Albury transmission plant set for sale this month

TROUBLED Albury-based transmission maker Drivetrain Systems International (DSI) will be sold by the end of the month, and can look forward to a more secure future.

Receiver Stephen Longley, of PricewaterhouseCoopers, told GoAuto an undisclosed number of buyers had been sizing up the operation and, in particular, new products in the DSI pipeline.

All prospective buyers are car-makers – some in emerging markets – looking to secure supplies of transmissions by buying DSI, which is one of only two independent transmission makers in the world, with ZF.

DSI was placed in receivership on February, but resumed production on Monday, March 9, making about 130 transmissions a day, most for Ford Australia which fits them to the Falcon wagon, LPG Falcons and the rear-drive Territory.

DSI also completed an outstanding order for Indian manufacturer Mahindra and Mahindra last Tuesday.

The DSI workforce has been cut by more than half, from 394 to 168. These numbers include a cut at the Springvale research and development centre, from 48 to 32 people.

Mr Longley, who has just returned from Korea, said new DSI products included seven and eight-speed transmissions, an automatic for front-wheel-drive applications, a dual-clutch unit and a transmission suitable for hybrid cars.

Mr Longley’s task is to stabilise DSI, get it to a sustainable position and sell it to recoup some or all of the more than $20 million that it owes creditors, including $15.6 million owed to employees.

The catch to the auction, and how much it will raise, is that the new owner will have to be prepared to find at least $12 million to finish a new production line being built at the Albury plant.

The new line is crucial because it will make DSI’s first front-wheel drive automatic transmission needed by Ssangyong for its make-or-break C200 SUV to be released late this year.

Ssangyong first needs clearance from Korean courts to restructure and continue trading. That decision will be made on May 22.

If DSI is liquidated, millions of dollars will be lost by several contractors who have already bought equipment or materials for the new production line they were installing.

Mr Longley said care was taken to preserve as much expertise as possible at the R&D centre, as that was the most valuable part of DSI in the eyes of the bidders.

“I did not want to stop R&D work. I wanted to keep it going, but I needed some cost reductions because we only have the Ford contract at present,” he said.

“I am very confident of a successful sale because of the nature of the asset.” Mr Longley said DSI was valuable because it was one of only two independent transmission makers in the world – next to ZF – and had a world-class product development centre capable of designing the new breed of fuel-efficient transmissions in demand these days.

“The most likely outcome will be an acquisition by an overseas investor,” he said, adding that it would certainly be a car-maker.

“There are a number of interested OEs (original equipment manufacturers), particularly in the BRIC countries. DSI would be a perfect acquisition for them.” He said he thought there would be real competition to win DSI and he felt there was already some “bidding tension” building.

Mr Longley said companies on the short list were being driven by two main factors.

“First, there is the strategic reason that their existing transmission technology might be old and that DSI can give them modern designs.

“The second reason is defensive. They might feel that they cannot afford not to own DSI if they (the OE) are to be successful in future.” Mr Longley said the newly developed six-speed front-wheel drive transmission would open up a large part of the automotive market to DSI if the new production line was completed.

A new owner would also be able to guarantee themselves supplies of the right transmissions in the right volumes, Mr Longley said.

Being aligned to an OE would also ensure that DSI would always have good production volumes.

“When there is a decent volume going through the plant, DSI makes a lot of money. It is capable of making some serious cash,” he said.

Mr Longley said the sale of DSI had been started before the company went into receivership, helping to shorten the receivership.

“DSI’s owners were running a sale process through Deloittes. They started that two months before I was appointed.” “They have already received a number of indicative offers and have short-listed the interested parties. The bids are in line with our expectations,” he said.

“I expect the sale will be completed before the end of March. That will bring a lot more certainty to the company’s future.” “DSI is a good business and has really good prospects.” The DSI receivership could not have worked without Ford Australia’s commitment to continue taking the four-speed automatic transmission for the Falcon station wagon and rear-wheel-drive Territory.

“When I was appointed, the only customer was Ford, but DSI had used all its raw materials needed for making transmissions,” Mr Longley said.

It was only after receiving Ford’s assurance that it would continue to take transmissions that Mr Longley could start the resurrection of DSI. The Ford contract is set to run until June 2010.

He had to approach DSI’s 60 suppliers and ask them to resume supply of materials so DSI could restart production of the four speeder for Ford.

“That wasn’t easy,” Mr Longley said. “Some suppliers have now been burned twice.” He said one supplier in Korea proved difficult to persuade because it had taken a bath when DSI’s former owner, Ion Ltd, went down in 2004.

“Even though DSI owed them $440,000 this time, they seemed more upset about the $50,000 they were owed from 2004.” He said it took a lot of work to bring them around, and he paid tribute to the DSI management, who worked hard alongside his PricewaterhouseCoopers team, to get the job done.

Ford is taking about 450 transmissions a week under its contract, which extends to June, 2010.

DSI’s future lies with exports and, while it does not have any signed contracts at present, there are at least two companies keen to secure supplies of transmissions from the Albury plant.

Ssangyong still looms large in DSI’s future, even though it was Ssangyong’s receivership which led directly to DSI’s receivership.

The Korean SUV maker took 60 per cent of DSI’s output, but all orders ceased when Ssangyong went into receivership in January.

Mr Longley was in Korea last week for talks with Ssangyong and that company’s receivers over a day and a half.

“There is a lot of confidence they will be allowed to restructure,” Mr Longley said.

The receivers are before a Korean court seeking permission to restructure and a decision will be handed down on May 22.

He said there was optimism about the court decision because Ssangyong has virtually completed development of what it calls the C200 model.

“That model is critical for the restructuring and rehabilitation of the company,” Mr Longley said.

It has been designed to use DSI’s new front-wheel drive six-speed transmission, which will only be produced if DSI’s new owners can stump up the $12 million to $15 million to finish the new production line being built at Albury.

Mr Longley said that, although DSI was just completing a contract for Mahindra and Mahindra (Mahindra), the Indian company intended to source future products from DSI.

Mr Longley said the global financial crisis had forced Mahindra to reduce production and that Mahindra had cut back the volumes it had ordered from DSI to unexpectedly low levels.

After talks with Mahindra, Mr Longley said he was convinced Mahindra wanted a long-term relationship with DSI.

On that understanding, he has agreed not to enforce the minimum volume clause in the Mahindra contract that could have been triggered by the low volumes Mahindra is now taking.

He said he believed Mahindra’s orders would start to rise in April, and that would offset an expected tapering in Ford volumes after Ford re-stocked its supply line.