Fruehauf Corporation

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Fruehauf Corporation

10900 Harper Ave.
Detroit, Michigan 48232
U.S.A.
(313) 267-1000

Public Company
Incorporated: Feb. 27, 1918 as Fruehauf Trailer Company
Employees: 26,500
Sales: $2.56 billion
Market value: $2.1 billion
Stock Index: New York Pacific Midwest

A leader in the volatile truck trailer manufacturing industry, Fruehauf has had more than its share of ups and downs. So far, it has managed to recover from its bouts of financial instability and it has successfully fought off an unfriendly takeover bid. But the company is still trying to live down a period of poor management and a damaging tax fraud conviction against two of its chief executives.

August Fruehauf, born on a small Michigan farm, became apprenticed to a blacksmith in 1882. By 1903 he had begun to raise a family in Detroit and was gaining a reputation as an expert carriage builder. In 1914 a Detroit lumber merchant, Frederic M. Sibley, Sr., asked Fruehauf to make him a type of dray that could hook onto his Model-T Ford. The lumber merchant owned a boat and wanted to transport it to his summer house.

Fruehauf’s semi-trailer, a two-wheeler with a pole acting as tongue and brake, worked so well that Sibley commissioned Fruehauf to build another one to haul the merchant’s lumber. The result was a stronger semi-trailer with a platform, and it proved both practical and economical. Fruehauf began to canvass manufacturers and advertise. His maxim was “A horse can pull more than it can carry... so can a truck.” Orders poured in and Fruehauf had to operate both a day and night shift; even so, his supply could not keep up with demand. Recognizing that he needed to raise capital to expand his meagre facilities, he incorporated as the Fruehauf Trailer Company in 1918.

Constant improvements and new designs characterised the Fruehauf Trailer Company for many years. The manual coupler in which the semi-trailer’s jacks were replaced by wheels was introduced in 1919, and in the same year Fruehauf developed a reversible four-wheeler trailer. Soon thereafter, the Fruehauf van-type trailer became popular with haulers such as small-item manufacturers who had once operated with horse and dray. In the early 1920’s Fruehauf introduced the first refrigeration trailer, which had a trap door on the roof into which ice and salt were poured.

By 1926 Fruehauf had made an automatic version of his semi-trailer; coupling and uncoupling were now accomplished mechanically by the engine’s power. Another very useful innovation was the drop-frame semi-trailer onto which a tank was mounted. This enabled haulers to transport gasoline and oil more efficiently and economically. In 1929 the company’s sales climbed to $3,759,000.

The following year August Fruehauf retired from active management. He remained chairman of the board, but died in 1931. His son, Harvey, became president and continued August’s tradition of innovation, introducing the tandem axle in the early 1930’s. Trailer lengths and heights were increased, and the larger payloads brought greater profits. Even the Depression did not harm the company; since trailers were so practical and economical, the demand for them remained healthy. The company next introduced a “frameless” van which was much lighter but very durable; this satisfied the trailer weight restrictions of states where Fruehauf’s heavier trailers could not go.

As the company expanded, relations with its work force worsened. Harvey Fruehauf opposed the Wagner Act which permitted collective bargaining, but in 1937 the Supreme Court upheld the Act and Fruehauf was forced to comply.

Throughout World War II the business expanded rapidly because of the increased demand for truck trailers to mobilize troops and supplies. Then, in 1953 Roy Fruehauf, another son of the founder, wrested control of the corporation from his brother Harvey. Roy had an excellent reputation as a salesman, but his lack of expertise in other business areas was to prove costly.

In 1954 the company introduced a longer trailer, the 35-foot Volume Van, and by 1956 68% of all vans purchased were of this length. (Previously, most vans had measured 32 feet; today most new vans are 40 to 45 feet long). Another important step for Fruehauf was the acquisition of Hobbes Manufacturing and Hobbes Trailer and Equipment of Texas. With these facilities, the company was able to expand its production of flat-bed trailers, tank trailers, and vans. Fruehauf also acquired the Steel Products Engineering Company in order to increase its range of supplies to the aircraft industry. Then came the acquisition of the Independent Metal Products Company, a manufacturer of quality tank vessels for trailers.

Despite these important developments, no one in the organization controlled manufacturing costs and there was heavy borrowing to finance excessive inventories. Roy Fruehauf’s solution was to reduce costs, and one of his methods, initiated in 1955, later involved the company in damaging litigation. But long before the details of Roy Fruehauf’s cost-reductions became public knowledge, he was indicted on federal charges involving a 1954 loan to the Teamster union’s president, Dave Beck.

At the heart of Fruehauf’s cost-cutting measures was a scheme to reduce the company’s excise tax burden. Fruehauf officially lowered the price of truck trailers to customers, thereby reducing the excise. Then he billed the customers for a variety of “services,” including advertising and record keeping which were not subject to excise tax, to make up the revenue difference. The company’s counsel considered the scheme legal, but only on the condition that all “services” billed were actually performed. But when the IRS issued a regulation forbidding the exclusion of advertising costs from a manufacturer’s excise tax base, Fruehauf simply changed the word “advertising” to “printed matter, catalogues, etc.” without any study of the company’s true cost for such materials.

