Tough losses hit Powerway: Software firm cuts workers, CEO resigns after General Motors terminates contract

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Its software was supposed to become the American auto industry’s standard. Instead, Powerway Inc. finds itself scrambling once again to recover from a sudden reversal of fortune.

Detroit-based General Motors Corp. has terminated its 2-1/2-year-old agreement to implement Powerway’s quality-control software throughout its supply chain. As a result, Powerway’s CEO Theodore Wozniak has stepped down and the company has fired a quarter of its work force.

“It’s frustrating and disappointing that, under such great financial pressure, the American-based manufacturers are cutting in this area,” said venture capitalist Tom Hiatt, who serves as Powerway’s chairman. “We’re still in conversation with other automakers, and still confident … that Powerway.comwill eventually emerge as an industry standard.”

Hiatt has repeatedly led investments in Powerway over the years through his venture firm C e n t e r fi e l d Capital Partners and its p r e c u r s o r s . Four core members of Centerfield’s exe c u t ive team oversee Powerway’s day-to-day operations.

Its managers say they remain confident in Powerway’s potential as a transformative technology for the auto industry. Hiatt compared the software-maker’s fortunes to Federal Express, which famously took years longer to revolutionize parcel delivery than its founders expected.

“It’s not called patient capital for nothing,” Hiatt said. “The fact is, Powerway had significant increases in sales for the last three years. Until we were hit by this economic tsunami by GM like many other suppliers, we had our best months ever in January and February of this year.”

But by any measure, the loss of the largest North American automaker as a customer is a huge blow.

“For a relatively small company like Powerway, losing a big customer like GM is always a problem because of the obvious revenue hit,” said Mark Bunger, principal analyst for Cambridge, Mass.-based Forrester Research. “In auto, it’s especially problematic because it’s a tightly knit industry with only a few large players, and who you are working with today is a big factor in determining who will buy your software tomorrow.”

Worse, Hiatt revealed that Powerway’s 2002 agreement with Detroitbased Ford Motor Co. to also make the software standard in its supply chain fizzled almost before the ink was dry.

Now, Powerway must fall back on its close relationship with Detroit-based DaimlerChryslerAG, which owns a 40 percent equity stake. For growth, Powerway is targeting foreign markets.

“It may well be the next great area of opportunity for us is in Europe, or possibly even Asia, rather than with the troubled U.S. automakers,” Hiatt said.

Once the darling of area economic developers, Powerway was the kind of brash young company that seemed poised to transform Indiana into a 21st Century information technology hub.

Founded in 1987, its goal to automate and standardize quality control in the fragmented and change-resistant auto supply chain was ambitious, even audacious. But by the end of its first decade, Powerway seemed poised to do just that. In the late 1990s, it hinted at an initial public offering. After DaimlerChrysler invested, the company brokered $53.4 million from the state, mostly in the form of EDGE tax credits, in exchange for a promise to hire 2,000 people.

As with every high-tech firm, the burst of the dot-com bubble was a setback. So was the April 2002 suicide of Chairman and CEO Mike Campbell. Even so, Powerway soldiered on. And its product won accolades. Its software was regularly lauded by the likes of major business magazines such as Forbes and CIO.

When the “Big Three” American automakers announced plans to require all their suppliers to use Powerway’s software, the company’s future seemed certain. The implementation was to be through Covisint, the Big Three’s joint IT venture.

“They had a fortunate spot in that the Big Three anointed them as their quality vendor,” said Martin Piszczalski, industry analyst for Stamford, Mass.-based Gartner G2. “That put them in an enviable position.”

After an extensive search, Powerway hired Wozniak in July 2002 to replace Campbell. With 32 years of IT experience in the auto supply chain, Wozniak seemed a perfect fit. Before joining Powerway, Wozniak was vice president of materials management and information technology at Aurora, Ontario-based Magna International Inc. subsidiary Intier Automotive.

