Shifting gears to hybrid and electric with Xtrac

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Audio Transcript

Tim Smallbone

Hello and welcome to Inflexion Point, the podcast that explores those crucial moments in a company's journey that change the trajectory of success. Through conversations with business founders and entrepreneurs, we'll explore what those moments look like and how to recognise and harness them. And in this episode, we'll speak to Adrian Moore, the chief executive of Xtrac, a market-leading manufacturer of transmission systems for the motorsport and high-performance automotive sectors.

Adrian Moore

We had the opportunity in the marketplace, and then the investment coming in allowed us to change the ownership of the business. That was the catalyst, really.

Richard Booth

Fantastic brand, fantastic financial profile, and lots of growth potential.

Tim Smallbone

I'm Tim Smallbone and in my 20 years as part of Inflexion, I've been lucky enough to witness a huge number of inflection points that are a part of every success story. Adrian has grown up with Xtrac, joining the business in 1992 as a design engineer, and over 25 years later in 2018, being appointed CEO, a position that he still holds today. The business has transformed in that time, seeing huge organic growth and evolving its product offering, including the recent shift to more focus on hybrid and electric vehicles. Inflexion partnered with the business from 2017 until last year, when it was sold to US private equity firm Middle Ground Capital. I'm pleased to also welcome Richard Booth, head of Inflexion's Industrials team, who sat on the Xtrac board during the investment. Welcome to you both and thanks for joining us.

Adrian Moore

Thank you. It's a pleasure to be here.

Tim Smallbone

Adrian, I wonder if you could start off by... Just tell me what does transmission systems mean? What do you actually do?

Adrian Moore

So we design and make gearboxes for racing cars and for high-performance automotive vehicles. So they're really ultra-high-performance hypercars that you see on the road from time to time, very limited-edition vehicles. So motorsport, really it's the top level professional motorsport. So all the very top formulas in the world, so Formula One, IndyCar racing in America, sports car racing, so Le Mans is the race that a lot of people have heard of, sports cars that race at Le Mans, GT cars, rally cars. So we design and make gearboxes for those. And the company has been doing that for nearly 40 years.

Tim Smallbone

So when I'm looking at them all on the grid, in a Formula One race, when they're all about to hit the accelerator, Max Verstappen at the front, he's going to put the power through one of our gearboxes.

Adrian Moore

He's going to put the power through Xtrac gears, yeah, in his gearbox, yeah.

Tim Smallbone

And you say high performance cars as well. These are cars that I could go and buy

Adrian Moore

You could go and buy if you had enough money, yeah. So these are the very limited edition, high-performance vehicles, so vehicles such as Pagani. Mercedes AMG One, which is a very limited edition hypercar. So it's the very limited edition car.

Tim Smallbone

And just give me an idea of what that actually means. So I have a gearbox in my car at home. Is yours like 10 times stronger and bigger or what do we mean?

Adrian Moore

Yes, so more power to transmit through to the road because the vehicles are high performance, probably a more optimised design, less cost sensitive, although cost is still important, and very integrated into the vehicle. It's a very high performance vehicle, so the transmission is a very highly integrated part of that vehicle.

Tim Smallbone

You work with the original manufacturer like years in advance on the programme, do you? So the programmes don't last a long time.

Adrian Moore

Yes, so if it's a road car for sure, we work very closely with the manufacturer, so we're in at the very beginning of the programme where they're deciding on the layout of the car, the structure of the car, what the configuration will be. So, a really good example, we're on the Gordon Murray T50, which is a limited edition hypercar, a British car, 100 being built. And we sat down with Gordon in the early days of that programme to decide what sort of specification of transmission he wanted. Was it automatic? Was it a manual? Was it a paddle shift? How was it going to work? How was it going to fit in the vehicle? What was it going to be?

Tim Smallbone

So, this is a petrolhead's dream, this business.

Adrian Moore

Yes, I think you have to be more than a little bit interested in road cars and racing to work in the business, yeah.

