Katcon’s Unstoppable Evolution: From National Producer to Worldwide Automotive Reference

Interview with Carlos Turner, CEO at Katcon Global.

By: Karina Almaraz

Katcon’s Unstoppable Evolution: From National Producer to Worldwide Automotive Reference
A catalytic converters company founded in Nuevo León to supply the national market has managed, in less than 30 years, to develop new lines of business and expand its presence in America, Europe, and Asia. A lean business model, designed for difficult times, and an enormous capacity to detect opportunities contribute to the success of this company that today dreams of going to Mars.

Katcon is a world reference in the production of automobile catalysts and exhausts. What are the origins of the company?
Katcon was established in Nuevo León in 1993 to produce catalytic converters under license from General Motors (GM) and supply their plants in Mexico.

For the company’s first 15 years, we operated as a joint venture of our family and GM first, and then with Delphi Automotive Systems. During that time, we built a very productive partnership for both parties. We learned a lot from the requirements of the automotive industry, which was expanding rapidly throughout the country thanks to NAFTA. For our counterpart, as a mature American company, it allowed them to cut costs and strengthen their competitiveness by moving part of their production platform to our country.

When it was conceived in 1993, the founders of Katcon had in mind a modern and innovative business model applied to a relatively small company. At that time, mature American and Canadian companies predominated in the automotive industry, with a relatively high cost base and closely linked to the management model developed in the 1960s and 1970s. Katcon traced a different path from the beginning by incorporating a relatively new, leaner management model; a dynamic management team; and a reduced but better paid workforce. In the different departments of the company, we focused on driving the motivation needed to face challenges and take advantage of the opportunities of a market in full expansion as a result of the launch of the FTA.

Contrary to the practice of making large investments—very widespread in those times—we opted for modular-type investments, leaner and with more modern management systems. We made this possible with a great deal of financial discipline, to design a business for difficult times rather than for good times.

To this day we continue to use this model, and over the years it has allowed us to grow profitably. We grew organically the first 12 years with very good results, with a very efficient operating structure; our fiscal discipline has allowed us, at some key moments, to identify and leverage key growth opportunities. The values and principles of the company are innovation, austerity, financial discipline, enthusiasm, teamwork, collaboration and a culture that puts the customer at the center of all actions. These values are taken for granted today, but 25 years ago, they were not so popular or well known.

 

Could you tell us about the current size of the company in terms of for example global production, number of employees, countries where it operates?
In terms of production units, we expect to manufacture this year close to 3 million catalytic converters and exhaust systems: a third in America, a third in Europe, and a third in Asia—a very balanced regional production. We have close to 1,600 employees around the world, and they are also divided in thirds by region. We currently operate in Mexico, the United States, Luxembourg, Germany, Poland, India, China, and South Korea.

 

What are Katcon’s main lines of business?
We have three active lines of business and one under construction. The first—and most important—one is catalytic converters and exhaust systems, which are the components that reduce the pollution generated by internal combustion engines. This division resulted in more than 90% of our global turnover. More than 90% of our activity and employees are dedicated to the design and manufacturing of exhaust systems.

The second one is composite materials, a division that makes industrial components, not necessarily automotive, using composite and innovative materials allowing to improve physical characteristics and reduce the weight of some products. In this way, we contribute to reducing pollutant emissions.

The third line of business is industrial components for temperature management; in other words, thermal shields used to ensure temperature is maintained within the ranges and in the engine spaces provided for in the manufacturer’s design.

We are working on a fourth line of business. We are around the corner from an era of transformation that goes beyond the automotive industry. Digital technology, together with the speed with which innovations occur in the world, places us on the threshold of a transformation that may be as important as the transformation seen in the industrial revolution.

At Katcon, we are working towards this transformation that is going to reshape the industrial landscape worldwide. We anticipate that the industrial value that is given today to transformation and manufacturing will be transferred to the solving of complex problems through sophisticated technological tools. We are thus building what we call the ship to Mars: a business portfolio that will allow us, as a company, to face this new reality.

Composite materials are the first line of business in this portfolio, but we will have to also look into the megatrends of Industry 4.0, the Internet of things, and big data. By incorporating these tools, we will find the formula to participate successfully in the economy of the future. We don’t know exactly if it’s going to be in the automotive industry, in the transformation industry, or if we’re simply going to have to transform them into something completely new. What’s for sure is that we’re getting ready to identify and leverage the opportunities that are expected to come with the digital revolution.

