Eurovem h4mwgemenf Joumt Vol. 11, No. 3, pp. 347452, 1993. 02634373193 $6.00 + 0.00.

Printed in Great Britain. Pergamon Press Ltd.

Restruc~~g in the Domestic Appliances Industrv: Implicatibns Corporation Operations

for and

MaY~g its European

MICHAEL MCDERMOTT, Assistant Director, Sfrufhdyde lnfemafiond Business Unit, ~~~ve~i~ of Sfr~f~cly~e

In May 1993, Maytag Corporation, the parent company of Hoover, the UK and US market leader in vacuum cleaners, confirmed its decision to close the Hoover plant in Dijon, France, and transfer production to Cambuslang, Scotland.

I’his latest initiative is part of a review by Maytag of its Hoover Europe company, which includes the emergence of a new corporate strategy involving complementary strategic alliances. The first partner is Germany’s BSH.

Michael McDermott examines Maytag’s corporate strategy as well as industq-wide trends since 1980. He suggests that Maytag faces difficulties in competing with industry leaders and is unsure of its future European strategy. Also, the future for Cambuslang appears fragile.

Introduction The focus of this paper is on Maytag Corporation, America’s fourth largest producer of domestic appliances and since 1989 the parent company of Hoover, the market leader in the US and the UK for vacuum cleaners. Maytag Corporation consists of twelve companies (see Table l), with home appliances including Hoover, still accounting for around 95 per cent ot sales. It has around 21,400 employees worldwide, and had 20 manufacturing operations in six countries, though the closure of Dijon will reduce employment to less than 20,000 with manufacturing operations in five countries,

This article examines Maytag’s acquisition strategy since 1980 and its attempts to emerge as a major international player in the large domestic appliance industry. This review is prompted by the company‘s announcement in May 1993 that it has completed its three-week review of one of its twelve companies, namely Hoover Europe which has been a loss-making business since it, and the rest of Hoover, was acquired by Maytag in 1989 through the $lbn acquisition of Chicago Pacific Corporation, which itself had acquired Hoover for $53Om in 1985. The review was initiated by Mr Gerald Kamman, who had

Table 1 Maytag Corporation and Its Family of Companies

Appliance Group Other

Admiral Maytag Financial Services Jenn-Air Magic Chef Maycor Appliance Parts

and Service Corporation Maytag Corporation Jackson Appliance

Company

Hoover Group

Maytag International

Hoover Australia Hoover North America Hoover Europe

Dixie-Narco Inc

Dixie-Narco Group (vending machines)

Source: Company Annual Reports

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just become President of Hoover Europe and UK Managing Director, following the sacking of his predecessor and two other senior executives.

This latest review of Hoover’s floor care manufacturing operations in Europe, confirmed the decision of a previous review (the results of which were revealed in January 1993), namely to close the Hoover plant at Dijon in France, and transfer production of cylinder vacuum cleaners to its plant at Cambuslang, Scotland, which manufactures upright vacuum cleaners.

Maytag’s competitive strengths were thus its ability to produce high quality, branded products with superior technology. It was also at this time financially strong. Its major weakness though was total reliance on a narrow product range in the saturated US market. It thus faced a number of strategic options:

(I) related product diversification (i.e. into other large domestic appliances); or

This paper provides a critical review of Maytag’s corporate strategy and examines industry-wide trends, suggesting that Maytag on its own lacks the resources necessary to compete head-on with industry leaders, the most aggressive of which are now pursuing a global high share strategy. On the other hand, the company’s strength in its domestic market is based upon its com- petitive advantage in the premium niche, and Maytag may seek to apply its focused generic strategy in international markets.

(2) unrelated product diversification (e.g. computers);

(3) ireographical diversification (e.g. Europe); or

(4) continued focus on its existing market (i.e. domestic laundry equipment).

Maytag selected (1) related product diversification, and in 1981 undertook its first significant acquisition, buying Hardwick Stove Company, which extended the product-line from laundry to cooking appliances. The next significant deal was the purchase of Jenn-Air Corporation, the leading US manufacturer of indoor electric grill ranges. This gave Maytag a complete range of gas and electric cooking appliances.

