Dan McCurdy / Bodycote
Dan you and I have known each other for probably 25 years going back to the early days of Marathon Monitors but I am sure readers would be interested in knowing how you got involved in the heat treating industry to begin with. Care to enlighten us?
“When I was a senior in high school (circa 1972) I participated in the local a Cincinnati ASM chapter recruiting event in conjunction with the University of Cincinnati in which I was introduced to metallurgy. At that point all I knew was that I wanted to be an engineer but I didn’t know what type. I must have checked a box on a form at that event because from that point on, I was heading to the Department of Materials Science and Engineering at UC and I never looked back. UC had a great co-op program which allowed me to go to work at a local gear company (now known as Xtek Inc.) in which I was brought up through the lab and into the operations of their large captive heat treatment department. The combination of the 5-year scholastic schedule with the working every other quarter in a real-world environment was perfect and I found myself quite ready to enter the workforce as a heat treatment metallurgist when it was all over with. A couple of years after graduation I moved into the Commercial heat treatment business with Cincinnati Steel Treating, which gave me a completely different look at the same industry. Looking back, I would say I was very lucky to have these opportunities because it is very difficult to find people these days that’ve experienced anything like it.”
You’ve been with Bodycote now for almost 14 years. What changes have you seen in the company?
“When I joined in 1998, my deal with John Hubbard, who had recently sold his company (Hinderliter Heat Treating) to Bodycote, was to stay 1-2 years and work on special projects for him. Little did I know that John was the future CEO of Bodycote or that I was headed down this incredible path! In those days, Bodycote was a UK-centric company with relatively new investments in Germany, France, and Sweden, plus a brand new seven-plant footprint in North America. It was already the world’s largest commercial heat treater but had almost no reputation to precede it. People were wondering what was going on, how sustainable it all was, and where it was headed.
The first really big change I experienced was the acquisition of Lindberg Heat Treating. From a global perspective, Lindberg was not that big and did not represent a major challenge for Bodycote PLC. But in North America, Lindberg was much larger than Bodycote’s existing footprint and we were somewhat swamped with integration issues for a couple of years. That whole experience was a valuable lesson for me.
The most recent change was the announcement of John Hubbard’s retirement and the appointment of Stephen Harris as our new CEO. This change took place right as the full scope of the 2008-2009 downturn had become evident to all of us. As Stephen walked in the door, the need for serious cuts and restructuring was already growing rapidly, and that’s the direction he had to go. Up until that point Bodycote had been a ‘heat treaters managing other heat treaters” company, but under Stephen (who is an engineer, by the way) this culture gave way to one based more on global strategies, focused local planning and overall fiscal discipline. We are now organized in two global market sectors: “Aerospace, Defense, and Energy” (ADE, which includes HIP) and “Automotive and General Industrial” (AGI). This alignment works very well and can be most easily understood if one envisions all the things that often go wrong when an automotive heat treater chases after aerospace work or vice versa.”
As you said a couple of years back Bodycote split their plants in North America into different divisions, your current title is “President, Automotive and General Industrial Heat Treating, Bodycote North America and Asia” which is a mouthful. With this division what plants are you responsible for around the world?
“The Great Lakes region is still the center of the Automotive and General Industrial customer base in North America, and that’s where most of my Division’s plants are. Moving west to east, they are Eden Prairie MN, New Berlin WI, Sturtevant WI, Melrose Park IL, Indianapolis IN, Ft. Wayne IN, Canton Ronda MI, Canton Haggerty MI, Livonia MI, Columbus OH, Kitchener ON, Newmarket ON, Rochester NY, York PA, and Roselle NJ. I also have responsibility for plants in Silao Mexico, Ranjangaon India, and Wuxi, Ningbo, and Jinan in China.
North American plants in the ADE Division that I do not have responsibility for are concentrated on the East and West Coasts (mostly aerospace and defense) and in the Southwest (mostly energy). My colleague Tracy Glende is responsible for those locations. Another colleague, Jody Turin, is responsible for the HIP (Hot Isostatic Pressing) plants in North America and all over the world.”
