Offshore opportunities

RHM Fluid Power, Inc. is following Big 3-related accounts overseas, serving foreign companies that sell machinery to automobile manufacturers

By -- Industrial Distribution, 12/1/2000

While working through cultural differences with its European and Asian customers, RHM Fluid Power, Inc. has undergone its own cultural transformation. This mid-sized fluid power distributorship embraced international sales six years ago and has changed from a company selling parts and systems to Michigan-based OEMs into a global firm.

The company was originally brought into the international sales arena by the requirements of their Big 3 customers, particularly General Motors. President Bill Tulloch, and vice presidents Jeff Verona and Emil Muccino are now comfortable in their roles as international businessmen. However, the trio realize that similar distribution companies may be anxious about the intricacies and costs of maintaining an overseas customer base.

"Many companies of our size are chasing this market locally," Tulloch says. "They're a little bit intimidated by it because if you send a machine overseas and the pump starts making weird sounds, what do you do? You put someone on a plane and head them over there. That's the price of doing business and I think it scares a lot of people."

About 20 percent of RHM's component and systems sales are to international customers and 80 percent to domestic customers. With each new overseas contract, the company has strengthened the financial savvy, social skills and internal flexibility necessary to serve this increasingly important component of its business.

Illustrative of the changes is that Tulloch, Verona and Muccino converse easily about the intricacies of the company's small foreign sales corporation in Barbados. The three principal shareholders of the employee-owned Westland, Mich.-based company are well-versed on the European Union's position on the U.S. tax laws governing such corporations and pending Congressional actions on these laws.

Change and growth

RHM's expanded sales territory horizons have also enhanced its revenue stream. Founded in 1958 as a hydraulics distributor by eight men who invested $10,000 each, RHM's revenues in 1993 were $13.7 million and $31.5 million in 1999.

During the same six-year time span, the employee headcount began at 50 and increased to 85, including additional engineers and AutoCAD professionals. Despite the changing market mix, RHM stands by its long-standing philosophy of committing to seven or eight key suppliers.

The company's products and systems include hydraulics, coolant, lubrication, compressed air and pneumatics equipment. Its six branches include a fluid power assembly and test facility at the Detroit-area headquarters and at the Grand Rapids branch, a comprehensive air compressor engineering and service center. About half of the revenue stream comes from traditional distribution and half from value-added systems building jobs.

"We've been in the systems business since day one, but it's starting to really snowball and grow," Tulloch says.

New skill sets and flexibility go hand-in-hand with developing a new customer base. Tulloch says he's learning conversational German to navigate social situations in that country. Verona adds that RHM is expert in rust-proofing and crating its systems for air or ocean transport.

Flexibility includes availability during off hours. The three principals and other sales staff sometimes make or receive telephone calls in the wee hours of the morning. Verona says faxes and e-mails can cover a lot of the issues created by time-zone discrepancies, but distributors doing business overseas must be willing to get up early or stay up late when an issue needs to be hammered out.

Willingness to travel on short notice is also imperative, Verona adds. "If you have a problem overseas, you're going to have to be willing to put someone on a plane to solve it. When they want to talk to you, they usually give you about a week's notice."

As the company continues to strengthen the international component of the business, the principals are considering institutionalizing its success. Ideas on the table include creating an international sales specialist position, exhibiting at Germany's Hanover Fair and marketing in Europe and Asia.

Entering the fray

RHM started making direct international sales in 1994, but has been meeting the requirements of foreign customers for decades. The products it makes for Michigan-based OEMs are often sold offshore. Tulloch cites the specs for a system designed for use at an aluminum plant on the Nile River in Egypt. Specifications called for a snake-proof tank and rat-proof hoses, which left RHM to translate this into technical terms.

"We had positioned ourselves domestically as one of the top builders of fluid power systems in North America," Tulloch says. "I think it gave the Big 3 confidence [in us]."

Standardization is increasingly common in today's global environment, Tulloch and Verona say. In fact, some of RHM's European trips are for meeting Big 3 specification personnel. However, because there is no single international body creating standards, companies like RHM must adapt to the circumstances of each order. Tulloch and Verona say the systems side of RHM is set up to do that efficiently.

"We don't sell hardware, we sell a solution," Tulloch says. "We go in and design, engineer, do drawings and suggest redesigns. We find a way to take a company's machine and make it simpler, faster, more efficient, less costly and more reliable."

RHM's involvement with international machinery makers began because of the Big 3's shift to foreign-made machines for their U.S. plants. The auto companies want U.S. controls on the equipment, including electrical, fluid power and lubrication, because of the local availability of replacement parts and service. And that's where U.S. distribution companies enter the picture.

"Companies like ours have to follow the business where it goes," Tulloch says. "We probably would prefer that [these machines] were built in Warren, Mich. or Rockford, Ill., but the reality is that the Big 3 are buying more and more machinery offshore."

One of RHM's customers is IHI, Inc., the U.S. unit of a Japanese industrial machinery manufacturer. Bruce Anderson, IHI's U.S. engineering director, says GM required locally built hydraulics when it awarded IHI a contract to make press equipment. IHI put out a competitive bid and RHM won; because its performance was good, GM requested that IHI continue to use RHM in subsequent years.

Anderson says RHM's good relationship with GM is an extremely valuable part of its relationship with the distributor. Even though the machines belong to IHI, Anderson says GM personnel feel comfortable calling RHM directly to fix hydraulics glitches. Anderson offers a typical example about a recent problem with a pump system.

"RHM got involved and really didn't require any assistance from IHI to work with our customer," Anderson says. "That's probably one of the best things we have with RHM."

Lessons learned

Although RHM has enjoyed great success in selling systems to international customers, it hasn't always been smooth sailing. In fact, the company's first venture was nearly a disaster.

After RHM shipped the system to a German machine tool builder, the customer went belly-up and left RHM with an unpaid bill of several hundred thousand dollars. Tulloch says he and Verona went to Ford, the end customer, seeking help. RHM eventually got its money due to a technicality of German law.

"There was an issue of fraud on the letter of credit from the machine builder," Tulloch says. "When that was discovered we got our money within 72 hours, but it was a lesson learned and it's never happened again."

Now RHM requires customers to either sign irrevocable letters of credit or to wire funds to RHM's banks for release when the product is shipped. It also helps that Jane Barrett, the company controller, is a CPA and has an MBA in finance, Tulloch adds.

The sales process is also different for these overseas customers because it often takes three or four trips and several months before RHM secures an order. In addition, the orders are typically larger and more technical, Verona says.

Likewise, internal business practices have also changed. Verona says that RHM's testing and inspection procedures are much more intensive and extensive, in particular because of what Japanese customers have taught the company. RHM has found contemporary Japanese manufacturers as meticulous as their counterparts from previous generations, who instituted total quality management principals years before their American peers.

"They're asking us to look at things we never would have thought of looking at," Verona says. "They come here and stay for days, weeks, months and do an inspection while we're testing. They want to see us do our testing."

Anderson, who reports to IHI's Yokohama headquarters, says that RHM has been extremely cooperative towards IHI's inspectors when they travel from Japan to Westland to witness test results. In many cases, RHM assembles and ships the first job to Japan, but subsequent units are shipped directly to the GM site.

"They've tried very hard to overcome these cultural issues and work with our people in a satisfactory manner," Anderson says.

Although RHM principals realize that money exchange rates play a role in the potential sales it can make to foreign customers, Verona says the company's number one goal is to get these customers to buy from RHM when not required to by an automaker. "We want to get these companies to come to us anytime they have something coming into the U.S."

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