Maytag therefore needs to consider a number of possible solutions:

(I) the company merges with, or is acquired by, another white goods producer in a complementary deal. This suggests the other party will be from either Asia or Europe, with perhaps the latter being the most likely;

(2) the formation of a comprehensive strategic alliance to achieve complementari~. It has already made progress on this front, as will be seen later;

(3) a fundamental change in strategy, abandoning international ambitions and divesting accordingly, and adopting a focused niche strategy in the US market.

In 1986 it acquired Magic Chef, which itself had recently purchased other US producers (i.e. Norge, Admiral), and gained a foothold in the refrigerator and freezer sector. In terms of its line of business, the decision to buy Magic Chef was consistent with Maytag’s acquisi- tion strategy. On the other hand, the competitive positioning of Magic Chef products was in the mid-price range, rather than in the premium segment occupied by Maytag. Thus, Maytag’s policy was that this should be a preservation acquisition, with the Magic Chef brand name continuing, rather than an absorption acquisition, in which the Magic Chef brand was replaced with Maytag’s (Haspeslagh and Jemison, 1991).

As of June 1993, Maytag seems to be pursuing solution

(21.

Maytag, Domestic Growth through Acquisitions: The 1980s Until 1980, Maytag produced only washing machines but under the then Chairman and Chief Executive Officer, Mr Daniel J. Krumm, it decided to pursue an acquisition policy of related diversification in order to obtain a full line product range of large domestic appliances. This strategy was necessary in order to:

This decision proved popular with Maytag’s dealers who already had the broader product range from previous deals, but who now were also able to target another market segment, albeit without a complete range of mid-priced goods. The Magic Chef acquisition had also been funded through a share issue, which enhanced the financial strength of Maytag, and enabled further investment in capital equipment to increase productivity, product development and marketing.

l improve the competitiveness of Maytag; and, . reduce its vulnerability to a takeover threat from

another producer implementing a similar strategy.

In terms of competitive positioning, Maytag’s products commanded a premium price in the US market. The company had a strategy of focused differentiation. Its products enjoyed a longer life-span (i.e. in excess of 15 years) than those of its major US rivals, and it had larger profit margins.

At this time the US market was buoyant and in 1987 Maytag’s revenues were up, and net profits were up 19 per cent to $262m. The acquisition policy was proving a success. At the same time peripheral businesses were divested (i.e. the small appliance business, Toastmaster, in 1987; and in 1988 the Magic Chef air-conditioning arm and Jenn Industries ventilation business). These disposals generated further income. Internally Maytag was strong, but the extemaf environment in the US and abroad was changing dramatically.

In the US, where the market was entering a recession, Maytag continued to lag behind Whirlpool, General Electric and Electrolux. Table 2 provides US market

348 EUROPEAN MANAGERS JOURNAL Vol 11 No 3 September 1993

RES~U~~NG IN THE DOMESTIC APPLIANCES INRUS~Y

Table 2 US Market Share by Company for Large Domestic Appllsnow In 1991 and 1992 -

amine Laundry Equipmenf Cooking Ranges 5~s~was~ers Refrigerators 7991 199.2 1991 1992 1997 1992 1997 7992

-

Whirlpool 52.1 52.1 17.5 17.3 30.0 31.0 23.0 25.0 General Electric 16.4 16.4 25.0 25.3 40.0 40.0 34.0 35.0 Electrolux 10.9 11.2 16.7 19.2 20.0 20.0 20.0 17.0 Maytag 16.4 16.4 21.6 21.2 9.0 6.0 12.0 13.0 Raytheon 4.0 3.7 13.0 13.4 - - 7.0 6.0 Other 0.2 0.2 3.9 3.5 1 .o 1.0 4.0 2.0 -

