Stern Rubber poised for growth following acquisition

STAPLES, Minn.—Stern Rubber Co. is readying for a new frontier, while not abandoning its current one, through two major expansions that will nearly double production space and employment.

The firm plans to add 60,000 square feet of production space through an investment north of $3.36 million to two of its three Minnesota facilities—its main campus in Staples and its gate valve site in Aitkin. Both plants will double in size, with employment increasing by at least 75 jobs.

The projects are part of Stern's preparation to break into the automotive industry after being acquired by Zhongli North America Inc., the North American unit of Shanghai-based Zhongli Corp.

Zhongli purchased Stern with the intent of localizing its automotive products manufacturing capabilities in North America. Stern Rubber President Bob Jackson said the firm also is interested in continuing to grow Stern's current non-automotive business.

“Zhongli so far has been a good transition,” he said. “They have not come in and totally changed everything. They're continuing to let us continue business as usual. There are obviously more changes coming as we continue to get into the auto world, but with an acquisition you never know. Sometimes you get a company that comes in and says "everything is changing.' It's just not that way. We're doing business as usual and actually Zhongli is changing some of the way they do business to be closer to what we do, which is interesting.”

Chris Heckert—managing director of Generational Capital Markets Inc., an affiliate of Generational Equity L.L.C., which assisted Stern Rubber in the selling process—said more foreign companies are interested in acquiring U.S. firms to establish a base in the region. The company said Stern Rubber and Zhongli is an example of a positive acquisition.

“Having more domestic manufacturing has been an important push for many groups,” Heckert said. “It's become price competitive. As some of the foreign countries' prices have increased and costs have gone up that margin difference between manufacturing something in China and manufacturing something in the U.S., while certainly not even, is a lot smaller than it used to be. Combine that with the fact that if you have domestic manufacturing you're able to control your supply chain a lot better. Your product isn't sitting on a boat for 60 days.”

Stern Rubber's Aitkin site will double to 20,000 square feet and add 10 employees to the plant's current 16-person work force. The expansion is driven by a combination of its newly acquired gate valve business and a need to locate all of its gate valve operation in Aitkin to free up room in Staples for added automotive products production the firm is set to receive in the coming year.

Currently Stern's high volume, 4- to 12-inch sized gate valve business is in Aitkin. Any gate valve larger than 12 inches is currently produced in Staples. Some span up to 24 inches and weigh about 500 pounds. The firm also has a customer that buys as small as 2-inch valves.

Stern Rubber plans to break ground in July on the expansion with completion projected for early 2017, about a six-month build, Jackson said. Stern Rubber is investing $1.26 million in the Aitkin expansion, including equipment.

In addition to relocating the gate valve lines to Aitkin, the company is going to add 50,000 square feet to its main building—nearly doubling its size. The expansion is projected to at least double the facility's work force, which currently sits at about 65 people.

The Staples addition, which Jackson said has not been finalized yet, will cost $2.1 million plus additional capital for equipment. The company is projected to break ground sometime before the winter so it can be operational later in 2017. The build time is about 10 months for the project.

The Minnesota Department of Employment and Economic Development is supporting the Aitkin project with a grant just shy of $80,000 through its Job Creation Fund, a pay-for-performance program that gives funding to businesses after meeting certain qualifications. Businesses must create at least 10 full-time jobs and invest at least $500,000 to be eligible for financial assistance. Jackson added that the firm had to commit to at least a $13.50 hourly rate for the new employees and meet all of the requirements within two years after the project is complete.

Stern Rubber also operates a third site solely dedicated to extrusion. Located on the Staples campus, the 14,000-sq.-ft. building houses two extrusion lines and four employees dedicated to producing a thin walled extruded rubber tube used in the bottom of sewer ponds to break down sewage.

Stern's Staples expansion will set it up to receive an influx of automotive goods production from its new Chinese parent company, which acquired Stern Rubber last November to localize some of its capabilities in the North American market.

“With our purchase by Zhongli we are going to expand into the automotive world,” Jackson said. “So we're moving some work from Staples to Aitkin so that we can free up some people and some space in our Staples facility.”

Based in Shanghai, Zhongli operates its North American unit out of Troy, Mich., which houses a 33,000-sq.-ft. parts storage and re-packaging warehouse facility used to distribute its automotive-related rubber products manufactured in Shanghai and Wuhu, China. It also operates a 13,000-sq.-ft. technical center in Madison Heights, Mich., that performs sales, engineering, logistics and quality control functions.

The firm is set to locally produce suspension bushings and control arms currently produced by Zhongli in China. Jackson said Stern Rubber will be molding the rubber bushings and then assemble them into the control arms and ship a completed finished part to the customer.

Jackson said even though the firm is taking on automotive product production, it is not abandoning its current sources of business. Just the opposite, it is still trying to grow that area with Zhongli's support. Right now the firm is laying the foundation to take on this production.

In addition to the expansion, the company had to get audited for a new spec—ISO/TS 16949, which is the quality management standard for suppliers to the automotive sector. The firm completed the audit in June.

“That's been a six-month, all hands on deck process to get ready for that and we just went through the audit,” Jackson said. “It's just a lot more in depth, we had to look at every single thing we did and modify or enhance to meet the tighter requirements.

“There's a lot of stuff we have to get done before we can jump into the automotive world. So hopefully within the next couple of months we'll be registered to that TS spec. We had to have that to be able to get into the auto world.”

Heckert cited a number of reasons for foreign-owned companies to locate production in the U.S., the main one being flexibility. It's a lot easier for a company with manufacturing in the region it serves to respond to demand because of the quicker lead times a shorter supply chain provides.

Interest rates in the U.S. are also low, despite the dollar's strength. But Heckert cited a “Made in the USA” push that's beginning to drive more investment into U.S.-made goods.

“If you can claim that you're doing manufacturing here in the states, that I think helps,” he said. “It helps with your relationship with the customers and it helps with the perception of your brand. All of those are reasons that I've been hearing for this shift. We certainly are seeing a number of foreign entities working on deals.”

While there are never any guarantees in business, there are things companies like Stern can do to ensure they find the right match.

Heckert said spending time with the buyer and learning about their reasons for a deal—whether or not they make sense or align with the seller's goals—is important. But ultimately it all comes down to culture.

“You want to see how they conduct business and see if that's a fit with how your people work,” he said, adding that one thing that gave Stern confidence in Zhongli was that the Chinese company already had made investments in the U.S. and had established a North American subsidiary in Michigan.

“The cultural fit between two organizations during an acquisition is critically important regardless of whether it's domestic or international,” he added. “I've seen plenty of domestic groups where they look good on paper, but you start talking to the principles and you find out one is more open and free spirited and the other is more bureaucratic and regimented. You just know that's probably not going to end up being a good fit because it's too hard to merge the cultures.”