An edited transcript of the interview appears below:
Knowledge@Wharton: What are your thoughts about what is going on with the global economy?
Mangels: I do not think anybody really knows exactly what is going on, except that we seem to be caught in a terrible vicious circle all around the world. It just seems to be feeding on itself. Every market that goes down affects the next market that goes down, and it keeps following the different time zones.
I was just thinking about a comparison between what is going on these days versus what happened in 1929. Back then we did not have computers, we did not have fast communications like we have today, and the reaction to situations was not nearly as quick. It took years for any problem they had at that time to work itself through all the markets and the system. This time, as a result of the speed of communication, people have instantaneous knowledge of what is going on everywhere at all times. This has created a lightning speed of things happening that I do not think anybody has experienced before. This is a downturn that is being propagated and communicated instantly and everywhere; its effects are just not well known. It is scary because I do not think anybody knows where this is going to take us.
Knowledge@Wharton: How has the manufacturing sector in Brazil been affected so far, and what do you see coming down the road?
Mangels: Interestingly enough, in Brazil we have yet to see any financial institution fail, in spite of all the problems that we have been having. The common impression is that all the major financial institutions in Brazil seem to be healthy and seem to be weathering the storm pretty well. I would say that the main implications so far have been a very high volatility in the dollar versus the local currency, the real; and secondly, an incredible drop in the stock market. So many companies have lost so much value in the stock market, it is incredible.
Over the last several years we have had a steadily declining real versus dollar rate -- in other words, the local currency has been steadily becoming stronger and stronger against the dollar. With no sign of this letting up, many companies took some risks on dollar versus real financial instruments, betting that the local currency would continue to revaluate bit by bit. With the sudden devaluation of our local currency, some companies were caught by surprise and have had huge losses in the hundreds of millions of reais. Some companies have [even] had losses of billions of reais. That has made the market in Brazil jittery.
The companies that were affected, interestingly enough, were not banks. The companies affected were industrial companies that had been speculating on the currency -- actually, betting on the currency. Brazilian President Luiz Inácio Lula da Silva has been complaining that a lot of companies lost money because they were betting against the currency. But that is not true; they were betting in favor of the currency, but it went the other way. This has made stock market investors nervous because it is not clear how many companies have had significant losses with different hedging or financial instruments.
Knowledge@Wharton: It is true that companies have lost money because of speculation. On the other hand, when the value of the currency goes down, it might also help trigger exports. Would that be good for manufacturers in Brazil?
Mangels: Well, sure. The industrial sector of Brazil has been complaining for years that our currency has become overvalued, which has hurt exports out of Brazil. Brazil has had a high balance of trade surplus because the country is a large producer of commodities such as iron ore, soy beans, paper, pulp and other products. You might say we do not have too much choice because we produce much more than what the market locally can absorb. So Brazil is a net exporter of several commodities and probably will be for many years.
Knowledge@Wharton: Will the fall in stock prices of good companies create buying opportunities?
Mangels: Yes, I think so. Some companies are now beginning to seriously think of a stock buyback program. These companies were not seriously affected cash-wise by speculation and, at the same time, they are seeing their shares go down. Their shares are becoming extremely attractive and they are seriously thinking of buying them back.
In Brazil, there is a law that says that a publicly traded company is allowed to buy back 10% of its free float at any given time within one year. Once the Board of Directors approves the buyback program, you have one year to buy those 10% of the shares back if you want to. But you do not even have to do that, you can just buy some and not buy the rest.
Knowledge@Wharton: What are some of the other challenges that manufacturing companies in Brazil face? In other parts of the world, manufacturers are concerned about Chinese imports. Is that a factor for manufacturers here?
Mangels: Absolutely. Several sectors are suffering as a result of heavy imports out of China. One of them is the toy sector, which has a lot of imports. Another is auto parts -- that is a sector where we are involved and we do have some products that are being imported that compete directly against ours, such as aluminum wheels. However, at the same time depending on the industry, the customers want to have local manufacturing. They realize that if you import something from far away, especially when it is part of a manufacturing or assembly process, then to have the logistics of this part start someplace in China and make its way to a factory in Brazil is risky. So the preference of the car companies, just to take this sector as an example, is to have local manufacturers to give more confidence and credibility and to assure that logistically those products will be always readily available for the factory, for the customer.
Knowledge@Wharton: Since you spoke about your company, could you tell us about its history? I believe it was launched as an immigrant-founded business during the 1920s.
Mangels: Last October 1st we celebrated our 80th birthday.
Knowledge@Wharton: Congratulations.
Mangels: Thank you. The company was founded October 1st 1928 by my grandfather and his partner. My grandfather was Max Mangels, Jr. His partner was named Heinrich Kreutzberg, and the two of them began a manufacturing company. Interestingly enough, they wanted to manufacture something [but] they did not know what. They thought of many different products that were being imported at that time and decided on galvanized steel buckets. One of those buckets still stands in our front hallway.