Total loo.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 -

Afl Appliances fQQ1 1992

34.2 34.6 26.0 26.4 16.2 15.6 15.3 15.4

6.2 6.4 2.1 1.5

100.0 100.0

Source: Appliance Manufacturer

Table 3 Market Share by Brand of US Vacuum Cleaner Market In 1991 and 1992

Company 1991 1992

Hoover 37.0 34.0 Electrolux 20.0 22.0 Royal 7.0 13.0 Regina 7.0 9.0 Whirlpool 8.0 9.0 Ryobi 7.0 5.0 Other 14.0 8.0

Total 100.0 100.0

Source: Appliance Manufacturer

share data for large domestic appliances by product and Table 3 offers the same for vacuum cleaners. While Wh~lpool is the overall market leader, it is the number one for only one product category (i.e. laundry equip- ment), while General Electric the overall number two, is the market leader for three product categories (i.e. cooking ranges, dishwashers, and refrigeration). These rivals were also strong in other geographical markets, which provided them with a counter cyclical cushion, should the US market decline and others grow, or vice versa. Maytag by contrast was fully exposed to any downturn in the US market. This led to a fundamental shift in its strategic goals. The company thus entered the 1990s with quite different strategic priorities from those pursued in the 1980s.

Maytag and Internationalisation through Acquisition: First Strategy for the 1990s Geographical diversification was seen as essential, and fortunately in the late 1980s two acquisition opportunities arose. These were Philips’ large domestic appliance business, and the US company, Chicago Pacific Corporation (CPC) which owned Hoover, the market leader for floor care products in the US and the UK. Hoover’s US arm produced floor care products only, but in Europe it was also in the laundry equipment market.

In contrast to Sweden’s Electrolux, Philips, the Dutch

multinational, had failed to achieve a strong position in white goods outside Europe. It was therefore not going to be one of the few successful global giants and thus decided to sell its large domestic appliance business. Philips was number two in Europe‘s white goods market, and its decision presented other manufacturers with a one-off opportunity to gain a strong position in the EC. EC competition policy precluded Electrolux from acquiring Philips.

This chance was seized upon by Whirlpool. In 1988 it took a 53 per cent stake in Philips’ main appliance division, before acquiring outright control. Whirlpool, already the market leader in the US, now had sales in Europe alone of around $Zbn, about the same level as Maytag in the US.

Maytag saw a number of benefits in acquiring CPC. Domestically, it provided an opportunity to become the US market leader for vacuum cleaners, but the key consideration appears to have been the desire to inter- nationalise and to gain a strong position in the European market. This acquisition appears ill-conceived in several ways. Firstly, while Hoover was the US and UK market leader in floor care products, and number two in the UK laundry equipment market, it was very weak on the Continent, and its total European market share for large domestic appliances was an estimated 1-2 per cent. In the intensely competitive climate in Europe, it is virtually impossible for Maytag, through Hoover, to improve upon its market position.

The purchase of CRC in order to gain Hoover represents therefore an unsuccessful attempt by Maytag, not even a national champion to become a leading international player. Given this failure, it is doubtful whether Maytag can survive in the European market much longer without at least a wide-ranging strategic alliance.

Before examining in more detail Maytag‘s financial per- formance, it is necessary to appreciate current trends in the white goods industry, As is shown below, the leading players in the US and Europe have developed global expansion plans and are implementing these in an effort to be strong in each of the Triad regions. America‘s Whirlpool and Electrolux have already estab- lished a strong presence in the two Western markets, leaving Asia the missing piece in their global strategy. As their focus switches to Asia, the leading Asian

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producers are likely to exchange the threat and target Western markets.

In this respect, Japanese and South Korean white goods manufacturers face the same dilemma which many Western multinationals in other industries have long experienced. For example, one of the most frequently cited cases of this exchange of threat strategy involves Michelin. With a heavy dependence upon the European tyre market, and under attack from Goodyear, the French multinational defended itself not on its home turf, but by investing in new greenfield investments in the US, forcing the US rival to divert resources away from Europe in order to protect its domestic market share.

