The Ohio maker of specialty steel has 60 PhDs developing new alloys to tackle punishing conditions.

You might look at Timken (TKR), the Canton (Ohio) manufacturer of bearings and specialty steel, and wonder if pursuing a diversification strategy is worth the bother. In the last six years the $5.7 billion Timken has branched into new businesses while lowering its sales to the auto industry from 40% of revenue to less than 20%. Yet even while skirting much of the fallout from the automakers' woes, the 110-year-old company keeps getting hammered. "I never dreamed we'd see a recession where demand for our products fell by 40% to 50%," says CEO James W. Griffith.

Still, by shifting its focus away from nearby Detroit, Timken is plotting a path for Rust Belt resurrection. The strategy, which includes a total of $3 billion in sales and acquisitions to date, points Timken toward high-margin niche markets, many of them overseas. The key is to find places for its highly engineered parts in far more expensive and demanding machines than Chevys or Fords. Timken figures customers will pay for premium parts in industries in which breakdowns can spell disaster. Aerospace, which accounted for $400 million in Timken's sales in 2008, is a priority. Says Douglas H. Smith, senior vice-president for technology: "We want to go where the cost of failure is very high."

That's the thinking that led Timken to windmills. As windmills get bigger, the demand to place precise and dependable components inside them will grow. "Think of it," says Griffith. "You've got turbines the size and weight of a school bus" spinning on poles hundreds of feet in the air. He predicts that windmill components, which now account for less than $50 million in sales, "will be the fastest-growing part of Timken over the next two or three years."

COMPETING ON QUALITY
The company is putting finishing touches on a plant near Shanghai to serve China's booming windmill market. Timken's main competitor for these large industrial parts, says Eli Lustgarten, senior vice-president at Longbow Securities, is another premium player, Sweden's SKF Group. The two, he says, are more likely to battle over service and quality than wage costly price wars. That bodes well for Timken's bottom line.

To keep ahead of the commodity players, Timken is banking on its 300-member research and development team, which includes 60 PhDs. The scientists are developing exotic alloys that can withstand punishing conditions. In offshore drilling, for example, a single pipe must burrow seven miles into the earth. If the detonations necessary to break open pockets of oil and gas deform a pipe, Smith explains, the hole is ruined, and the damaged pipe turns from a conduit into a plug.

The company expects the recovery in its markets, whenever it comes, to be rapid. When the recession hit last fall, Griffith's customers cut orders at record speed. He attributes their quick response to the latest generation of enterprise software, which provides a fast and precise read on sales, production, and industrial supply chains.

Griffith thinks orders will return just as quickly. So while he reduced Timken's labor force in the last year by 20%, cutting 5,000 jobs, he is readying his plants to gear up. The 25% of office jobs he cut are gone for good. The goal, he says, is for Timken to emerge from the recession nimbler and more global than it was at the start.

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