So they began making galvanized buckets, then they went into parts for electric light posts, which are also galvanized. They kept using the galvanizing process. During the 1930s, an entrepreneur in Brazil began distributing liquefied petroleum (LP) gas, which is called propane in the U.S., for cooking. Soon enough, he needed gas cylinders to distribute his cooking gas, and so he asked my grandfather if he would mind making gas bottles. The extent of my grandfather's strategic planning and feasibility analysis was basically to answer, "Why not?" So that is how we started making LP gas cylinders, and we have been making them ever since. This year we have been making LP gas cylinders for 70 years and we continue to be in the market. We are the largest and one of the only ones remaining that are still making gas cylinders.
My father and my uncle, who were born here in Brazil, finished high school in Brazil and then they went both to college in the U.S. -- they both attended Lafayette College in Pennsylvania. Both of them became engineers and joined the company during the 1950s. They worked in the company from the 1950s until the late 1980s, which is when I assumed the Presidency of the company in 1989.
What my uncle and my father did during their watch was, first of all, in the late 1950s they entered the automobile market by making steel wheels for cars and some other auto parts. That was the first investment in the automotive business. During the 1960s they invested in a business which today is half of Mangels's business -- that is, cold rolled steel strip. In other words, we went into buying flat rolled steel from the steel mills and processing the steel in a way to add value to it. From flat rolled steel, [we made] these big coils of steel that are used for making strapping for packaging, steel strip for saw blades, for springs, and for a number of different uses in Brazil. Today, one of our biggest customers is Honda motorcycles in Brazil; they buy a lot of our steel. We also have a number of other auto parts suppliers who use our steel. Two of them make clutches and we make the spring steel for clutch springs. That is the business we went into in the 1960s.
Then, in the 1970s, we decided to stop supplying steel wheels to the auto companies because it would have meant an incredibly large investment [and] we decided to go into aftermarket steel wheels. During the 1980s we found out that the aftermarket was starting to prefer aluminum light alloy wheels instead of steel wheels. We imported a used aluminum wheel plant from Germany for $1 million in the late 1980s and started making aluminum wheels. We have since 1989 become the largest aluminum wheel maker in South America, and we have been supplying to all the car companies in this market. That has become about a third of our business.
As I said, the cold rolled steel business is roughly 50%; 15% of our business continues to be the gas cylinders; and 5% is the galvanizing business, which is the oldest business we have today. Now instead of making buckets, Mangels makes guardrails for highways. We galvanize our own guardrails, but mostly we galvanize steel parts for third parties. Our net revenues this year will be somewhere in the neighborhood of 750 millions reais, which depending on the dollar rate, which seems to be fluctuating quite a bit, will be somewhere around $350 million to $400 million.
Knowledge@Wharton: Succession is usually a major challenge for family-owned businesses. The number of companies that makes it successfully to the third generation is relatively small. In the case of your company and your family, what attributes allowed that to happen?
Mangels: One of the attributes is that we have had able business people available in each generation so far to run the business. It is also important that I say what my definition of a family business is: For me [that] is not only a business that is owned by a particular family, but also a business that is run by the family and not just [having family members sit] on the board. A lot of people consider just sitting on the board as being a family business, but I do not believe that. It may be called a family investment, but not a family business. Family investors are different than family businesses. The reason is that when you are on the board and you look at the company as an investment, you slowly start thinking more and more like an investor and less and less like a family owning a business. An investor has a different mindset than a family business, or a business family, you might call it.
A business family values not only the return on investment but the legacy that has been left for the current generation. It also values what type of legacy the current generation is going to leave for the next generation. To me, that has a lot to do with being a family business; that is the mindset of a family business. It always happens that members of any generation may choose to sell some of their shares. The business family must create an internal market for shares so that different members who really do not identify with or are not interested in the business could sell their shares and do something else with the money. And [then] those that continue to believe in the legacy of the family business can keep building the future of the business, until hopefully the next generation takes over the responsibility.
If the family is an investor, the mindset of an investor is to not put your eggs all in one basket. Bit by bit, the family will over time sell the business for that reason or at least sell a majority part of that business.
Knowledge@Wharton: That is a fascinating distinction between family investors and family businesses. What are you doing to prepare the next generation of the family business? What advice would you give them?
Mangels: Over the last three years my siblings and I plus our spouses have been meeting on a regular basis. The reason, first of all, is to define our role as shareholders of the business. Secondly, we want to define the role of the entire family, as the extended family of this business family. We also need [to define] what our role is as far as far as succession goes, not only of the shares, but also of the management and what legacy we want to leave for the next generation.
We have written a family member employment policy that defines the criteria and rules for a family member to be able to work for the family business. It is not a given that anybody who wants to can just join the family business -- we have criteria for that. We have also written the mission of our family. We also want to determine a what the values and the mission of the company should be in the future.
