FLSmidth, at your service

Established in Denmark in 1882, FLSmidth is the market-leading supplier of integrated cement plants, with over 2000 kilns installed globally. ICR caught up with Group CEO Jørgen Huno Rasmussen at his office in Copenhagen for a wide-ranging interview, which gives a remarkable insight into the evolution of the group, its management philosophy and latest strategic focus on growth.

Our meeting took place against a busy backdrop of corporate activities, including reporting on a solid set of results for 2011, the unveiling of a new group strategy, fresh appointments to the board and, just for good measure, an M&A transaction in Australia requiring 24h working days. But the interview starts by looking at the origins of the company.

ICR: How did a company, founded in Copenhagen in the 19th century, become  a global player in cement technology, with one of the industry’s most respected brands?

Jørgen Huno Rasmussen (JHR): Surprisingly, FLSmidth was global within the first 10 years of being founded. Why was that possible? Of course, there were some fundamental conditions in place. The Technical University of Denmark opened less than a generation before and soon grew to a very high standard and that developed an engineering culture that formed the basis for a number of companies to become world players. FLSmidth was founded by Frederik Læssøe Smidth, who had started at the University, and two partners.

Of course it’s not enough just to be a skilled engineer, and what it took here was the combination of these three engineer-entrepreneurs who saw the world as their battlefield. They literally went off in all directions: Alexander Foss sailed east to St Petersburg and sold the first kilns into Russia before the turn of the century. The other partner, Poul Larsen, sailed to the USA. He saw the great potential of the rotary kiln that had been invented in the US and how it could revolutionise the industry. He imported the first two of those to Europe and he put them up at the plant, Aalborg Portland, Denmark, which FLSmidth had founded. And then he obtained the licence to develop, manufacture and sell the kilns. From there on, FLSmidth has now reached well over 2000 kilns, but it started with the two US kiln imports. And based on that technology FLSmidth went to the world market one year ahead of the competitors, who had also employed the rotary kiln technology from America. Then, if we jump ahead 100 years, things had changed, and FLSmidth had gained a very strong global position in the cement industry.

ICR: By the end of the last century, FLSmidth had evolved into a less-focused company, with a range of different activities and to some extent lost its way?

JHR: The group was going through a difficult period for a decade or so because it had turned into a conglomerate. The group was involved in aerospace and had formed a company making environmental products. Both of these activities were so remote from cement and the company’s core competencies, that they were dramatically loss-making. That was a huge problem for the group.

ICR: What was the solution – how did the company redefine itself?  JHR: So ultimately a new structure was needed, and at the beginning of this century there was a restructuring of the company where peripheral activities in the conglomerate were sold off or closed down, and the company refocused on its core business. And in addition to selling loss making activities, that included selling the cement Aalborg Portland, in spite of it being a very sound and profitable business. We decided to become the pure play supplier, servicing our customers and not competing with them. So the strategic decision taken in 2005 was to move out of producing all sorts of building materials, and just be an engineering company, servicing these industries. And that’s what we do today.

ICR: To what extent was this new strategy driven by the low-cost competition emerging from Asia at the time?

JHR: When we restructured and refocused our cement business, that was to a large extent to beat the Chinese competition that came out in spring 2004. We had to sharpen our weapons and we did.

We decided in 2004 to take three crucial strategic initiatives. The first step was to double our investments in product development, which we did over a three-year period, to maintain our technological leadership.

But that’s not enough. Customers want the best technology, but not at any price. So we had to reduce our costs and thereby our sales price. First, we reduced our internal cost and our primary internal cost – engineering hours. That’s why we decided to expand dramatically in India where the cost for engineering hours is about one-sixth of what it is in Western Europe or the USA. We did that in a big way: in 2004, we were 600 staff in India. Today, we are almost 4000. And now 90 per cent of all standard cement engineering is carried out in India, no matter where the plant is to be executed in the world. But we maintained the global technology centre for cement at the head office in Copenhagen. That’s expanded from 1100 to 1600 employees today. And the third part was attacking an even larger portion of our costs – our external sourcing of components and equipment. We did this by transferring external purchasing from Western Europe and the US to what we call cost-competitive countries, the 3Cs, and that is primarily China. In 2005 the 3C procurement was just five per cent our supply and today it’s 40 per cent. The new target is to make it 75 per cent. And that’s what made us competitive.

ICR: So now in 2012, group revenues have climbed to DKK12.4bn (US$2.2bn) in minerals, DKK8.4bn (US$1.5bn) in cement. It’s a bigger company, but it’s not purely a cement business anymore, it’s a mineral group as well. How did this transformation come to pass?

JHR: So we’d gone through a couple of phases of restructuring, and we established our position as the market leader in cement with approximately one third, in spite of Chinese competition.

Going forward, we’ll continue to grow in cement, but when you are the market leader, there’s not that much room for dramatic growth, at least not more than the market, which is typically four per cent or so annually, if you look at the global growth in cement consumption.

So we said we’d like to continue to expand more as a group and how can we do that? And the natural choice was to expand into minerals, for obvious reasons because it uses the same basic technologies and it allows us to use our core competencies. And in developing into minerals we also found a solution to the old problem of the cyclicality of cement, which was also the reasoning behind the conglomerate in the 1990s. Of course, when the whole world drops into a hole like in 2008-09 any industry is hit. Then there’s nowhere to hide. But apart from that, it does reduce our dependency on the cycles.

So from 2005, after we restructured as a pure play in cement, we then made a strategic decision to develop the minerals to become comparable in size to that of cement. And we did that over a five, six year period and we crossed that line last year when minerals became 56 per cent of the turnover.

