Tucked into this sleepy Midwestern town just outside Chicago, Molex Inc. is a true reflection of the global markets it serves. Flags from more than 20 nations hang in the center of the company's headquarters, where cubicles are filled with employees from Asia, Europe, and the Americas.
Besides its head-office location, however, there's nothing laid back about the component maker. Molex has a connector product for every imaginable electronic device, and a strategy that aims at narrowing its competitors' edge by plowing a whopping 20% of sales back into R&D and capital expenditures.
Its goal is to blanket the world with new products from plants in each regional market, selling them through electronic-components distributors and a growing team of salespeople in Europe and Asia.
With 51 manufacturing, sales, and engineering facilities, Molex is undoubtedly a global company.
"Our reach is great," said Fred Krehbiel, who steers the company with his brother, John. "We're active in every industry, [and] we serve a broad range of customers from many different industries and from many different countries."
The two co-chairmen will tell you that the global focus is just part of guiding principles set by their grandfather, Fred A. Krehbiel, when the company was founded in 1938, and carried on by their father, John Krehbiel Sr., who pushed it to nearly $1 billion in annual sales before his death in 1993.
Today, as Molex looks to lift sales over the $2 billion mark, maintaining a culture of respect and "leading by example" is at the heart of the Krehbiels' management style. Externally, the brothers said they apply a similar common-sense approach to their business.
"Our strategy is not to buy our way into growth but develop through product development, although we'll make acquisitions when they make sense," Fred Krehbiel said.
Acquisitions not a priority
Molex hasn't participated much in the electronics industry's consolidation frenzy. In fact, the company recently passed up a deal to acquire Sheldahl Inc., Northfield, Minn.
Molex, which owns 18% of Sheldahl's stock, got locked in a bidding war with an investment group when it offered $7.75 per share, or about $161 million, for Sheldahl in early February.
The investment group, led by Irwin Jacobs, stepped in with an $8.50 per-share offer for the company, claiming Molex's bid was too low. Jacobs and two other investors together have a 9.8% stake in Sheldahl.
Following the Jacobs bid, Molex was expected to raise its bid. Analysts at the time said Molex was attracted to Sheldahl's line of flexible-laminate connectors, which serve the automotive market.
"There was a higher offer made for the company," Fred said. "Upon contemplation and reckoning of our responsibilities, we felt that his offer was superior to the offer we had made and we wished him good luck."Now, it's up to him to get on with it," he said, adding that the integration of a previous acquisition, Cardell Corp., is working out well.
In June 1999, Molex bought Cardell for $129 million. The company, located near the heart of the automotive industry in Auburn Hills, Mich., not only broadened Molex's line of automotive-connector products, but also expanded its customer base with the addition of the top U.S. automakers.
"And we're already seeing signs of new business that Cardell or Molex wouldn't have gotten on their own," John said.
Still, the company concentrates on developing the business from within.
"New-product development is what's driving growth at Molex," said Joe King, president and chief operating officer.
Molex kicks back about 20% of its revenue into product development, including capital spending, one of the highest levels in the industry. About 5% of sales is earmarked for R&D, while approximately 15% goes toward capital expenditures. In its last reported quarter, Molex doled out $32.2 million for R&D and $89.1 million for capital expenditures.
"And you have to continue to stay close to the customer, listen to what they want, and continue to spend the money for research and development and capital tooling to turn those needs into saleable end products," Fred Krehbiel said.
"Our strategy is based on the majority of our sales growth coming from internally generated products. That's why the reinvestment is so important."
As a result of improved sales, the company adjusted its estimate for internal reinvestment in the current fiscal year to $360 million, up 8.4% from the previous year.
The bulk of that money is used to support the company's flagship R&D unit, the Advanced Development Division. That unit is Molex's key to maintaining its competitive edge.
Its importance is demonstrated by the fact that the late John Krehbiel Sr. worked in the unit, helping to envision solutions for Molex customers and plug holes in the company's product offering.
Jim McGrath, director of strategic product development, said the process used to involve a mechanical engineer discussing his or her idea with an electrical engineer before it was introduced to the marketing and business side of the shop.
Today, the approach is team-focused, with the mechanical and electrical engineers sitting together with the marketing and business managers, "which gets the product to market quicker," McGrath said.
At the same time, there are engineers and managers studying the market, "looking for holes," as Gus Panella, senior product engineer, explains it; holes that can be plugged with a new Molex product.
"You find and attack the holes," Panella said. "If you're looking at developing products that are on the market by the competition, well, you're too late."
The Krehbiels said the goal is to develop the business twice as much as the market grows, or at least 15%, whichever is greater, and to generate a 10% after-tax profit that is reinvested in the company.
Molex's growth strategy is to continue to evolve into a broad-based global connector supplier by offering not only connector products and assemblies but installation equipment as well.