So far, the mission of the company has been written by the management of the company, not by the owners. Bit by bit we would like -- shall we say, the Mangels business family -- to have its imprint on the company. Happily, I can say that my family believes in very good corporate governance, a very transparent type of management, in following the letter of the law, and in treating employees fairly and with respect. We believe in a sustainable type of company that is not going to hurt the environment or hurt people in order to make money and be successful. There are a lot of values that we have and things that we believe in which I feel that we are going to be able to, in an organized fashion, pass on to the next generation.
Knowledge@Wharton: During your tenure in the leadership of the company, what is the biggest leadership challenge you faced? How did you overcome it, and what did you learn from it?
Mangels: Oh boy. Probably the toughest period we faced was right after I became president in 1989. Brazil had hyperinflation. But, at the same time when you are fighting inflation in a serious manner, you can easily create a recession, which did happen -- more than once. You create a situation where companies start having difficulties because they do not have the cost structure that they need to have.
What happened in the 1990s was a combination of inflation fighting efforts together with opening up the Brazilian market to more international trade. Aside from the inflation fighting efforts, the biggest change was that the average import duties fell from 60% in 1989 to about 10% or 12% in 1992 or 1993. In a matter of just two or three years, we had incredibly lower import duties and with that a flood of imports. It meant we had to drop our prices by at least 30% to stay competitive, and we simply did not have the cost structure to do so.
To give you an example, perhaps the most dramatic change was to have to drop the number of employees from 4,000 -- which Mangels had at that time -- to about 1,500. We had to reduce the number of officers, managers, supervisors -- I mean, it was done from top to bottom.
We had to eliminate businesses that were costing us money and not making returns. We had to make an incredible number of changes in order for the company to survive. That was extremely difficult. It took a lot of determination and courage at the time to keep up this policy of reducing people, because as you imagine, the working climate inside the company was horrible. Everybody was afraid to lose their jobs. But on the other hand, this was happening in most companies around Brazil. Everybody was downsizing, which of course affected the level of the economy.
The 1990s were an incredible adjustment period for companies to lower their costs, increase productivity, and increase their quality -- and do all this while surviving cash-wise. That was the biggest challenge I faced.
Maybe it was just as big [a challenge] as it was towards the year 2000 when we suffered major exchange rate devaluation. In Brazil, interest rates have always been very high in relation to the inflation. We would easily have 15% to 20% real interest rates after inflation. So, if you wanted to live off loans, you would go broke very quickly. The only way we could survive with loans -- which Mangels did have at that time because we were not totally capitalized -- [was] by having dollar loans. So then what happens? We had a major devaluation, and those dollar loans basically threw our equity down to almost zero. That was a moment that was extremely scary as well, but since it happened to everybody in Brazil, the banks were rather lenient. They realized that this was an accounting loss. At the same time, we had a tremendous opportunity to start exporting more and also to raise our prices locally because the imports were going to be more costly. So we could go back and start selling more products locally because there was a natural foreign exchange rate barrier to imports.
Knowledge@Wharton: What did you learn from overcoming these challenges?
Mangels: One thing I learned is that you need to have a good group of dedicated and committed people working with you, who believe in you and are willing to make the tough changes that have to be made. Not everybody in the company was willing to make those changes. They were very committed to their employees; they did not want to face those employees and say, "I am sorry, you have to leave because otherwise the company will not survive." They were just not willing to do that, so we had to let them go as well. These are situations where you really have to be tough-minded and ask, "What are the priorities?" Is it better to survive with half the people or not survive at all and have 100% of the people lose their jobs? That is the choice you have to make. In the end, you have to sit down with the people and say, "I am sorry but for the company to survive somebody will have to leave because we just do not have the cost structure to support it."
Generally, people were understanding. Obviously, they were upset and sad because they had to leave their jobs. It was not easy at the time to get new jobs because a lot of companies were going through layoffs. And you do feel sorry for the people. Obviously, it is very stressful to know that so many people and families are going to be without their breadwinner, and they will not be making any money, and they are going to suffer. But we tried to give everybody a generous package when they left, even the factory workers.
We learned from this experience that you must always think about the benefit of the company. You have to believe that your decisions have to always be best for the company in spite of the interests of the individuals who are in the company. That is valid for the factory worker, and it is also valid for the CEO. Even the CEO runs the risk of having to leave the company if the CEO is not adequate, perhaps by not having taken the best interests of the company into account. Everybody has to play by those rules. This has to be done at all times. Some companies did not act quickly enough to make those decisions in order to survive.
Knowledge@Wharton: What is your dream for the future of Mangels Industrial?
Mangels: My dream is for Mangels to become a multinational company, that we have plants all over the world. We are already reflecting on this in specific ways. For example, our biggest competitors in the wheel business are the multinational wheel competitors. Our wheel business today manufactures 2.5 million wheels a year. We have the largest production in South America. But we are a regional company, and the big multinational companies in the wheel business make anywhere from 15 million to 20 million wheels a year and have plants all over the world. That is the way we are headed. We need to maximize the opportunities and potential of each of our businesses in that manner. As far as I am concerned, the sky is the limit.
Thanks to Knowledge@Wharton
http://knowledge.wharton.upenn.edu/printer_friendly.cfm?articleid=2135
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