Tim Smallbone

So, you joined it such a long time ago as a design engineer. Just tell us about what the business was like then.

Adrian Moore

So, I joined in 92 so I'll probably sort of wind back slightly from that. I did a degree in engineering, sponsored by Rolls-Royce to do my degree. I graduated in 1988, so an awful long time ago, and worked for four years at Rolls-Royce as a graduate in advanced engineering. And then I really was interested in motor racing. And this is pre-the internet. So how did you apply for jobs? How did you do? You wrote letters, you sent CVs, you knocked on doors. And I was very fortunate, got a job at Xtrac in 92. It was a very small company then, a little bit more than 40 people. It had been going for eight years designing gearboxes and making gearboxes for racing cars, only for racing cars. So I joined there and actually stayed at Xtrac for 3½ years. But the lure of Formula One took me away from Xtrac and I actually was very fortunate to work for two Formula One teams. So I worked for Ferrari, a Formula One team as a designer. And I worked for the McLaren Formula One team as a designer. I was very fortunate to be working with McLaren when we won a world championship as well in the late 90s. And I had no real intention of going back to Xtrac. And it was a time when motor racing was really growing and becoming a lot more professional. But Xtrac needed more technical support. So Peter Digby, who was the managing director of Xtrac at the time, he contacted me and said, look, we need to grow the engineering team. It was quite a small team. And would you like to come back and be chief engineer? So I did. So went back to Xtrac in 99. The engineering team of 17 people, grew that over the next 15 years to 80 people in the engineering team. And we really developed our capability, our technical capability, designing better products, more integrated with the customer and developing our manufacturing technology as well. So we grew the business a reasonable amount from sort of 2000 to 2015, but really focusing on motorsport. That was the main focus.

Tim Smallbone

So, roll forward to the point that you get to now, 2015, getting on to the buyout in 2018. So, it turns to Richard: as a manufacturing business, it was growing, but what did you really see in it? What was of interest to Inflexion?

Richard Booth

Fantastic brand, fantastic financial profile, and lots of growth potential. And one of the things we always look for in any of the businesses is ways we can accelerate the growth rate of the business. And with Xtrac, there was a very clear opportunity to expand the capacity of the business. And that's not just in the physical infrastructure of the business, but also around the headcount within the business as well. So, we invested very heavily early on in the investment period to probably almost double the capacity of the manufacturing footprint of the business. And alongside that, put a material amount of investment into the headcount as well to support the business in driving that.

Tim Smallbone

What was your original plan?

Adrian Moore

2015 we did a management buyout, 10 of us, and the aim from there was to get an investor on board. And the reason we wanted an investor on board is we'd seen the opportunity with this once-in-a-generation technology change, as vehicles going from internal combustion engines through hybrid to EV. And that change is very integrated into the transmission. That's a key part of delivering that electrification in a vehicle. And we could see that there was an opportunity now to go into sort of more production of those items and we needed someone on board to help us do that. And Inflexion were really interesting to us just because of the sort of, the people we're involved with who we met from Inflexion were really interested in the business. They really understood and could see that growth- ICE, hybrid, EV, that growth potential and why we needed an investor in the business. They could understand both of those points. And so that made it very, very appealing to us.

Tim Smallbone

So that catalyzed the change point in the business's story.

Adrian Moore

It really did. And I think there's two reasons for that, really. One is that the technology change was the opportunity was there. And that's what Richard referred to. There was an opportunity in the marketplace. But secondly, we were an employee-owned business. The slight downside with an employee-owned business is that all your shareholders are also your workforce. So, it does drive quite conservative behaviour by the leadership team. And we found that over a number of years, we were very cautious about what we were doing. And so by bringing an investor on board, we could de-risk some of the workforce. And as Richard said, we were then brave enough to then go and invest in a new factory or extension to the factory. And we were looking, I remember it very well. We were sitting there with the Inflexion team at the beginning. We wanted to sort of put up a 10,000 square foot because we thought we needed 6,000 square feet. So we'd maybe put up 10. And Inflexion just said, look, how much space have you got? And we said, well, 25,000. They said, well, put up 25,000, fill the space. And it's been brilliant because we still haven't used it all today. We're just moving into the, we cordoned off part of it, and we've just started moving into that bit now.