Large Domestic Appliances: an Emerging Global Industry? The world’s large domestic appliances industry has been transformed over the past decade, initially by domestic or intra-regional acquisitions, but more recently inter- regional acquisitions. The latter has resulted in Whirlpool, the leading US producer gaining a strong position in Europe, and Electrolux, the leading European producer achieving the same in the US. In 1986 Electrolux’s President had warned that:

“There are three principal markets for consumer durables in the world - Western Europe, the USA and Japan. In order to ensure long run survival, it is necessary . . . for a company to be well established in more than one of these regions” (Scharp, 1986).

The strategies of leading US and European domestic appliance producers in recent years have been consistent with this view.

“The US domestic appliance industry has undergone a major transformation resulting in the top five players accounting for 98 per cent of the market. Yet the industry leader, Whirlpool was ‘virtually unknown outside its home country“’ (Financial Times, 22 August, 1988).

The European industry has witnessed a similar fate, with Electrolux of Sweden leading the way in acquiring national champions throughout the EC to emerge as the clear market leader, with a 25 per cent share, and the first pan-European company, with a full range of large domestic appliances (i.e. white and brown goods) and a strong position in each EC market. Yet while the company today employs two pan-European brand names (i.e. Electrolux and Zanussi), it has 18 others for

be larger than either the US or European market (Financial Times, 19 February, 1993). This market is dominated by Japanese and South Korean producers, and thus they have a very solid base should they choose to mount an onslaught upon the US and/or European markets.

Maytag’s Second Strategic Solution

white goods products, and many of these are essentially for the 1990s: a Complementary

single country brands. Electrolux is thus utilising, on Strategic Alliance? the one hand, a regionally integrated strategy, and, on From the above analysis it can be seen that Maytag’s the other hand, a country centred strategy. Electrolux’s costly acquisition of CPC seems inappropriate from a strategy was indicative of the policy of other leading strategic perspective. This is reinforced by a review of players, namely to ensure that they had a complete the company’s financial performance (see Table 4). product line of all large kitchen appliances, and that they Moreover, Maytag still relies on North America for 79 held strong market positions in more than one region per cent of its total sales (see Table 5), and the company of the Triad. has in recent years invested heavily in two new produc-

350 EUROPEAN MANAGEMENT JOURNAL v01 11 No 3 September 1993

Despite concluding some 200 acquisitions during the 198Os, with most of these involving European targets, Electrolux continues to consolidate its presence in Europe, in terms of increasing its geographic coverage and widening its product line. In order to achieve the former, it acquired in 1991 a leading Hungarian producer, Lehel, and to gain the latter, in 1992 it entered into a strategic alliance with Germany’s AEG, Europe’s sixth largest white goods producer, which is 80 per cent owned by Daimler-Benz. Electrolux has taken a 10 per cent stake in this premium producer, and has an option to raise that stake to 20 per cent. At the same time it has embarked upon a cost-cutting programme, which has already involved 10 plant closures and will result in a 15 per cent reduction in the number employed worldwide.

While Electrolux is Europe’s number one, on a national basis the Scandinavian countries are the only markets where it enjoys this position. Bosch-Siemens Hausgeraete (BSH), Europe’s number two, is the market leader in Germany, while Whirlpool, the number three is not yet the market leader in any country.

Further industry concentration has also taken place on a transatlantic basis:

. Whirlpool, America’s number one, eventually acquired full ownership of Philips’ large domestic appliance business, having paid !§470m for a 53 per cent stake in the division in 1988;

. General Electric, the number two US producer, has established a tie up with GEC, the UK market leader; and

. White Consolidated Industries, America’s number three, was acquired for $736m in 1986 by Electrolux, Europe’s market leader.

In Asia, Whirlpool has a mere 1 per cent of the Asian white goods market, but that is more than any other Western producer. As in Europe, Whirlpool is likely to rely on joint venture agreements with local partners to build up its market share. Asia is the world’s fastest growing market and it is estimated that by 1995 it will

RESTRUCTURING IN THE DOMESTIC APPLIANCES INDUSTRY

Table 4 Selected Financial Data on Maytag (SOOOS) --

Year Sales Net Income EPS Long term debt -.