Bodycote is the largest commercial heat treater in the world with sales of almost $1 Billion USD/year and the only truly global commercial heat treater. Being the largest has both advantages and disadvantages, an obvious advantage being that you have resources unavailable to many of your competitors but on the other side of the coin a common complaint is that the company has become too large. Specifically it has been said that Bodycote has become so large that it reacts slowly to market changes and that it runs on paperwork. What would you say to these points?
“I wish I had a dollar for every time I heard that Bodycote has all of these purchasing advantages over the independents! Yes, we are able to buy a few things like nitrogen cheaper than many of our competitors via global arrangements. But we also regularly find out that the independent heat treater right next door to us is still getting nitrogen 10% cheaper than we are because he is using a local vendor who was able to piggyback him on another big account close by. The suppliers in the heat treatment industry know the truth, which is that Bodycote pays what everyone pays for most goods and services, and sometimes we even pay more because of our own specifications.
What Bodycote has, which most independents struggle with, is cash to fund growth, all of which comes from operating our business in a disciplined way using our administrative economies of scale that ensure that sales actually convert to profit and cash. With most of our plants, there is constant demand for capital equipment spending which must be refereed by the executive team. We simply choose those projects which we believe will provide the best returns for our shareholders in the medium-to-long term. The process of choosing which projects to execute is not as simple as anyone would like, but the devil is always in the details of these projects and that’s where we have to focus to be sure we’ve got it right. This is the piece that gives us the reputation of being slow to react at times I think.
For example, when approached by a customer to add a furnace in return for doing their heat treating, many independents would jump at the chance. They would find, buy, and rebuild a used furnace and get things rolling, all perhaps in the space of just a few weeks sometimes. The industry is full of examples of heat treatment companies that have grown into very solid businesses by this method. But the industry also has a large number of sick, dying, or dead companies for exactly the same reason. The only difference was often simply the presence of an entrepreneur in the business who somehow instinctively knew which opportunities to grab and which to avoid. With Bodycote being a public company with 180 plants in 28 countries, we obviously cannot rely on instincts of individuals; we instead rely on formal investment evaluation methods to make sure we take advantage of the best opportunities while avoiding those with too much risk. Having said that, when a solid opportunity presents itself we do move things along pretty quickly I think.”
The recent acquisition of the heat treatment plants owned by Metal Improvement Company in the US, one of the largest commercial heat treaters in the country certainly sparked a lot of attention and caught many people off guard. The acquisition has some people scratching their heads as to why Bodycote felt it important to make such a large acquisition at what appears to be a premium price. What are your thoughts?
“If you looked at a map of North America and saw where Bodycote’s plants were in comparison to Metal Improvement’s plants, you would immediately agree that they were located almost exactly where we were not and vice versa. We actually rarely competed with them anywhere. Metal Improvement made the decision to focus on things other than heat treating, and we were able to agree with them a price for the nine (9) heat treatment plants which was not far at all from what historical deals in our industry would indicate. We are happy to have the new plants and are currently integrating them into our management, sales, and logistics strategies which will allow us to reach more US customers than ever before. At this point I can tell you that the acquisition went very smoothly, the plants are so far running well under Bodycote, and the former Metal Improvement employees are for the most part very happy to be a part of our organization. We have definitely learned from the past in terms of smooth integration of acquisitions.”
When speaking to individuals who have a great deal of experience in the industry (and you certainly fit the bill) one of my favorite questions is; “where do you see the industry going in the future?” Things change slowly in this industry, a perfect example of which is Batch IQ furnaces. While there have been some small changes in the design at the end of the day it is pretty much as it was introduced 50 or 60 years ago. So my question would be do you see any radical changes in technology or the way metal parts are processed?
“When we bought our first LPC/gas quench furnace in North America 6 years ago I commented that we had probably bought our last conventional batch IQ furnace. That was maybe 25 batch IQ furnaces ago so my crystal ball is obviously fuzzy. In our industry, we could almost define “revolutionary” as something that takes less than 10 to 20 years to become commonplace. That’s not a shot at the industry – it’s the reality of the industry.