Tim Smallbone

You would never have done that without being the external investor on to change the dynamic, the confidence around the board table.

Adrian Moore

Yeah.

Tim Smallbone

And once that was said, you knew it was the right thing to do.

Adrian Moore

Yeah. And then we put the bigger, bigger unit in and we hired people fast. We bought some more machinery. We had one assembly hall, an area for assembling gearbox because we put a second one in. So we had two. So we did some quite big steps or big steps for us anyway.

Tim Smallbone

Richard, that must have felt pretty scary.

Richard Booth

It was scary, but equally. Xtrac's got such a fabulous brand name in the market. Customers just pick up the phone and instantly go to them. So, we kind of had a feeling that the business was there to be won. And if you look at the output of what was ultimately delivered through that investment, I think when we invested, it was kind of single-digit, low single-digit millions. And then I think at the point when we kind of sold the business, it was over 30 million. So that's kind of a tenfold increase. just in that product segment off the back of that investment and focus into a market that we saw that was rapidly growing.

Tim Smallbone

So, there were two changes. HPA you just referred to as high performance automotive. So, we've got two changes going on. What was very interesting, one is you've taken into a new market, you were motorsport, and you've taken into high performance automotive as well. And at the same time, you have this dynamic, which I really just want to understand about going from an internal combustion engine to an electric car. I didn't think electric cars had gearboxes.

Adrian Moore

Yeah, no, well, that's, well, they do. So, you have to join the electric machine to the wheels somehow. And the electric machines rotate at very high speed. And in a high-performance vehicle, they're very high speed, 30,000 RPM, some of the electric machines. So you have to have some gears to reduce the speed to match the speed you want from the road wheels. So, they are simpler. Generally electric vehicles have simpler gearboxes, but they still have gears. and casings and oil pumps and oil systems and it's highly integrated in the vehicle, it's optimised, all the things that we're good at still apply to an electric vehicle.

Tim Smallbone

You design these and you manufacture them, so you get like lumps of metal in one end. I mean, you actually have lathes and all the traditional, yeah.

Adrian Moore

It is literally from an idea through to a finished product. As a rule of thumb, what I say is that all the complicated, difficult processes are in-house and some of the simpler ones we subcontract out to suppliers, but we keep the complex parts or processes in-house because of the quality. Keep the quality in-house.

Tim Smallbone

And that sort of level of complexity means this is suited to a small-run UK business. You worry about manufacturers all going to go to the Far East.

Adrian Moore

Yeah, so it's really low volume manufacturing. If we're making two or 300 racing gearboxes over three or four years of one particular type, that's quite a big number for us. So it is what the UK is particularly good at doing.

Tim Smallbone

So Richard, from our point of view, manufacturing efficiency is one hell of a challenge.

Richard Booth

It is extremely difficult and I'm full of admiration for the team at Xtrac for delivering what they do. As Adrian describes, it's completely vertically integrated in what it does. So very much from the pure raw material to a beautiful end product, beautiful enough to go into the highest-end cars that you can buy. And the complexity of the process is incredible, but the team of design engineers and the team on the factory floor do an incredible job of just pulling that all together and producing great quality output, which the market values incredibly highly.

Tim Smallbone

And you presumably have to schedule this stuff through endless bottlenecks to get from a piece of metal through thousands of processes to a gearbox at the other end.

Adrian Moore

We do, and we are in an industry where time pressure is really critical. And funnily enough, the only similar sensation you get to it must be live sport, live TV, live radio, because you've got live races. So races, Le Mans happens the middle weekend in June every year.

Tim Smallbone

You can't be late.

Adrian Moore

You can't be late. This year at Le Mans, 52 of the 62 cars entered had Xtrac gearboxes.

Tim Smallbone

Did the winner?