 

Katcon has an important presence in foreign markets. What do you believe are the milestones of your internationalization process?
There are four milestones. The first one, which might seem minor, is the first plant outside our borders that we established in Venezuela at the end of the 1990s; we did so to participate and compete for business in the Andean Pact countries. This first international venture, into a relatively small market and with a rather modest company, gave us the poise and experience to identify and pursue more ambitious opportunities.

The second milestone was in 2004 when Delphi Automotive, our partner, decided that its production in the United States was not as competitive as ours. Since their cost structure made it difficult for them to develop new businesses, we reached an agreement to acquire their factory in the United States and practically become the only producers of catalytic converters for Delphi in North America, which allowed us to grow very rapidly since 2004.

That was the first big leap the company made in terms of size. After growing organically for 10 years, we managed to multiply that growth by three and have access to a market eight or ten times bigger than we had here. That was our first big leap: succeeding in absorbing a company that was considerably larger than us at the time.

The third milestone comes four years later, in 2008, when Delphi made the decision to sell its entire catalytic converter business—not only its factories in Poland, South Africa, China, and Australia, but also its technical centers in the United States and Luxembourg. This transaction meant Delphi’s complete exit from this line of business, and for us a very interesting opportunity to expand our presence in international markets.

At that time, the world economic situation was very complicated, not many loans were given out, there was no liquidity in the market, our competitors didn’t have money either (they were more concerned about their own operations), and the financial viability of the automotive sector and large assembly companies in particular was being questioned. In such a situation, not many had the ability or experience to get involved in a project of this size. We knew that the time was right to broaden our horizons. The lean model with strict financial discipline and operational excellence allowed us to have the financial and human resources to be able to take on the risk. We gave an offer and won the bid. On April 30, 2009, we went to sleep as the owners of a medium-sized company with a presence in Venezuela and North America. The next day, we woke up at the helm of a company with a global presence. In addition to the significant geographic expansion of our operations, from this moment on Katcon ceased to be a manufacturer of converters designed and marketed by its foreign partner, to become a world-class company responsible for the technical and physical integrity of its products—from its design to the end of the warranty. This opens up a completely different perspective.

The fourth milestone is China’s expansion in 2009. The size of that market is such that we decided to take on an aggressive expansion and, in some way, become a Chinese company in China, instead of a foreign international company with a presence in China. This involved, first of all, the establishment of a research and business center in Shanghai. Instead of bringing technology, products, and technological solutions from our technical centers in North America or Europe, we developed our own products and businesses in China. This decision gave us an important differentiating feature in the market. On the one hand, we had the backing of an international company and an international client portfolio; on the other, we operated as a Chinese company and fully identified with the technical and trade requirements of that country. That combination opened many doors for us and allowed us to grow very aggressively. After the success of our plant in Shanghai, we decided to expand within China: we opened a plant in the north of the country, one in the south, and another in the central region, seeking to cover the different regions of the country and establish closer contact with our customers.

 

Can you tell us what your expansion in Europe has represented?
What I would emphasize the most in terms of Europe is the learning that came out of it. I think that the daily coexistence of two such diverse cultural trajectories has been very educational. Something that we currently see and that has given us as a very positive message, is the fact that, as Mexicans, we have a lot to contribute to the entrepreneurial culture of the world. Although we came from a smaller company, with a shorter history, we saw that the values that define us as a company such as dedication, work, commitment, and innovation are highly valued by our European peers.

It’s a two-way street; we also learned a lot from their culture and experience. We especially value the order they have when working, and their respect for procedures and rules—but not only that. We realized that in Europe they’re in a privileged position and have a very rich business environment because they are in the center of the world: in the morning, they have the opportunity to serve the markets of the region; in the afternoon, the markets of Asia and Africa; and at night, North America. The business environment in Europe is extraordinary and diverse, you find suppliers and professionals from all over the world and that allows you to enrich your business perspectives.

 

How does a manufacturer of catalytic converters and exhausts prepare for the transition to electric cars?
The first thing is to be aware that the world is changing. If we don’t realize how big this transformation is, it will be difficult for us to get ready to face the challenges of the times to come.

Things change and not changing with the times makes you obsolete. Although internal combustion engines will not disappear, the massification of electric vehicles and other technologies will gradually erode the market share of fossil fuel-based automobiles. In our case, we have to diversify our product portfolio, not only to manufacture, design, and sell other car parts, but also to enter new sectors and markets.

