Chip Emery's World is Round

One of the biggest changes for MTS is yet to come. This fall, it will roll out its first modularized load frames. These general-purpose test systems, assembled at a new plant in Chanhassen, will allow customers in the ground-vehicle, infrastructure, and aerospace testing markets to mix and match according to their specifications. Emery says that MTS is following demand from its overseas clients and from North American middle-market clients who can’t afford big-ticket, fully customized machines. “The middle of the marketplace is where a lot of the big decisions are being made today, especially in emerging markets,” Emery says. “More of our customers are asking, ‘Can’t I buy a standard thing that’s less expensive?’”

Future World

Emery says designing standardized equipment “modules” is expected to enable MTS to reduce its inventory of parts substantially and be more creative in finding possible modular combinations. “We do expect over time that the test business will move from a custom-projects business to a standard-plus-custom business,” he says. “I’m expecting growth out of that combination because it gives us more flexibility.”

MTS has historically been a strong-performing Minnesota company, attracting a range of investors, whether growth- or value-oriented. “They pay a dividend, they’re a shareholder-friendly management team that’s accessible, and they buy back stock,” says Paul Kaump of Minneapolis-based Northland Securities. After the first fiscal quarter of 2007, MTS’s results were impressive: It had little debt, a cash surplus of $115 million, and projected earnings per share growth of low single digits for the year. In a report it issued after the release of MTS’s 2006 annual financial results, Northland Securities said that it expects MTS’s fastest sensor growth will be in developing European and Asian markets, particularly China.

Analysts like Kaump believe that as long as the global economy remains strong, international industrial development should benefit MTS for the foreseeable future. “The Asia Pacific landscape is shifting from one of low-cost manufacturing to product development,” Kaump says. “They have significant infrastructure needs in order to join the developed world, and MTS provides the testing equipment to tell them what to build and where to build it.”

Later this year, MTS expects to make one of its biggest moves of all—opening a facility in China to assemble test systems for its markets there. “If you take a relatively small system, like an actuator that makes something move, and you put it together, you bolt it to steel pieces to make it actually work—those steel pieces we could just as well buy in China,” Emery says. “They’re not high-value pieces. We’d take the critical force and control components manufactured here and ship those components to a shop in China, and MTS employees in China would buy the steel and base plates and assemble those Minnesota-made components into a system to sell to a Chinese car manufacturer to test his equipment.”

It’s a sensible move. But doesn’t this represent the kind of outsourcing that MTS has avoided for decades? Won’t this mean some lost jobs in Minnesota? Emery doesn’t see it that way. “We expect [continued growth there] to [increase] demand for the . . . component pieces manufactured here, so we expect it to increase demand at [the Minnesota] facility,” he says.

Still, if the Asia Pacific region is indeed shifting from low-cost manufacturing to product development, might an Asian company arise to compete for MTS’s business, at least in Asia? Emery expects that to happen, but he also believes MTS should be able to “see that coming and anticipate how to react well in advance. For example, if an Indian company figures out how to test a new orthopedic device with equipment presumably at lower cost than MTS, we should have the market knowledge to already have moved on to more value-added means of assisting customers to develop their products. The Indian competitor may be cheaper, but most customers want to stay with the supplier that is keeping them on the leading edge of solving their problems.

“We do that today,” he adds. “We face all kinds of competition from, for example, German companies. We’ve got one competitor in Europe that I’m competing against every day, and his labor costs are 20 percent of ours. But we still manage to beat him most of the time because we bring better value to the marketplace.”

Analysts Kaump and Franzreb agree that the move toward standardized modules should, over time, provide MTS more stability against the peaks and valleys of relying on more customized orders. “This push to standardize products has been a driver of their earnings over about the past two and a half years or so,” Franzreb says. “They’re a little late to the game as far as trying to capitalize on that, but [the strategy] makes perfect sense.”

Will MTS’s new direction succeed? “It better,” Franzreb says. “They’re spending enough money on it.”