Adrian Moore

Including the winner. Yeah. You cannot be late. You have to have gone through that whole development process and have the parts there and support the customers. So the time pressure is very profound in our business, which has its downside in the fact that customers change their minds, want things faster, or want different things. And so we have to remain very, very reactive. We're a customer service business. It's the highest quality product, the best customer service.

Richard Booth

I think it's probably one of the challenges that we always discussed in good spirit around the boardroom table of how we can meet that customer demand on time. Because, as you alluded to, it's just a constant challenge of the customers driving us to tough deadlines where we've got a complicated process ourselves that we need to navigate around to hit those deadlines.

Adrian Moore

I think that's a really good point Richard makes there. It was challenging throughout the whole investment cycle, trying to balance what the customer wants with the sort of business performance. We absolutely have the best product. We absolutely have the best customer service, but we still have some work to do to develop the business to be more efficient in our manufacturing processes, etc., for sure.

Tim Smallbone

And I think we introduced one of our serial Chairmen, Andy Caffin. Has he been fun to work with?

Adrian Moore

So, Andy's been really helpful for us, really, really helpful. So, he's actually originally a production engineer. He did, I would say, far more in some of the detail of the business than the chairman would normally do, because he had a lot to offer. He had a relevant background. And that was really helpful for us.

Tim Smallbone

So you formed a strong relationship with you.

Adrian Moore

Yes, yeah, formed a strong relationship not just with me, but with the rest of the leadership team, you know, with Steve Hatter, Ops Director, built a good relationship with him, and the other engineer, Stuart Croot, our engineering director, and built a strong relationship with Jane Setter, our Commercial Director. So really worked incredibly well with the leadership team.

Tim Smallbone

And it's clear, Richard, that we worked with the company, also with the chairman, and that dynamic, that three-way dynamic worked well here.

Adrian Moore

Yeah, it works really well, very effectively.

I think Adrian, Andy, and Inflexion as a team got on very well together, worked collaboratively, even when times were a bit tougher. So going through the COVID period, which was clearly a black swan event for the business and motorsport kind of just paused for a while, there was a lot going on. But I think having that kind of trio of stakeholders working together to get through that was a real advantage.

Tim Smallbone

So, you've mentioned Formula One. Have we been able to sell into the United States motorsports market?

Adrian Moore

We set up a US business 20 years ago this year, actually. And We have supplied IndyCar with transmissions since 2000. So every single IndyCar, which is the open wheel race series in America, they look a bit like Formula One cars, race on road courses, street circuits and ovals. They have had a gearbox that's manufactured in the UK. It's assembled in the US, but we make the parts in the UK. So that has been a really good business for us and we've worked really close with IndyCar since 2000. In the last few years, the regulations have aligned very closely with Europe and the rest of the world. So now you've got a common sports car platform. that races in Europe and the rest of the world and US. So that's really been a great benefit to us. We've worked really closely with the organising body.

Tim Smallbone

We're on that common platform.

Adrian Moore

So we're on that common platform.

Tim Smallbone

We're on a British success story. So they're racing around those tracks in the IndyCar and they're using British-made gearboxes.

Adrian Moore

Yeah, and they're same for NASCAR. So we won the single supply contract for NASCAR. So one of the things we've really specialised in is supplying a grid of cars. So instead of every car having a bespoke, very expensive gearbox, we supply to the organising body and every car has the same gearbox and you supply to that grid of cars. So you need scale to be able to do that. You need the quality, you need reliability of supply. You need the customer service; you need to be able to treat all the customers fairly. It's complex to be able to supply in that way, but it means that once you've got the whole grid of cars for a fixed period, you know, as a business it works really well for us.

Tim Smallbone

Richard, that feels like a bit of an all-or-nothing situation. If they're going from sourcing by team to suddenly the whole of the grid is one type. We were faced with an all-or-nothing proposal at that point.

