painting equipment division. In 1987, he was recruited from Ransburg by the board of Hurco.

Chief Financial Officer Michael Campbell, whom McLaughlin calls "the man who turned the company around," started working with Hurco in 1982. He saw its profits plunge and helped orchestrate the recovery. He explains part of Hurco's strategy: "There are three basic parts of a machine tool. One is the cast iron; the second is the computer control and the hardware that drives the computer. The third is the drive and spindle system. The cast iron is the low-tech end of the machine tool. Hurco has decided that we simply don't want to invest money to produce the low-tech end of the machine. So our money has been invested in CNC controls and the drive system to make a high-accuracy and high-efficiency cut from the machine tools our controls go into.

"We're looking at ways to leverage our knowledge of the computer control technology into other applications for machine tools. Because the hardware gets less and less expensive each year to produce, the real value is in the software side. That is why we need to make sure we develop the application and software side of the product, because in the future, that is where the real value is going to be."

Hurco sells products that range in price from $35,000 to $125,000--about 3,000 to 4,000 units per year. The company sees itself as a control builder first and tries to purchase from the most economical locations around the world.

The Voluntary Restraint Agreements with Japan and Taiwan, however, have forced Hurco to increase the U.S. content of its products. By the end of 1989 or 1990, Hurco products should be about 80 percent U.S. content, up from the current 50 percent.

"We've tried to position the company to take advantage of selling more and more computer controls," says Campbell. "In 1984 we purchased DynaPath, an original-equipment manufacturer. They hadn't invested in research and development for many years. We updated their technology and introduced a new product last year that has updated their software and hardware. Their volume has helped us increase. Four years ago, we may have sold a thousand controllers a year. Today, that has more than doubled."

Another major product development was the Ultimax, introduced in 1984 and significantly improved in 1987. Hurco claims it is the world's most powerful CNC controller for machine tools of its size.

Ironically, it was research-and-development money spent on coming up with new products that contributed to the company's five years of major losses. According to Campbell, $12 million to $15 million alone went into the Ultimax system. And now those expensive R&D projects are paying off by securing Hurco's niche in the marketplace.

Improvements in the parts and service side of the operation have also helped raise the company's profit outlook. As McLaughlin says, "Parts and service was a $3 million business for this company in 1982. It's a $12 million business today. That was one of the key areas we focused on to try to improve the quality and response. There's no doubt in my mind that that is a major part of why we are where we are today."

The company's restructuring also played a major role in swinging the company back into the black. Hurco's peak employment was in August 1984, when the company had 650 workers. It reduced employment to a low of 357 and did so without a decrease in sales volume.

"What we did was to outsource as much as we could to lower our costs and eliminate work on projects that did not have a positive return on investment," Campbell explains. "We focused on what we felt were the most profitable products and discontinued several products we thought were not profitable."

The result: Hurco took 35 percent to 40 percent of the cost out of its products. It can produce and sell an $80,000 machine today. Four years ago, to make the same gross profit, it would've had to charge $95,000.

Currently, the company's employment roll is back up to 430 people, plus an additional 15 to 20 temporary people--increases that are due to improved sales activity. This year, Hurco has received $68 million to $70 million in orders and has made $64 million to $65 million in shipments. Its backlog is bigger than he would like to see it, Campbell says.

You might think the company would be pleased with those results. Nevertheless, McLaughlin and Campbell agree that there are more improvements to be made.

"We're not naive enough to believe that the dollar is always going to be weak," says Campbell, "so we feel in the next three to four years we have to cut another 20 (percent) to 30 percent out of the cost of our product. You can't sit still in our business. Our competition isn't around the corner in Indianapolis. It is around the world. We cannot be the same company in four years that we are today."

Campbell suggests that the best thing for the United States would be a continuation of the weak dollar value in foreign markets. The stronger foreign currencies make the prices of U.S.-made goods very attractive for overseas buyers as well as for domestic buyers who in the past might have been tempted by a lower Japanese price.

Another problem the company faces is the cyclical nature of the machine-tool industry. Hurco had the bad luck to plan its last big R&D push at the very moment (1982) when the industry entered a downward cycle.

"The industry goes in cycles, and it's tough to avoid those cycles," says Campbell. "One of our major objectives is to reduce our dependence on the cyclicality of the business. We want to increase our penetration of the geographic markets. We need to fit our control technology onto other different kinds of applications in the machine-tool industry. We need to broaden our product depth and sell more controls each year."

McLaughlin and Campbell believe this strategy will allow them to make larger profits per dollar. And it they can maintain a relatively low overhead they should be able to stay profitable, even if the cycle turns down.

"Hurco is a very progressive company in terms of where we see ourselves fitting and what we need to do in the next several years," says Campbell. "We've been able to restructure and reposition ourselves to grow in the future."

M. William Lutholtz is a free-lance writer based in Indianapolis.
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Title Annotation:Profile; Hurco Companies Inc.
Author:Lutholtz, M. William
Publication:Indiana Business Magazine
Date:Oct 1, 1988
Previous Article:The economic debate.
Next Article:Hurco Companies Inc.

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