The German company model is a source of inspiration for us. It is common to find very old companies in that country. Their presence in the market—which, in many cases, exceeds a century—is due to their great capacity for adaptation. A company that currently manufactures robots, for example, originally made buttons, from there it went on to uniforms, then to sewing machines, then to automatic machines, until they reached their current line of business and are leaders in it. This is how I see the transformation that must occur in the automotive industry; some companies are going to incorporate new products to remain in this activity, others will migrate to similar industries, such as aerospace, and some more will radically change their line of business.

In reality, my job as CEO is to increase the likelihood that the company will remain current in the market. Not so much to show good results in the next semester, but rather that this company survives the next 100 years so that all of us who depend on it can develop successfully. That’s where the acquisition of skills, talent, technologies and digital tools comes into play. But the fact is that there will be enormous business opportunities and not necessarily in the traditional industry as we know it today. Mastering digital tools will be essential to make the most of them.

 

Katcon Global Advanced Materials started operations in 2014. What do you believe are the main achievements of this business initiative? Have you met the objectives that were set for its creation?
The main objective of this division is to incorporate new production capacities that allow us to rebalance our product portfolio and participate in industries unrelated to internal combustion engines. Katcon Global Advanced Materials is the door to activities with greater projection: being able to design more advanced materials to replace the ones used today to make a car part, a piece of furniture or a medical device. An example of this is developing alternative materials for hoods that are currently manufactured with steel, perhaps based on some natural resin to make it lighter and, at the same time, preserve the aesthetics and advantages of the material. It is a hypothetical problem, but if you can solve it, you will surely have a growing number of customers and they will have a greater market share. Ultimately, we want to develop innovative solutions to complex problems, something that cannot be simply emulated overnight.

 

Do the new rules of origin for the North American automotive sector represent a hindrance or a boost to the development of national suppliers?
In addition to the rules of origin of the new trade agreement, there are factors that favor the incorporation of more Mexican companies into international trade. First, we have the problems faced by supply chains due to trade disputes in China and other Asian countries on the one hand, and the United States and Europe, on the other. Fears of a possible disruption to the supply chain increased following the recent blockade of the Suez Canal. Today, companies that made the decision to send part of their supply to India, China or Europe to save a few pesos, are paying the consequences because when a ship blocks the operation of the Suez Canal, the supply chain is interrupted for three to four weeks.

In the specific case of the rules of origin, I think they close many of the gaps that existed in the previous agreement. Now, in order to import many components from Asia, more value needs to be added in Mexico to access the United States or Canada under preferential conditions. The new rules open the door for Mexican suppliers to have more opportunities to compete with Asian companies. I think—and I hope—this is going to be of benefit to us.

 

Do you think that the automotive industry established in Mexico is prepared to face the challenges we have been talking about?
The established automotive industry in Mexico—the national economy’s great engine for the last 25 years—faces a threat on two fronts. The first one comes from the transition to electromobility and the development of new digital features in cars. We—traditional companies—must be aware of the magnitude of this transformation and act accordingly. The second front, probably the most important one for the country, is related to the digital revolution and Industry 4.0. One of the great competitive advantages of Mexico in the last 25 years has been the cost of labor, a factor that has attracted a great deal of automotive production in our country. The upcoming digital transformation will erode this competitive advantage. It is becoming increasingly affordable to automate processes and reduce the participation of human labor in repetitive activities. Faced with this trend, more and more production processes will no longer be candidates to be located in countries like ours and the same will happen with China, India or Indonesia, and in general with all the countries that, in some way, export labor to the most developed countries. Hence the importance of strengthening our industrial fabric with companies that incorporate more added value and that provide solutions to complex problems.

Now, regarding whether or not we are ready. Although we are not fully prepared, my colleagues are aware of these threats and know what needs to be done. Fortunately, the Mexican auto industry is well organized. Its chambers and clusters allow us to share experiences, opportunities, and learnings. Although we are not fully prepared, we can say that we have the willingness to prepare, and also a well-organized and robust support group to undertake the great transformation imposed by the times to come.

 

Could you share with us other measures to help companies face these challenges?
The first thing is to acknowledge them, and the second is to rely on experts. We must acknowledge that we need help, that we need to support each other and to diversify beyond the automotive industry.

Last, something we haven’t talked about much—but is valuable—is adding windows to our work. Many times, we focus on what is ours; we are only involved in our company, our industry, our market, our clients. Taking into account how things are and how they will be, we need windows to see what’s happening in other places, companies, your clients, your suppliers, the people who are around, clusters; what’s being done around the world. Now, more than ever, it’s important to look outside and be interested in what’s happening around you, and build your own perspective on the direction and speed of change.