Richard Booth

It's all or nothing, but a very exciting proposal to be able to say to other customers, we cover that entire racing series. We go from not just a product supplier, but a really true stakeholder customer partner to the racing series and the teams, particularly with the service model that brings. So not only does the business then get the revenue from your product sale, we also get all the revenue from the servicing that comes with it, because these cars do have crashes now and again, and do call on our need to put them back together again in the right way to get them racing the following week.

Tim Smallbone

During the course of the life of our investment, we had this big event called Brexit. Now, was that a big issue for you as a manufacturer in the UK, where predominantly a lot of your customers you've been name-checking for, actually, they're European.

Adrian Moore

We were fortunately big enough to be able to understand what we had to do with our shipping. And it's not the shipping out that's the issue. That's relatively straightforward. It's actually having products back for service and educating our customers how to do the paperwork so they can come back to service, so therefore we can export them back out of the country again. And that's been the hardest bit. And I just feel terribly sorry for some of the small businesses that just didn't have the bandwidth to understand how to do that. And it's just been debilitating for those businesses.

Tim Smallbone

So, our scale helped us through that.

Adrian Moore

But we were scaled sufficiently, and we've changed our logistics, how we manage our logistics. It's all changed because of Brexit. But I think we've done a great job and the customers, it's as seamless as we can make it for the customers.

Tim Smallbone

I mean, one of the interesting things about this is to have built a UK manufacturing business. And what young person says, hey, I'm going to be a metal worker. It doesn't, it's not really the vogue thing, is it?

Adrian Moore

It is at our end of the market, actually. We're very fortunate that we're an exciting sector, and racing cars and high-performance cars are exciting. And the electrification piece is really exciting. A lot of young people are really interested in that transition from ICE, you know, internal combustion engines to hybrid to EV and really interested in what we're doing. We have a very, very strong apprentice and undergraduate scheme and have had for a long time. And so we bring young people in. And this year we're bringing in about 20 we brought in, in September. So it was always around 10, sort of five apprentices, 5 undergraduates, and we've really upped that in the last couple of years. And we've put in-house; we've built our own academy, so we have an apprentice academy now. So we've offered apprenticeships for a long time, but all the basic machine shop training was done outside; we outsourced it. And then we brought them in-house, and they'd be in our main factory, which isn't the best place for teaching because everyone's busy making product. So we built an academy with a set of machines, lathes, milling machines and grinding machines and the CAD training suite. And the apprentices start all their basic training in there. And that's worked really, really well.

Tim Smallbone

Richard, when we were saying to the company, look, let's really go for it and have this much bigger factory than they originally imagined, were we worried about the people at the time? Did we always think we were going to be able to get to 500 people?

Richard Booth

I think that's another challenge the business has faced and dealt with really well. As Adrian was saying there, I think we were less than 300 or so people at the start of the investment and we're almost 500 people today. I think credit to the business and be able to recruit that talent, the academy and the work that Adrian has done in kind of developing that internal capacity within the business has been really important to deliver and just having a very good reputation in the local work area as well as contributed to bringing the right people in.

Tim Smallbone

So we developed this academy, we developed this apprenticeship. I think we actually won an award.

Adrian Moore

Yeah, no, we did. We've actually won the Princess Royal Training Award twice, 2018 and 2022. And that's an award that's given for training with apprentices. And because we've won it twice, we were very, very fortunate that Princess Anne actually came to visit in 2022, to meet our apprentices. So she came, it was the usual sort of schedule for an hour that you, or 45 minutes, and she stayed for about three and all her staff were going mad, because she had three other functions to go to. But she just spent the whole time talking to the apprentices, talking about cars, talking about gearboxes. She's very knowledgeable. She talked about Formula One gearboxes as well. So that was a really great day for the apprentices. And we did a sort of photo shoot with every person in the business who'd been an apprentice and was a current apprentice with a photo with her as well. So that was really good to do that as well.

Tim Smallbone

The change to hybrid and electrification, that's just irreversible. So will the business just sort of completely stop doing internal combustion engine?