Trends that I see happening at present:
- There continues to be increasing demand for lower distortion heat treatment processes. This trend is decades old and it’s not showing any sign of letting up. Heat treaters who work with customers productively on distortion issues will continue to win market share.
- Continued growth in nitriding, especially FNC-type processes, which are turning up in applications that require simple wear resistance and/or corrosion resistance. The trend away from both hard and decorative chrome plating is driving part of this, but customers have also gotten smarter about using shallower-case processes where they fit with their products.
- There is continued, albeit slow, growth on the commercial side in LPC and gas quenching. This trend has moved slowly because of a lack of commercial process availability which has in turn been caused by very high capital costs. The captives, meanwhile, continue moving forward with LPC on their own. Commercials are going to have to catch up somehow at some point because 30 years from now (note I’m being more conservative this time!) there will be few batch IQ furnaces left.
- Distribution of manufacturing production to emerging markets will continue, commensurate with the projected demand in those markets.
- Competition for new talent will continue to be a challenge for everyone associated with the heat treating business, especially in the mature markets. In the emerging markets, retaining the talented people will continue to be a challenge because there are so many opportunities breaking out all around them. In the 1980’s the heat treatment industry could not spell ‘HR’, but these days Human Resources has become one of the more important administrative departments in Bodycote.”
In such a tight knit industry there are always rumors floating around and one persistent one over the years has been that the company would divest itself of it’s North American operations primarily due to the fact that margins are lower in NA than many other parts of the world. The acquisition of Metal Improvement Company certainly put those rumors to rest but looking at the overall picture what geographic areas do you see as of the most interest to Bodycote in the future?
“Bodycote has NEVER seriously considered divesting itself of its heat treatment plants in North America (just the opposite in fact) and I have never understood the origin of that rumor. One of the very attractive characteristics of Bodycote to investors is its diversification in a portfolio of plants in different geographic markets and all the various market sectors that require heat treatment. These people no longer see us as a UK heat treatment company, or a European heat treatment company, but a globally diversified metal processing company that is able to adjust to, and take advantage of, changing conditions around the world.
Average margins in the North American market these days are quite comparable to those seen anywhere else in Bodycote. That said, there is constant movement in which parts of the North American market are gaining ground and parts which are losing and adjustments constantly have to be made, just as would occur in any business. Occasionally we have to close a plant because the market to support it just isn’t there anymore. This is a very unfortunate but all too-common aspect of global manufacturing industries. At the same time, however, we usually have a nice handful of projects which will lead to new plants in the future in other markets.
As far as where Bodycote is looking for growth in the future, I would say that the emerging markets continue to be of great interest but North America clearly has a long way to go in manufacturing growth and we plan to be part of it.”
While this question is not specific to heat treating it certainly is very connected to it. We all read that manufacturing is fleeing high cost areas of doing business such as North America and Europe and if this is true it will obviously have a tremendous impact on heat treating in these regions. Do you share the general pessimism about that forecast?
“Politicians like to summarize all this in a few sound bites to make companies sound like scoundrels for opening manufacturing facilities in emerging markets, but the truth of the matter is much more complex. My view is that the companies rarely have a choice if they want to survive in the global marketplace.
For a start, it should be obvious that most companies have to go where their customer are. For Bodycote, this meant opening heat treatment shops in China, India, Mexico, the Czech Republic, and so on, simply because our customers were opening plants in those locations and were demanding that we come. Prior to that, our customers opened plants because their customers opened plants and demanded that they come, and so on. This is how a supplier base comes to be in an emerging economy.
The second fact is that some of what used to be made in North America and Europe for export to emerging markets has finally moved to where it can be manufactured and consumed in the same geography, which was inevitable and logical. The typical scenario we see has some production staying in North America or Europe and some moving to the emerging markets. This has been good for the commercial heat treatment industry in all markets, by the way, because lower volumes out of any one manufacturing plant make the idea of captive heat treatment that much less attractive.
