The Assembly Top 50
Examining this year's Assembly Top 50, 11 companies moved up two or more positions, while seven companies moved down two or more spots. Yet, the most significant move may be that one company managed to inch its way up just one notch. Small though it may be, that one step represents the rise of one manufacturing powerhouse at the expense of another.
In 2003, Ford Motor Co. (Dearborn, MI) ranked second in the Assembly Top 50. In 2004, it fell to third, and this year, it drops to fourth. Conversely, Toyota Motor Co. (Toyota City, Japan) ranked fifth in the Assembly Top 50 in 2003. But, in 2004, it was fourth, and this year, it passed Ford to take the third spot.
During its fiscal year, which ended in December 2004, Ford sold 6.8 million vehicles worldwide, an increase of less than 1 percent. In contrast, Toyota sold 7.4 million vehicles in its fiscal year, which ended in March 2005, an increase of 10.3 percent. In 2004, Ford claimed 19.3 percent of the U.S. market, down from 20.5 percent in 2003. In contrast, Toyota claimed 12.2 percent of the U.S. market in 2004-05, up from 11.2 percent in 2003-04.
To determine the impact of product assembly on the U.S. economy, ASSEMBLY magazine ranked the top 50 publicly owned manufacturing companies by gross revenue. To qualify for our list, a company must derive a significant portion of its gross revenue from products that it assembles or that it designs and has assembled by another company. More importantly, a substantial amount of this assembly, whether in-house or outsourced, must occur in the United States.
Investors looking to pitch their holdings in manufacturing companies in favor of Google or Yahoo may want to reconsider. Thirty-one of the Assembly Top 50 enjoyed double-digit revenue growth in 2004, and 17 of the Assembly Top 50 posted back-to-back years of double-digit revenue growth. One company, Magna International, posted three straight years of revenue growth above 19 percent.
In 2002, 16 companies posted net losses for the year. In 2003, half that number took a net loss. In 2004, just six companies recorded a net loss for the year. Of the eight companies that posted net losses in 2003, three posted net gains in 2004: TRW Automotive, CNH Global and Flextronics International.
Even though six companies posted losses, the net income accumulated by the Assembly Top 50 still increased 19.4 percent-from $82.6 billion in 2003 to $98.6 billion in 2004. All totaled, the Assembly Top 50 racked up $2.24 trillion in gross revenue in 2004, an increase of 10.7 percent over 2003. If all this revenue were created entirely in the United States, it would represent some 19.1 percent of the U.S. gross domestic product.
Truck manufacturer Paccar Inc. (Bellevue, WA) debuts in the Assembly Top 50 this year at No. 45, climbing seven spots from No. 52 in 2004. Paccar delivered a record 124,000 trucks in 2004, and the company owned one-fourth of the market for Class 8 trucks in the United States and Canada. Of the 130 manufacturers we looked at for this report, only two other companies-Applied Materials Inc. and AGCO-had higher revenue growth in 2004 than Paccar. The company's gross revenue increased 39 percent, from $8.2 billion in 2003 to $11.4 billion in 2004. The company's 2004 net income of $906.8 million was the highest in its 99-year history and ranks 36th overall among all the manufacturers we surveyed.
Many of Paccar's facilities established production records in terms of quality metrics, inventory turns and assembly hours during the year, and the company's Kenworth assembly plant in Renton, WA, was the first recipient of ASSEMBLY magazine's Assembly Plant of the Year award (see November 2004 issue).
Major capital projects during 2004 included the completion of the Kenworth Research & Development Center; installation of robotic paint systems at three plants; setting up new engine machining and assembly transfer lines; and commissioning of a new Engine Development and Test Center.
Here's some of what's going on at other companies in the Assembly Top 50.
No. 19, Motorola Inc., Schaumburg, IL
After a tough year in 2003, Motorola bounced back in 2004. The manufacturer of cell phones, wireless networking gear, two-way radios, automotive electronics and broadband communications products jumped two spots in the Assembly Top 50, from No. 21 in 2004 to No. 19 in 2005. Gross revenue increased 35.3 percent, from $23.1 billion in 2003 to $31.3 billion in 2004. That's the fifth largest increase among all 130 companies we looked at for this project. Net income increased 71.6 percent, from $893 million in 2003 to $1.5 billion in 2004.
Motorola's wireless handset business had a particularly strong year in 2004. Net sales increased by 53 percent, operating earnings increased by 257 percent, and unit shipments increased by 39 percent. The division introduced 60 new products, including the ultrathin RAZR phone.
Motorola's wireless networks business experienced a 24 percent increase in net sales in 2004.
No. 20, Caterpillar Inc., Peoria, IL
2004 was a particularly good year for manufacturers of tractors and heavy equipment. Of the 20 companies with the highest increases in gross revenue in 2004, six assemble tractors, heavy trucks or the engines that go into them.
One of those is Caterpillar, which climbed three spots in the Assembly Top 50, from No. 23 in 2004 to No. 20 in 2005. Gross revenue increased by 13 percent in 2003 and 32.9 percent in 2004, while net income rose by 37.7 percent in 2003 and 85.2 percent in 2004.