Adrian Moore

Yes, ultimately. So one day everything will be electric. At the moment it's not. At the moment it's internal combustion engine, hybrid and EV. We have a great reputation and products in all of those, for all those three different power sources. Our business is now 40% electric and hybrid this year. Next year it'll be 50% electric and hybrid. Every major race series in the world from next year will be hybrid. So the transition is, there's no going back from it. And the sector we're in, there's obviously an appetite for internal combustion engine vehicles still, the analogue supercar. And that will continue for a bit longer, but it will all be electric one day in the future. But we don't know when. No one knows when. Even if the government tell you it's 2035, no one knows when it will really be.

Richard Booth

And we saw that progression kind of month on month, year on year through our investment period. You mentioned it's almost kind of 50% today, but kind of year on year, it was kind of 10, 20, 30. It was kind of an unstoppable force that was coming through the business and the market that we were kind of very much embracing and being on the front foot of.

Adrian Moore

Yeah, we 100% embraced it. And that was the whole point behind the Inflexion investment. We'd probably spent almost 10 years doing one-off prototyping and some technology demonstrators, and we knew that then the opportunity was there to get into some bigger numbers, and the race series were going to adopt hybrid and EV, so the timing was perfect.

Tim Smallbone

We've sold the business on to Middle Ground. What was the story for them? Where are they taking now? An American group.

Adrian Moore

Yeah, so the key for Middle Ground is they're a very operationally focused business. And we talked to you earlier, and Richard mentioned that probably the area we still need to develop as a business is operational excellence. So we do lots of things very well, but there are some areas we can do better. Middle Ground is very operationally focused. They only invest in manufacturing businesses as a fund. And so they embed people in the business. We've got some people embedded in the business who are very operationally focused and, you know, they've been with us now for five months, nearly five months and really embedded on helping us focus in the right areas, which has been really useful. And that was why they were appealing. They also have a mobility fund. So they are very focused on American business, but they're very focused on the electrification piece as well. And so that's a key investment criteria. So the sort of ESG story is absolutely a focus for them. And it's a big focus for us as a business as well.

Tim Smallbone

It's a fascinating story, Adrian, the story of incredible transformation and growth and a real UK manufacturing success story. And what I particularly like was the aspect of changing the ownership; taking away from the employee ownership empowered the business and actually gave us the opportunity to leap the business forward. And you changed the dynamic in the boardroom.

Adrian Moore

Yeah, and I think that was the catalyst really, that change. And we had the opportunity in the marketplace, and then the investment coming in allowed us to change the ownership of the business and then take that opportunity to the marketplace for the benefit of everybody, including the employee shareholders who remained in the business.

Tim Smallbone

Thank you so much for taking the time to come and tell this story.

Adrian Moore

Thank you very much for asking me.

Tim Smallbone

And thank you, Richard, as well.

Richard Booth

Thank you, Tim, and thank you, Adrian, for helping us on the journey.

Tim Smallbone

Well, that's it for this episode. My thanks to Adrian and Richard for joining me. Remember to subscribe to Inflexion Point wherever you get your podcasts, so you don't miss an episode. And check out the Inflexion website if you would like to learn more about how we back ambitious business owners and help them to accelerate sustainable growth. Thanks for listening.

Shifting gears to hybrid and electric with Xtrac

In this episode, Inflexion Point tells the story of Xtrac, the UK manufacturer of gearboxes for the world's fastest cars, and how it scaled through a once in a generation technology change. Host Tim Smallbone is joined by Chief Executive Adrian Moore, who has grown up with the business since joining as a design engineer in 1992, and Richard Booth, the Inflexion partner who sat on the board through the investment. They reflect on the moments that shaped it: the 2015 management buyout and the search for an investor, the decision to build a factory far bigger than the team first imagined, the move from motorsport into high performance road cars, and the shift from combustion to hybrid and electric that now runs through almost half the business. Along the way, they talk about scaling to nearly 500 people, building an in-house apprentice academy, winning the single supply contract for NASCAR, and why the UK is still the right home for this kind of low-volume, high complexity manufacturing.