Roy Fruehauf’s questionable bookkeeping methods did not get the company out of debt, and creditors asked William Grace, who had been a major stockholder at Hobbes Trailer before Fruehauf acquired it, to try to resolve the financial problems. Grace succeeded brilliantly by reducing inventories, cutting expenses, and setting prices above cost. A loss of $5.5 million in 1958 swung to pre-tax profits of $27 million in 1959. In that year, the board removed Roy Fruehauf and installed Grace as president and chief executive officer (Fruehauf remained as chairman until 1961).

Under Grace’s leadership, the Fruehauf Trailer Company continued to expand and diversify. In order to reflect its broader interests, the company changed its name in 1963 to the Fruehauf Corporation. Then, in 1964 Fruehauf announced its “total transportation” philosophy, seeking to participate in businesses covering all phases of the transportation industry. To that end, it acquired the Magor Railcar Company of New Jersey in 1964, expanded into manufacturing cargo containers, as well as cranes and other unloading equipment for ships. In 1968 Fruehauf acquired the Maryland Shipbuilding and Drydock Company of Baltimore and the following year took over the Jacksonville Shipyards in Florida.

After IRS reviews in 1969, the Department of Justice brought charges of tax evasion against Fruehauf and accused its two highest officers, William Grace and Robert Rowan, of criminal tax fraud. But the case against the company and its chief officers did not go to trial until 1974, by which time Rowan was serving as president and chief executive officer. Grace maintained that since Fruehauf’s excise tax plan had ben declared legal by company accountants and lawyers, he had no reason not to continue the plan. However, in 1974 both Grace and Rowan were convicted of tax fraud, each charged $10,000 and given 6-month jail terms. The jail terms were later reduced to probation and community service. Grace and Rowan appealed all the way to the Supreme Court, but in 1979 the Court upheld their convictions. The two men resigned, but were reinstated by the stockholders because of their success in returning the company to profitability.

During the decade clouded by the tax fraud case, the company continued its policy of expansion. Most significant was its 1973 acquisition of the Kelsey-Hayes Company, a leading supplier of wheels, brakes, and automotive components. Fruehauf went on to acquire subsidiaries of Kelsey-Hayes, thus providing it with holdings in Australia, Japan, Europe, South America, and South Africa.

Over the years, Fruehauf had developed a nationwide network of more than a hundred service centers for its customers. It also developed the popular Model F Plus line, including closed dry freight trailers, open top units, trailers for railroad piggybacking, and warehouseman models. In 1980 the company introduced the Spacelite Refrigerated Van line for perishable cargo, which significantly improved thermal efficiency for the industry.

Fruehauf’s performance in the 1980’s has been inconsistent, at times depressed by down-swings in the market, at other times bolstered by favorable changes in legislation. 1982 was a particularly bad year with overall losses of $30.4 million. However, the Transportation Act of 1982 allowed manufacturers to build larger trailers, resulting in a substantial increase in orders for Fruehauf. Improved sales both at home and abroad, and cost cutting measures, gave the company an $8.4 million profit in 1983. Revenues were further enhanced by the deregulation of the industry. Many carriers consolidated, and this resulted in new customers for the company. During the 1984 record-breaking year in the U.S. transportation supply industry, Fruehauf received more orders than any of its competitors.

But after 1984 the industry experienced another downturn. Sales were off 8% to $2.6 billion, earnings dropped 26% to $118 million, and the company developed cash flow problems. Fruehauf’s woes prompted a takeover attempt in May 1986 by Asher Edelman, whose Plaza Securities investment group already owned almost 10% of Fruehauf stock. Stock prices rose in anticipation of the bidding contest, but fell sharply as Edelman’s attempt failed. In August 1986 Rowan was again in court, this time on charges of infringing upon the rights of stockholders by agreeing to a management buy-out at a price below that offered by Edelman.

Since other takeover attempts may follow, Fruehauf is considering various cost-reduction plans, including the possibility of sizable cuts in the number of its white collar workers. The company currently has 55 manufacturing plants and 115 sales, service, and rental branches. It is the only U.S. company of its kind to operate local service centers, part of its “total transportation” philosophy.

Principal Subsidiaries

Ackermann-Fruehauf oHG (West Germany); Crane Fruehauf (England); Decatur Aluminum; Fruehauf International Ltd.; Fruehauf Canada, Inc. (91%); Fruekel, Inc.; Fruehauf International Sales Corp.; Jacksonville Shipyards, Inc.; Kelsey-Hayes Co.; Paceco, Inc.; Rentco International Corp.; Trailer Rentals, Inc.