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BPO Journal

Sunday, November 20, 2005

Platform Companies and Performance

IKEA manufactures almost half of its products in developing countries but sells largely in high-costs countries in Europe and North America. Similarly, Sweden's Autoliv, the world's leading manufacturer of air bags, seat belt assemblies and other automotive safety equipment, manufactures a majority of its products in countries with low labor costs such as Turkey and Romania, and sells to the large automakers, many under pressure to lower expenses, worldwide. Amid the pessimism in the automobile industry, Autoliv has doubled earnings and tripled cash flow from operations over the past five years. These are examples of what a recent article in Forbes Asia describes as "platform companies".

The term, originally credited to Charles Gave, co-head of Hong Kong's GaveKal Research Partners, refers to "companies that manufacture or assemble in low-cost countries and distribute in high-cost countries. The high-cost nations add value in product design, information systems and marketing. A company's 'home country' is merely where it is registered and pays taxes." Autoliv is traded both in Stockholm (where the company is headquartered) and on the New York Stock Exchange. The article, which points to the relatively better performance of stocks of non-U.S. platform companies, in a struggling U.S. equities market, is further evidence of both, growth in outsourcing worldwide, especially Europe, and the positive relationship between outsourcing and financial performance. For example, Autoliv is selling at a remarkably attractive 13 times trailing earnings, with a market cap of $3.8 billion.

Other non-U.S. platform companies: Toyota Motor (91, TM), with a P/E of 14; Nokia (17, NOK), the Finnish cell phone innovator, at a 16 multiple; and Novartis (54, NVS), the Swiss pharma giant, at 20. Platform companies are obviously a particular example of outsourcing of the manufacturing function. However, given that most U.S. firms have outsourced other critical business processes including product development and design, enterprise technology, and customer relationship management, whose benefits are visible over a longer period of time, it would be interesting to see how these outsourced functions impact firm value over time. If firm value develops as a function of outsourcing, the latter may soon become a quasi-investment strategy, in that firms will design their outsourcing deals so that they can structure benefits to maximize firm performance and value.

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