The piece that gets everyone upset is when it appears that a company has moved production to an emerging market in order to take advantage of lower labor costs with the intent to export the goods back to the original home market. Having spent years now working on various projects in the emerging markets, I can testify that this does not happen nearly as often as people think it does. It almost never happens with small or medium volumes of machined and heat treated components; the economics simply do not work. There may be savings in labor costs, but energy almost always costs much more in emerging economies and then the goods have to be shipped overseas anyway. We have seen some larger volume projects successfully move, but not across oceans; usually just across a border, with work moving from the US to Mexico or Germany to the Czech Republic being prime examples.
Incidentally, I can state categorically that as of right now it is generally NOT cheaper to do heat treatment in any of the emerging markets despite lower labor costs. Just the opposite, in fact, because the required energy, manufacturing, service, and logistics infrastructures that heat treatment requires are simply not up to par (yet).
There have been a few anecdotes floating around projects that went to emerging markets, only to return a year later because of quality issues. This is certainly not a trend. There is no question in my mind that all of the emerging economies can or soon will be able to compete on quality with any European or North American company. The only open question is how long it will take some of these economies to begin to generate the sort of culture of creativity, innovation, and marketing savvy required to ensure long-term, self-sustaining success. Quite a while, I think, in some cases. Let’s just say that I’m not too worried about my grandchildren’s prospects for gainful employment if they choose to work in US manufacturing. Bodycote has a similar view about Europe; there are simply too many good things going on there to think that it could all move away to other geographies within anything short of a lifetime. And new things are being born in Europe all the time.”
The North American heat treating market has been estimated at $20 Billion/USD per year with commercial heat treating representing 10% of this total (both of these numbers by the way I have never been able to verify). The general consensus at least amongst commercial heat treaters has been that this % has been rising over the years and will continue to rise but again I have never been able to determine whether this is actually the case or more wishful thinking on the part of the commercials. Do you have a good feel for this?
“The data are indeed hard to come by because the required classifications on the captive side simply don’t exist. We do know the sizes of the various commercial heat treatment markets around the globe, but we generally do not know the size of the captive markets with the certainty we would like. The 10% number for the North American market has been floating around for many years, and I believe it is obsolete. I think it’s more like 15% and heading for 20% these days. Around the world it can be clearly seen that the more mature an economy is, the higher its commercial heat treatment share will be. Europe is at least 20% now and it continues to climb. On the other end of the scale, China is far less than 10%, despite the fact that there are several hundred commercial heat treatment shops in Shanghai alone.”
While Bodycote is certainly the largest commercial heat treater in the world you do have a few fairly substantial competitors around the world. Out of your competitors which one most impresses you the most as being a well run, responsive company with good technical and human resources?
“The brightest stars in our industry have tended to be those companies which have managed to couple equipment or process innovation with success in the heat treatment service business. The companies that immediately come to mind in this vein are ALD, Applied Process, Vac Aero, Solar Atmospheres, and Nitrex. However, all of these tend to be focused in their specific niche areas and in my opinion have not enjoyed the kind of large-scale success that can only come from leveraging smart people and money in the broader range of possibilities.
In terms of the US market, we certainly recognize Bluewater Thermal, Paulo Products, Specialty Heat Treating and Specialty Steel Treating (and obviously many others) as worthy multi-plant competitors. And there is no shortage of single-plant independent operators out there who do very well indeed in whatever local markets they are covering, very often giving us major heartburn in the process.”
After all these years are you glad that heat treating became your vocation or should you and I both have entered the computer field?
“Gord, I have landed in a spot that allows me to leverage my entire working experience on a daily basis, so it’s difficult for me to complain about anything at all. However my work is not nearly as glamorous as yours these days, since “theMonty.com” has become a heat treating industry juggernaut in its own right with no doubt the associated riches that ensue. When are you taking this thing public?”