Overseas strategy has Hurco roaring back: Local manufacturer sells most of its products abroad

Even with the U.S. auto industry under pressure and the North American manufacturing market experiencing relatively slow expansion, Indianapolis-based Hurco Cos. Inc. is on a tear.

The maker of metal- and machine-cutting tools and software has stayed ahead of the curve by growing aggressively overseas while keeping a lid on expansion costs.

That double feat is easier said than done, said Ananth Iyer, professor of operations management at Purdue University and director of the Dauch Center for the Management of Manufacturing.

“Hurco has increased sales while structuring itself with the placement of people and infrastructure in a way that has kept costs down to a level that has allowed profits to increase, and that can be a difficult thing to manage,” Iyer said.

Wall Street has rewarded Hurco, pushing its stock near $45 a share. Just four years ago, Hurco shares were languishing at $10 as the company struggled domestically and its globalization was still taking root.

Sales have skyrocketed from $70.5 million in 2002 to $148.5 million in 2006. Profits-nonexistent five years ago-have been around $16 million each of the last two years.

CEO Michael Doar credits a laser focus for making Hurco’s global strategy pay.

“Our success expanding globally can be attributed to three key drivers-identifying the right people to lead new market development; developing an extensible product line that can be effectively adapted to meet the unique needs of each market; and ensuring the global supply chain we designed operates efficiently to keep manufacturing costs down while having the flexibility to react quickly to fill orders as needed,” Doar said.

Iyer said key to that strategy is to keep inventory relatively low to keep the company nimble and to carefully outsource certain tasks to keep costs low while keeping critical trade secrets in-house.

“For a company of its size, this can be a terribly difficult thing to manage,” Iyer said. “You really have to give them credit. But when you study this market, Hurco really had no choice.”

Hurco executives concluded in the 1990s that the only way to survive was to expand overseas, where studies showed certain high-tech and other manufacturing sectors were about to take off. Many of those sectors would require computerized metal-cutting devices.

“European manufacturers liked Hurco’s products for their versatility, and it so happens that the markets they penetrated first had use for some of their highest-end machines and software which carried bigger margins for Hurco,” said C.H. Bush, who has been covering the machine tool industry for more than three decades and is editor of California-based CNC-West Magazine. “That meant higher profits.”

The growth in demand for metal-cutting devices continues to soar overseas, and Hurco continues to respond. According to the American Machine Tool Distributors Association, almost 90 percent of the industry’s 30-percent annual growth is due to overseas growth. Annual growth in the United States has been a steady 4 percent to 7 percent, according to industry figures.

While many North American companies are outsourcing such metal-cutting work, that’s not the case in overseas markets.

“Europe has a reputation for having high-quality engineering and manufacturing, which they use for their own market and for export products,” said John Oblazney, Hurco chief financial officer.

But Hurco wasn’t just focused on big overseas customers.

“They found that small customers often become bigger customers later,” Bush said. “By helping their customers grow, they saw a direct benefit.”

Global escape route

Hurco’s overseas expansion wasn’t by happenstance, Oblazney said. And it didn’t come a moment too soon.

Drowning in a sea of red, and besieged by myriad competitors undercutting its prices, Hurco decided to look beyond North America’s borders.

Hurco-which was founded in 1969-made its first forays into the United Kingdom, Germany, France and Italy as far back as the 1980s. In the last decade, the company moved into parts of Asia. Slowly, the strategy began to pay dividends.

In 2006, sales in Europe and Asia accounted for 66 percent of Hurco’s revenue, with a compounded annual growth rate there of 25 percent over the last three years. Hurco, industry experts said, has managed to outpace industry growth in every market it’s in.

While globalization buffered Hurco from downturns in a single market, Iyer said, it also exposed the company to more markets, and more market ups and downs, than ever before.

“This is a company that built a reputation on a reasonably priced, flexible product with quick turnaround times,” Iyer said. “So close management of its supply and demand in a multitude of markets is needed.”

Also, Iyer said, difficult decisions were required on where to manufacture the product, how to stay close to far-flung clients, and what design and production elements to keep closer to the vest.

There were growing pains.

As the industry landscape changed worldwide, the public company saw its revenue plummet from $96.2 million in 2000 to $70.5 million in 2002. Hurco competitors, industry analysts said, closed in on its technological edge, causing Hurco to spend resources defending its intellectual property on multiple fronts.

Hurco was forced to reinvent itself, trimming its work force from 630 in the 1990s to 240 shortly after 9/11. It has since increased to 320 workers, with 130 employed at its Indianapolis headquarters near West 71st Street and Georgetown Road.

Major changes

At the same time, it invested in research and development-mostly done in Indianapolis-and embarked on a 6-1/2 year effort to restructure its business plan, including a detailed global market study nearly three years in the making.

The result was increasing its offering from five models in 2000 to 27 by 2004. Several more have been added since.

Despite the industry’s post-9/11 swoon-which was even deeper than the manufacturing sector’s deep dip-Hurco executives stayed focused on their market study that told them to concentrate on clients’ needs, and showed them where to invest globally.

What resulted was a series of machines that, by industry standards, were relatively easy to operate without much additional training. Oblazney said this is a strategic pillar for Hurco.

“In Europe and North America, where labor costs are high, our customers value the productivity benefit to their shop while customers in Asia with high employee turnover and an unskilled to semi-skilled labor force realize the benefit in lower training costs and increased productivity,” Oblazney said.

As momentum built overseas, Hurco expanded its markets. Hurco, Bush said, carved out a reputation as a company that could supply the machines and software almost tailor-made for any client, and could do it for $40,000 to somewhere north of $200,000 per machine.

Hurco shows no signs of slowing its global growth. In 2006, it moved into China. It is opening a technical center and moving into India this year, while also advancing into parts of Eastern Europe, Indonesia, Australia, Vietnam and South Africa.

While most of the company’s high-level strategy comes out of Indianapolis, Hurco has sales, service and engineering offices in Germany, France, Italy, England, Singapore and Taiwan.

Hurco’s growth has surprised industry analysts.

“With strong demand conditions [overseas], Hurco blasted through our and consensus estimates in sales,” said analyst Debra Fiakas, who covers the company for Crystal Equity Research in New York.

“I think this is a perfect example that even small and midsize companies need to think about how they are going to engage with worldwide markets,” Purdue’s Iyer said. “If Hurco hadn’t developed a global strategy long ago, they’d be dead by now.”