Six Sigma is a major part of Caterpillar's success. Some 3,630 employees have Six Sigma black belt experience, and another 30,000 are involved in Six Sigma projects. Six Sigma was critical for Perkins Engines, a Caterpillar company based in the United Kingdom. More than 70 Six Sigma projects contributed to the development of Perkins' new 1100D engine, which meets Europe's tough new emission standards.
R&D is also a significant factor in Cat's success. The company has received more than 2,500 patents in the past 5 years, and it invests more than $4 million in technology each working day. That investment has paid off handsomely for Cat's engine business, where sales growth has been fueled by the success of ACERT, a revolutionary clean diesel technology. More than 170,000 on-highway engines featuring ACERT technology are on the road now, and in November, the company introduced its first earthmoving machine with ACERT technology.
No. 27, Magna International Inc., Aurora, Ontario
Besides Paccar, only two other manufacturers moved up in our rankings by more than five spots. One of those is automotive supplier Magna International, which leapt seven spots from No. 34 in 2004 to No. 27 in 2005. What makes Magna's gain even more noteworthy is that many of the company's competitors-Delphi, Visteon, Lear and TRW-dropped in our rankings by two or more positions.
Magna's gross revenue increased 34.6 percent, from $15.3 billion in 2003 to $20.6 billion in 2004. Net income rose 33.1 percent, from $520 million in 2003 to $692 million in 2004.
The past year was a challenging one for the automotive industry. Vehicle production grew modestly in Western Europe and declined slightly in North America. At the same time, prices for energy, plastics and steel rose dramatically.
Despite these challenges, Magna has continued to invest in new and existing production facilities. Some of its 2004 investments included:
- a new stamping facility in Sonora, Mexico, to support the launch of the Ford Fusion and Mercury Milan.
- a new fascia molding and paint facility in Georgia, and an expansion of its Class A stamping facility in South Carolina, to support the launch of the Mercedes M-Class.
- a new frame facility in Kentucky for the next generation Ford Explorer and F-Series Super Duty pick-up truck.
Magna also invested in equipment to produce components for GM's next-generation pick-up and sport utility vehicles, the Mercedes A-Class, MINI convertible, Volkswagen Toledo, Chrysler 300 and Dodge Magnum.
Among Magna's operating highlights in 2004 was the successful launch of the new BMW X3 by Magna Steyr, the company's complete vehicle engineering and assembly group. Magna Steyr was also awarded assembly of the rear-wheel-drive and all-wheel-drive Chrysler 300C vehicles, which will be sold in Europe and other markets outside of North America.
No. 29, Deere & Co., Moline, IL
Caterpillar wasn't the only Illinois tractor manufacturer to enjoy a good 2004. Deere & Co. also performed well. Gross revenue increased 28.7 percent, from $15.5 billion in 2003 to $20 billion in 2004. Moreover, net income increased 118.7 percent, marking the second straight year that the tractor assembler has doubled its net income. Deere jumped four spots in the Assembly Top 50, from No. 33 in 2004 to No. 29 in 2005.
Global expansion is an important part of Deere's growth strategy. Sales outside of the United States and Canada topped $5 billion in 2004, nearly twice the level of 1999, and operating profit outside of the United States and Canada was almost double what it was in 2003.
South America is emerging as a particularly attractive market for Deere. The company has assembled combines, tractors and diesel engines in the region for some time, and it recently broke ground for a new tractor factory in southern Brazil.
Deere has worked hard at establishing a more efficient cost and asset structure. Since 2001, operating asset turns have more than doubled, to 2.4 times last year. Equipment operating margins, which were slightly negative in 2001, neared 11 percent in 2004. As a result, Deere's equipment operations had an operating return on operating assets (OROA) of 25.5 percent for 2004.
Cost reduction has become a priority during new product development. For example, the company's Model 4020 compact tractors came to market with about half as many part numbers as the previous model and 85 percent fewer product configurations. Those changes had a positive effect on manufacturing costs and simplified asset management.
Deere has also taken steps to align the interests of employees, customers and investors. Some 18,000 salaried employees follow performance plans geared to their own responsibilities and developmental potential. These individually tailored plans, which reflect the objectives of each business unit and the overall company, are updated annually and formally reviewed twice a year. In addition, Deere implemented a unique compensation system in 2004. Yearly bonus payments for salaried employees are directly linked to either divisional OROA in equipment operations or return on equity in financial services.
No. 39, Texas Instruments Inc., Dallas
Like Magna and Paccar, Texas Instruments (TI) also shot up in our rankings, jumping seven spots from No. 46 in 2004 to No. 39 in 2005. The manufacturer of integrated circuits, sensors and calculators has enjoyed back-to-back years of double-digit growth in both gross revenue and net income.
Much of that growth has come from TI's semiconductor division, which accounted for 85 percent of the company's revenue in 2004. The division's revenue increased by 31 percent last year, thanks to strong demand for wireless, high-performance analog and digital light processing products.