But tying Powerway’s prospects to the Big Three turned out to be a mixed blessing. All have struggled in recent years with sluggish sales. Ford decided two years ago not to pursue any new IT initiatives, Hiatt said. Ford confirmed Hiatt’s account.

“We looked at [Powerway] as a pilot situation,” said Ford spokesman Joe Koenig. “We have our own internal system that effectively does the same thing, and we decided to stick with that.”

GM’s decision was more recent. Its $2.8 billon profit last year was $1 billion less than in 2003. Then, on March 16, GM announced revised 2005 guidance to its investors, reflecting lower expected sales and production cuts of 70,000 vehicles. GM said it expected a loss of $1.50 per share in 2005’s first quarter, compared with a previous target of break-even or better. For the year, it expects to earn $1 to $2 per share; the previous target was $4 to $5 per share. GM declined IBJ’s request for comment.

Wozniak has a few months left on a three-year contract. After Powerway received word of GM’s cutbacks, Hiatt said, Wozniak and the company mutually agreed he should step down. Powerway then cut its work force to about 75 from 105, Hiatt said.

Wozniak could not be reached for comment. Hiatt declined to provide details of the agreement or to discuss Powerway’s financials.

Powerway still has 2,000 customers using the installed “enterprise” version of its software. And DaimlerChrysler is committed to the Internet-delivered version, Hiatt said, with the vast majority of its suppliers already using it. Powerway is working on version 3.0 of its Internet product, for launch sometime next year.

DaimlerChrysler spokesman Dave Elshoff agreed. Powerway is now used by 100 percent of the company’s Tier One suppliers, he said, and DaimlerChrysler owns a 40 percent stake in the softwaremaker.

“We’re absolutely committed to it. It’s a great product. The proof’s in the pudding, if you look at our quality improvements over the last few years,” he said. “We can’t give Powerway credit for all of that, but it’s certainly a great tool.”

Powerway executives continue to speak in the evangelical terms of entrepreneurs. One day, they believe, the auto industry will catch up to their vision.

“The value proposition of the tool has never changed,” said Bill Becher, Powerway vice president of product delivery. “The opportunity is still there. We’re still creating a transformational technology.”

For now, Powerway will begin its search for a new CEO, continue to serve its existing customer base, and press to become profitable for the first time.

As long as DaimlerChrysler remains committed, Powerway has a solid foundation. Gartner analyst Piszczalski said many of Powerway’s customers probably signed on because of DaimlerChrysler’s mandate. That’s not necessarily bad news.

“On the plus side, these [automakers] are so huge, even if you just work with one, they can still produce a ton of business for a company like Powerway,” he said.

Given the financial circumstances of Ford and GM, there’s probably not much Powerway could have done to change executives’ minds there. If there’s a knock against Powerway’s sales and marketing strategy, it’s the concentration on a topdown approach, said analyst Julie Frasier, who has consulted on a project for Powerway through her Newbury, Mass.-based firm Industry Directions Inc.

Auto-parts makers in the supply chain have never been convinced of their need for Powerway, Fraser said. They see the software’s adoption as a hassle dictated from above.

“It’s like if you’re a little kid and your mom tells you to go take a bath,” she said. “It doesn’t matter if you’re filthy; you still don’t want to do it.”

The loss of GM could actually have an upside for Powerway.

“GM always is a high-maintenance customer. I don’t know anybody that supplies anything to GM that wouldn’t agree with that,” she said. “It may help [Powerway’s] relationship with Daimler-Chrysler, and it may free them up to focus more clearly on some of the other [original equipment manufacturers].”

It may seem small consolation to Powerway, but several analysts considered GM’s decision shortsighted. To compete globally, U.S. automakers have enormous challenges-the foremost possibly being the costs of their legacy pensions and health care. But almost as daunting, many drivers believe U.S. vehicles are inferior in quality to foreign models.

In the long term, domestic automakers must face the quality question, or face extinction.

“No matter how you cut it, quality is a major, major issue,” Piszczalski said. “To not very aggressively pursue quality would spell the end of the industry.”

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