CEO: small innovation firms becoming new technology incubators for global companies

Escalating rate of change requires small innovation firms to become new technology incubators for global companies, Torotrak CEO tells investors

Gaydon (UK):  At the company’s Annual General Meeting today (July 25th), Torotrak (LSE: TRK) Chief Executive Officer, Jeremy Deering, told investors that large multinational manufacturers will need to work more closely with small, specialist innovation firms if they are  to introduce new products at the rate required to meet both forthcoming regulations and growing market demand for new features.

Deering said that to help its customers take full advantage of these opportunities, Torotrak has changed strategy, investing in low volume supply including participating in the government backed “Proving Factory”, making it easier for Tier 1 suppliers to make more decisive investments in new technologies that will make their businesses more competitive. “The key to success,” he said, “is to complement appropriate innovation with robust, application-specific development and validation so that the business case for the manufacturer is compelling.”

In the automotive industry, the rate of advance in areas like communications, safety and emissions reduction has been quite phenomenal, but it places a huge burden on the R&D activities of the large first tier technology suppliers.  Deering believes that working with small innovation businesses allows these global companies to bypass the high-risk early stages by feeding validated technologies into their development process at a point that is much closer to volume production.

“There is an inflection point where we can already see some automotive Tier 1s taking a different approach, shedding conservatism and relaxing investment constraints that were more appropriate for slower growth, slower changing markets.  When markets develop quickly, substantial new opportunities open up for those companies that are agile enough to enter them swiftly and assertively. By far the biggest today is for Tier 1s to take advantage of exceptionally challenging vehicle CO2 and fuel economy requirements that are driving radical new thinking in automotive design.”

Torotrak is developing CO2 reducing technologies for cars, busses and trucks. Traditionally, its business was built around a licensing model, in which fees are paid for use of its intellectual property and then royalties for each item produced using that intellectual property. This design-only approach avoids the need for large amounts of investment, allowing the company’s resources to deliver highly leveraged benefits. With the need for faster change to respond to tightening emissions standards, Torotrak has adapted this strategy, investing in prototype platforms and lower volume manufacturing to make it easier for global manufacturers to develop a high level of confidence in its technologies.

Deering points out that the IT industry has excellent examples of global companies working with innovative, smaller companies within a similar structure. ARM, the microchip developer, which uses a similar licensing model, has achieved phenomenal success by providing technologies that help its customers introduce differentiated, highly competitive products. ARM’s technologies appear across a wide range of sectors, from cars to mobile telephones, with around 35% of consumer devices worldwide containing ARM technology.

“I can see the automotive industry moving much more towards innovation specialists and near-market specialists,” says Deering. “The first tiers will never stop innovating, but I believe they will find that external innovation partners can help to keep the product pipelines full for less cost and substantially less risk. The critical challenge is the intersection; delivering the ability to quickly, cost-effectively and robustly turn innovations into market-ready technology. That’s where many innovation companies fail, so it’s where we are making a particular effort to excel.”

Strong results linked to new strategy

Investors were told that in the year to March 31st 2013, Torotrak’s revenues grew by 74 percent driven in large part by a major licensing commitment by its commercial vehicle licensee, Allison Transmission Inc.  In the last five years, Torotrak has received license revenues of £21 million from its portfolio of blue-chip customers, helping to fund product development in advance of its technologies entering production. Licensees include many of the world’s leading sector specialists, including manufacturers of cars, trucks, busses and agricultural equipment, with customer products close to production in each sector.

Torotrak’s programme delivery director Garry Wilson, who previously held senior engineering roles with a major vehicle manufacturer and with a global Tier 1 technology supplier, believes that both types of organisation face growing pressures on their technology development resources. “There just aren’t enough really good engineers, money for investment is tight and timescales are always pressing,” he said. “Devoting these resources to an innovation programme, particularly when the potential application is at least one vehicle generation away, is always going to be challenging. Our new strategy helps to overcome this and has been warmly welcomed by our customers.”

Torotrak has strengthened both its engineering consultancy capability and its low volume production capability, allowing it to take ideas from concept to production-ready. “We identified that the biggest barrier to commercialisation of an innovation is confirming the competitive advantage for your customer when every factor is taken into account,” adds Wilson. “We therefore refocused our engineering capability to provide precisely the expertise and resources required during this critical stage. We take full advantage of the agility that comes with being a smaller business, but always using best-in-class computer modelling, quality systems and project management procedures that integrate seamlessly with our customers’ own engineering operations and deliver robust validation data that gives them confidence in every step up to the point where a production decision can be made.”

“This isn’t just about feeding innovation to the global manufacturers. That already happens,” concludes Deering. “It’s a new way of working where managing the next two or three stages of development and validation is just as important as the idea itself. This is a major growth opportunity for Torotrak. As well as supporting the adoption of our technologies, we believe it will deliver an increase in our services business by a factor of at least five over the next few years.”

About Torotrak

Torotrak (LSE: TRK) is the leading global developer of gearless traction drive technologies, focussing on applications that increase efficiency and reduce CO2 emissions in vehicles. These include the V-Charge variable-drive supercharger, engine auxiliary drives, IVT and CVT main drive transmissions and a variable speed transmission that enables efficient energy recovery using a mechanically-driven flywheel (M-KERS). The company’s engineering team works with proven, global tier one technology partners to provide a validated route from prototypes to production. Customers include major vehicle manufacturers and their suppliers in the light duty, heavy duty and off-highway sectors.