Approximately 40 percent of the division's revenue came from analog products, and TI's share of the market for analog products reached its highest level since 1975. The company introduced some 400 new high-performance analog products in 2004. Among those was a new chipset that serves as a highly accurate "gas guage" for battery-powered electronic devices. For example, a digital camera could use this technology to display the number of pictures that can be taken with the remaining battery charge.
Approximately 35 percent of the division's revenue came from digital signal processors (DSPs). Spurred by demand for third-generation cell phones, high-end televisions, and high-speed DSL Internet access, sales of DSPs grew 35 percent. In 2004, TI began volume production of 1-gigahertz DSPs, the fastest such processors and the first to be manufactured with 90-nanometer process technology. Already shipping to more than 70 customers, these chips enable engineers to develop innovative applications, such as self-navigating vehicles, complex vision systems and portable medical imaging equipment.
Last year, the company broke ground on a new manufacturing complex in Texas. The facility will use next-generation process technology to build some of the world's most advanced semiconductors on 300-millimeter wafers.
No. 46, Sun Microsystems Inc., Santa Clara, CA
Sun Microsystems dropped eight places in the Assembly Top 50, from No. 39 in 2004 to No. 46 this year. The computer and software manufacturer is the only company in the Assembly Top 50 to earn less revenue in 2004 than in 2003. In fact, 2004 marked the third straight year that Sun has posted less gross revenue than the previous year.
The decrease in revenue is due primarily to a decrease in net revenues from products. While unit sales of computer systems and network storage systems increased compared with 2003, intense competitive pressure forced Sun to reduce prices. An increase in net revenues from services partially offset the decline in net product revenue.
Sun's manufacturing operations consist primarily of final assembly, test and quality control of enterprise and data center systems. For all other systems, Sun relies on external manufacturing partners. The company manufactures most of its products in Oregon and Scotland, while distribution is done from California, the Netherlands and Japan.
The company is simplifying its manufacturing process by reducing the diversity of system configurations it offers and increasing standardization of components across product types. In 2004, Sun implemented a new customer fulfillment architecture that enables the company to ship some products directly from its suppliers to its customers. This has helped reduce cost and complexity in the supply chain.
R&D is critical for any manufacturer of high-tech equipment, and Sun is no exception. Over the past 3 years, Sun has invested 15 percent to 17 percent of its annual revenues in R&D.
No. 50, Medtronic Inc., Minneapolis
When the 130 companies we studied are ranked by net income as a percentage of gross revenue, medical device manufacturers dominate the list. Indeed, four of the top 10 most profitable companies and nine of the top 30 are medical device manufacturers-and that's not including General Electric and Philips Electronics, which have large divisions that assemble medical devices.
One of the companies in the top 10 is Medtronic. During the past fiscal year, which concluded in April, gross revenue increased 10.7 percent, from $9.09 billion to $10.05 billion. In fact, Medtronic has posted double-digit increases in revenue for four straight years.
Revenue growth at Medtronic has been driven by new product introductions. The company increased R&D spending by 12 percent in 2004-05 and 14 percent in 2003-04. All totaled, Medtronic spent nearly $1 billion on R&D over the past year, and R&D spending represented 9.5 percent of sales for the year. Approximately two-thirds of Medtronic's gross revenue is derived from products it introduced within the past 2 years. More than 200 clinical trials are currently underway across the company.
During the past year, Medtronic has invested more than $500 million to improve operating efficiency and enhance customer service. Major facility expansions were completed in Tennessee for spinal products; in Ireland for vascular products; and Puerto Rico for diabetes and neurological products. A large project is underway in Minnesota to support growth in sales of cardiac rhythm management products. In addition, a new companywide information system is being implemented across all of Medtronic's global operating units.
Highs and Lows
$193.5 BILLION: gross revenue recorded by General Motors Corp. in 2004, the most of any company in the Assembly Top 50
$176.3 BILLION: gross domestic product of Greece in 2004
$16.8 BILLION: net income recorded by General Electric Co. in 2004, the most income of any company in the Assembly Top 50
$11.4 BILLION: net loss recorded by Sanmina SCI Corp. in 2004, the largest loss of any company in the Assembly Top 50
39: percentage increase in gross revenue recorded by Paccar Inc. in 2004, the largest increase of any company in the Assembly Top 50
604: percentage increase in net income recorded by Ford Motor Co. in 2004, the largest increase of any company in the Assembly Top 50
26: percentage of Johnson & Johnson's 2004 gross revenue that came from assembled products, the lowest ratio of any company in the Assembly Top 50
20: percentage of Cisco Systems' 2004 gross revenue retained as net income, the most of any company in the Assembly Top 50
7: number of spots Paccar, Texas Instruments and Magna International moved up in the Assembly Top 50, the largest rise of any company in the Assembly Top 50
9: number of spots Ingersoll-Rand moved down in the Assembly Top 50, the largest drop of any company in the Assembly Top 50