1987 1,822,106 147,678 1.84 1988 1,885,641 135,522 1.77 518,165 1989 3,088,753 131,472 1.27 876,836 1990 3,056,833 98,905 0.94 857,941 1991 2,970,626 79,017 0.75 809,480 1992 3,041,223 (315,354) (2.97) 789,232

Source: Corporate Annual Reports

tion facilities. Its recently complemented dishwasher facility at Jackson, Tennessee, enables Maytag to produce its own equipment rather than simply buy from other manufacturers for sale under Maytag brand names. It has also closed its old, labour intensive and under-capitalised vending machine plant at West Virginia, and moved to a new $34m facility at Williston, South Carolina. Thus, in terms of North America, Maytag appears very strong in terms of its production operations and product positioning.

In contrast, Maytag relies on Europe for just 17 per cent of total sales but it accounts for all of the company’s operating losses. In late summer 1992, however, Maytag took a significant step towards overcoming its weakness in Europe. In the September it formed a strategic alliance to consider joint product development and marketing agreements with Germany’s BSH, which itself is a joint venture between Robert Bosch and Siemens. In 1991 BSH had sales of $5bn, most of which are in Europe. In particular the companies have agreed to explore opportunities in the US, Europe, and elsewhere, including agreements to market each other’s products (American Metal Market, 21 September, 1992).

Like Maytag, BSH’s products are positioned in the top- end of the market. Unlike the US multinational, it holds 12 per cent of the European market for large domestic appliances. However, it has a weak US presence.

Table 5 Maytag’s Geographical Profits ($OOOs)

Maytag has thus found the ideal strategic fit, but of course a successful strategic alliance also requires an organisational (i.e. cultural) fit. While a merger between these two has apparently not been considered, such a marriage would be entirely complementary in that Maytag is strong where BSH is weak and vice versa. Given the financial position of the two firms, the German company is likely to be the dominant partner, if not outright acquirer. As negotiations between the two companies continue, then perhaps this prospect becomes more likely.

The BSH deal though does not resolve Maytag’s problems with Hoover Europe, and Maytag itself appears uncertain of its future strategy for this business.

Hoover Europe: What Future? In the USA, Hoover is losing market share, down from 37 per cent in 1991 to 34 per cent in 1992, but it is profitable unlike Hoover Europe. Hoover Europe consisted, until recently, of four manufacturing plants. Two are based in the UK. Merthyr Tydfil manufactures washers, dryers and dishwashers, and has 1,150 employees. Cambuslang, with 975 employees, produces mainly vacuum cleaners, but also disposable vacuum cleaner bags, and motors for washers and dryers. A small operation in Lisbon, with only 67 employees, also produces vacuum cleaners. Dijon also produced vacuum cleaners and floor polishers and had a 700 strong workforce.

The French publication, Usine Nouvelle, reported that Hoover’s losses in the UK were three times those of Hoover France, and that Dijon had reduced production costs by 8 per cent even though it was operating at less than full capacity (Usine Nouvelle, 3 September, 1992). In January 1993, Maytag’s Chief Executive, Mr Leonard Hadley, explained that restructuring was necessary in order to stem further losses:

“Consolidafing OUT vacuum cleaner production in Europe is necessary in order to improve manufacturing efficiencies and

Distrlbutlon of Sales and Pre-Tax

Area 1992 7997 1990 1989

North America 2,407,591 Europe 501,857 Other 131,775

North America Europe Other Corporate (including

interest expense) Total

145,991 (67,061)

(51) (71,333)

7,546

Source: Corporate Annual Reports

Sales ($) 2,332,365 2,403,779 2,545,230

495,417 496,672 396,859 142,744 156,382 146,664

Pre-Tax Profits ($) 190,820 246,182 299,777

(885) (22,863) (8,612) 1,561 8,548 9,607

(68,099) (72,462) (93,800)

123,417 159,405 206,972

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profitability. When completed the restructuring will eliminate duplicate overheads, reduce labour costs in Europe, provide economies ofscale and result in much better plant utilisation”

Hoover’s European business relies heavily upon the UK both as a market and as its major production centre. Hoover Europe has for the fourth consecutive year reported losses - $67m in 1992. First quarter results for 1993 saw a further loss of !$4.lm on lower sales of f103m, against figures for 1992 of $1.7m on $124.lm.

