I got this call wrong! My investment case for Austin Engineering was based on what I’d researched about the business, the solid underlying and improving metrics for the business as it rapidly expanded in Indonesia, the USA, and Chile over 5 years. That was until the first cracks appeared in the Chile operation. The issue was not caused by a lack of sales, it was quite the opposite! The business failed to scale, or at least it failed to scale efficiently to handle the growth. It sounds like the general manager in Chile was totally incompetent, or perhaps it was the top management that had been asleep at the wheel?
There was a huge amount of steel wastage and the labour costs blew out as they used local contractors attempting to keep up with a huge OEM order. Then management came up with the great idea of drawing on the capacity at the Batam factory which in turn overloaded the capacity there and resulted in exactly the same issues! They needed to use contractors to keep up with the huge demand, and the costs blew out. Reading between the lines it sounds like the Indonesian operation is heading for a loss this year also. Not only that, a client in Indonesia has pushed their order out to next year. Now the sales are being hit!
Meanwhile, while management have been distracted plugging up the leaks in Chile and Indonesia, the USA operation (which had been powering ahead brilliantly) was undergoing similar pressures. Not only have they used contractors to keep up with the orders, they have engaged other manufacturers to build the trays for them! The margins here are being shot to pieces also!
What a debacle! It’s like the story of the rise and fall of Austin over five years! I had mistakenly given Austin management the benefit of the doubt. The ‘Austin 2’ strategy had been progressing swimmingly over the last 5 years. The business had turned around and the metrics were improving! Then what appeared to be a small crack in Chile turns out to be a systemic failure across the entire business. It appears management went to sleep at the wheel and woke up in a car cash!
So what am I doing in response? There are 3 choices; buy, hold or sell! Is management capable of fixing this mess? I’m not confident they will fix this mess given what is going on now!. The issues Austin management is facing now are mostly self inflicted. They didn’t foresee the issues ahead, they didn’t notice the issues as they occurred, they implanted a ‘fix’ that put stress on other parts of the business and made things worse!
They might manage to turn this mess around, but I have lost faith in management! So, while it hurts like hell, I’ve ripped off the bandaid and sold completely in SM, and 80% IRL (so far). I’ve copped a rapid and substantial loss.
Was there a lesson learned here? It’s always easy in hind sight of course, but it’s hard for me to say if I was faced with the same scenario again with a different business whether I’d do the same thing again? I would certainly look at the scars following this experience and be much more hesitant to jump in. Perhaps I would be less aggressive? When I think back to my investments in Codan and Nick Scali, were they much different at the time? Perhaps they were! Their issues were both external and not foreseeable. They were not cracks appearing in management as they were with Austin. Perhaps that was the first sign and the big lesson here?