Broad product lines driving sales higher
During its fiscal second quarter ended Dec. 31, Molex's sales increased 26%, to $543 million from $429.7 million in the comparable 1999 quarter. Net income rose 23.4%, to $54.1 million from $43.9 million in the year-ago period. Earnings per share climbed to 34 cents from 28 cents in the prior year.
In its 1999 fiscal year, which ended in June, sales reached $1.7 billion. Through last year's acquisitions, including Cardell and its $31.8 million deal to buy Axsys Technologies Inc.'s Beau Interconnect Division, a supplier of U.S. and Eurostyle terminal blocks, barrier blocks, and connectors, Molex should move to the No. 2 slot in the industry this year, analysts said. That should put it neck-and-neck with FCI Electronics, Etters, Pa., according to Ron Bishop of Bishop & Associates Inc., St. Charles, Ill., and behind Tyco Electronics Inc., the connector giant based in Harrisburg, Pa.
"We've been doing well," John Krehbiel said, adding that Molex is well positioned in the global markets it serves.
"Often you find that two regions do well and two suffer," Fred chimed in. "But today, they are all doing fairly well."
Indeed, about 70% of sales are from products manufactured and sold outside the United States in markets that include networking, premise wiring, telecom, datacom, automotive, industrial, and computer. As the Krehbiels see it, Molex's wide geographic reach into a variety of markets is the reason behind the company's profitability.
"We're not dependent on any one geographic region," John said. "We also have a very good distribution of our sales by end-customer industry."
That wasn't always the case. Although the company keeps intelligence about sales in specific markets close to the vest, the Krehbiels said 20 years ago, Molex was entrenched in consumer electronics, which made up about 80% of its sales.
Today, that market is down to about 19% of sales, with the remainder divided between the industrial, telecom, datacom, fiber-optic, and premise-wiring segments.
"We're in every industry except military, and that is a conscientious effort not to be a part of that," John added.
Hot markets: datacom and fiber Molex, however, is making a dedicated push into the fiber-optics sector, which is now the company's fastest-growing unit, with an expected increase in sales of 40% for the current fiscal year.
"Right now, we're a little capacity constrained," said Tony Dorin, director of marketing for the fiber-optics unit. "It's the Internet that's really driving it."
Molex is developing and launching fiber-optic products, including multiplexers and backplane interconnect products as well as multifiber and ribbon-cabling products.
"All with greater densities," Dorin said, adding that OEMs can expect Molex to release some new technologies over the next few weeks.
Another booming business for Molex is the datacom segment.
"We're blessed with a lot of opportunities," said Gary Humbert, product manager at Molex's datacom division, referring to the Internet's need for increased bandwidth.
Humbert said the push has been in the high-speed-connector segment. Molex's family of telecom and network solutions includes backplane, high-performance cable, fiber-optic connector and assembly, I/O, power, and mezzanine.
As the industry moves toward more outsourcing by OEMs, suppliers such as Molex have redefined roles in the market.
"We're finding that we have to sell not only to the OEM, but to the contract manufacturer as well," John Krehbiel said.
Fred Krehbiel said CEMs often want more than a connector. They will ask for a sub-assembly even though they are assemblers themselves.
"So we become a more valuable supplier to them," Fred said.
About 20% of Molex's sales in the United States and Europe go through distributors, which includes such companies as Arrow Electronics Inc. and Avnet Inc.
"We see it as a partnership," Fred said. "Our salespeople go in and work very closely with the distribution salespeople to serve the customer jointly."
Some would think that strong demand conditions in the telecom, datacom, and fiber-optic markets would place connector makers in a positive pricing position across all segments of the product line.
"But that's really not true," John Kreh-biel said. "We've seen strong price erosion this year."
John explained that the level of price erosion varies on the product type, but can be found more on the emerging, capacity-constrained lines. "We see price erosion in a number of markets and product lines even though there may be shortages in the capacity of some products," John said. "It is less than last year. Still, it's there."
Nothing to lose sleep over, it seems. But by no means is everything perfect at Molex, so what keeps the Krehbiels up at night?
"As your business is growing, I think you wonder if you have the right product mix," John said. "You wonder if you're active in the products that will be the most critical in the future and if we have enough managers to take on the growth."
"And can we get our cost down?" Fred added. "There's always a lot to worry about."
There's also the concern that as Molex continues to extend its global reach, some of the Midwestern sensibilities the company prides itself on will be lost.
But for now, Molex's top brass still work out of cubicles and they also park their cars like John Krehbiel Sr. did; not in a reserved space, but along with everyone else, first come, first served.
"That's just a small example-but a good example-of his mentality," Fred explained. "And that spirit carries on. So I think he would be very pleased with what he'd see today."