However, the most recent review of Hoover Europe, conducted perhaps significantly by executives from the vending machine business, has confirmed that Cambuslang will stay open and that Dijon will close. Cambuslang though still has only one product line (i.e. vacuum cleaners) and these are sold almost entirely in the UK and the Irish Republic, the two markets which recently offered the controversial free flights promotion. While the promotion campaign has proven an expensive mistake, it certainly succeeded in boosting Hoover’s sales, especially of the cheapest product which met the company’s qualifications for free flights, namely vacuum cleaners. Undoubtedly, many consumers purchased vacuum cleaners during the promotion period which they would have otherwise postponed.

The UK may, as recent GDP growth figures suggest, be coming out of the recession but this is little comfort for Cambuslang, given that the long-term effect of the promotion has been to weaken future sales prospects in its main markets. With its current product range, and even with the promise of further investment of E5m, it is difficult to see Cambuslang remaining open for much longer unless:

. Maytag itself decides to extend the plant’s product range and/or subcontracting work is secured from other producers; or,

. the alliance with BSH results in a new role for Cambuslang; or,

. there is a change in ownership of Maytag Corpora- tion, or at least its Hoover Europe operations.

In January 1993, Hoover’s Vice-President of Manufactur- ing declared that the decision to transfer production to Scotland had guaranteed the future of the Scottish plant for ‘10 years and beyond’ and that the Scottish facility has ‘core status’. Despite Scotland’s previous exper- iences, notably with Caterpillar, these assurances appeared to be accepted without question.

The reality is however that inward investment is mobile. It is attracted by market forces when the investing company is healthy, and it is withdrawn when either market prospects are bleak, and/or the group’s per- formance deteriorates and strategy changes. Currently, the prospects for Cambuslang do not appear particularly good, but this plant was threatened with closure before, in 1981, and survived at the expense of Perivale,

London. It has now been retained at the expense of Dijon. It may not prove so fortunate in any other future review of operations.

Maytag’s core business is large domestic appliances and the company appears determined to improve its stand- ing in its domestic market and in Europe, hence the deal with BSH. This complementary deal may relieve Maytag from the need to export large appliances from the US, or to have a larger manufacturing presence in Europe. However, as long as Cambuslang produces vacuum cleaners only - a product line in which margins are very tight for all producers - then its strategic importance to Maytag is relatively low. Such plants, whether domestic or foreign, face an uncertain future.

References American Metal Market, 21 September, 1992. Financial Times, 22 August 1988. Financial Times, 19 February, 1993. Haspeslagh, P.C. and Jemison, D.B. (1991), Managing

Acquisitions: Creating Value Through Corporate Renewal, The Free Press, New York.

Scharp, A. (1986), Electrolux Annual General Meeting 1986 - Address by Anders Scharp.

Usine Nouvelle, 3 September, 1992.

MICHAEL MCDERMOTT, Strathclyde International Business Unit, University of Strathclyde, Stenhouse Building, Glasgow G4 ORQ.

Dr McDermott is Assistant Director of Strathclyde Business Unit and author of seven books, including

Multinationals: Foreign Divestment and Disclosure (McGraw-Hill), 1989 which examined foreign-owned plant closures in the UK during the period 1978-86.

He is also author of two Economist intelligence Unit Reports examining the internationalisation of South Korean and Taiwanese industry. He regularly provides seminars in Hong Kong, Malaysia, Singapore and Taiwan.

He has undertaken consultancy projects for multinationals (e.g. IBM) and international institutions (e.g. the United Nations’ Centre for Transnational Corporations). National bodies in Portugal (e.g. ICEP) and Taiwan (e.g. the China Productivity Centre) have also commissioned him to provide advice and seminars on the international- isation of their small and medium sized enterprises.

352 EUROPEAN MANAGEMENT JOURNAL Vol 11 No 3 September 1993