ICR: Will there be any impact on the cement business, now that the mineral divisions represent a large share of the overall business?

JHR: There are no changes there whatsoever. We will continue to be the market leader, we will continue to grow in cement. We just want to do other things as well and we see that as a strength to our cement activities too.

ICR: You’ve announced a new company structure. How will this work and what will it achieve?

JHR: We spent a year planning and preparing for what we’ve just announced.  The idea is that cement will continue as previously. It gets its own division for focus but, in addition to that, we have split the previous minerals division into two so that we get a structure that opens for more expansion here.

And this split is logical in the sense that out of the five minerals they fall into two groups with different characteristics. One we call Bulk Materials and those are coal, iron ore and fertilisers. What they have in common is that they primarily need our material handling technologies. They move dramatic amounts of material. And then we have the other division called ‘Non-Ferrous’, primarily copper and gold. What is more key for them is minerals processing technology, separating the metal from the rest of the minerals.
Our ambition for each of these five minerals is to gain a comparable position to that of cement. That means covering the flow sheet 100 per cent, and becoming market leader in those industries as well.
And then finally we decided to separate in a special division all our service activities in Cement, Non-Ferrous and in Bulk Materials.

So we’ve had to develop a structure to facilitate growth. The idea is that each of these four divisions will now be chasing their own market. And our overriding principle is that we want to be closer to our customers – that’s our strategic theme. By splitting up the activities into four divisions we can become more intimate with the customers in slightly different ways, in the four different industries and four different categories of customers.

And, at the same time, we receive the best of both worlds because in the back office we stay integrated. For instance, we continue to have our engineering pool in Chennai, India, where we have almost 4000 employees today. This engineering pool is servicing all of the four divisions, which is a great advantage for us because it’s much more cost efficient to have the huge engineering pool there, rather than in western centres. And that is something many of our competitors envy.

ICR: Developing a separate services division seems to be central to this new growth strategy?

JHR: Yes, now we have a global focus on services, a global responsibility where service management has the responsibility to develop a growth strategy for services specifically: to develop new concepts, new types of services, to better understand exactly what kind of services our customers need.

A good example is our operation and maintenance contracts, which we systematically developed and tested over about a year. I think we are operating seven big cement plants today where we take on full operation. The customer hasn’t got a single employee in the plant and we guarantee a minimum output of that plant.

ICR: Can you talk a little about the new Super Service Centre concept?

JHR: One of the initiatives we’ve taken in the service business is what we call the super service centres, or ‘Supercentre’. We’re building eight of those across Latin America, Australia, South Africa, China, India – all over. These super service centres are equally interesting for the cement and minerals customers. We place them where we have groups of those customers and the concept is that in that centre, we place a regional inventory of critical spare parts so that we can reduce the time to market. We have repair facilities so we can take in the piece of equipment and repair it and quickly, bring it back to the cement plant, or to the mine. And we also have some training facilities, so that we can take in customer staff and give them training close to their site and bring them back on to site again. So that’s the three core activities.

And this has been seen by the customers as a very positive initiative. Actually it sold our last major contract in Mongolia, where we sold a copper concentrator in December, and promised to set up a service centre to service that and for having done so the customer also bought a cement plant. Precisely for the fact that we were willing to commit to the country and establish ourselves and get our feet in the ground. And there you see synergies that such a centre can deliver.

ICR: Turning to the present, and your recent annual results. It was a tough year for most of the global cement producers – how was it for FLSmidth?

JRH: As you say, 2011 was very difficult for our cement customers. We knew that the US and European markets were flat and would continue to be so in 2012. What we didn’t know was that it was going to deteriorate even more in Southern Europe, thereby dragging the rest of Europe into a more dramatic crisis.

Other news that hit us and our customers was the Arab Spring. We didn’t see that coming – I guess no one else did either. And then on top of that, India, the second-largest cement consumer in the world with a booming economy. Here the problem is that the economy’s going too well. Activity was too high, it drove up inflation, and the government consistently increased the interest rate, every month. And as a result, of course, when the interest rate turned into two digits, 11 or 12 per cent, investors started holding back.

So that’s why in a year when we had expected growth in the global market, we actually saw the opposite. One way of measuring it, of course, is to look at new kiln capacity, which dropped to 46Mta, which is a low point.

So yes, it was a difficult year. But the satisfying thing for FLSmidth is that we were able to deliver very good results and a very satisfying margin of 10 per cent [in the cement business], in spite of all those unforeseen events and difficulties. We see that as a clear documentation that our business model works. We’re flexible, and able to transfer some of the resources we had in cement that suddenly weren’t utilised into minerals instead, and thereby reduce some of the capacity costs.

And then, of course, on top of all the misery in the cement industry there were also lights at the end of the tunnel.  Russia came out as a positive surprise because they had been completely frozen after the financial crisis and you couldn’t obtain financing for any projects in Russia. But suddenly that cleared and we secured a couple of contracts and there’s more in the pipeline in Russia. They have all that outdated wet kiln capacity that they need to replace.

Also Latin America in general, Brazil in particular, keeps pushing, keeps growing. And there’ll be more to come from Brazil for sure. Then some countries still in Africa, some countries in Asia – there’s more to come in Indonesia, a huge population, with positive economic development. And it’ll be reflected in the cement consumption as well.

ICR: How do you see the US market and what opportunities do you see there going forward?

JHR: This year of course the continuing opportunity is selling spare wear parts and servicing existing plants. That’s continuing both in the USA and Europe. Then there’s the special aspect in the USA – that they have a new law to reduce emissions dramatically. And we have placed ourselves in a very strong position for that. We are the only one today, I believe, that will be able to fulfill every one and all of those new emission reduction requirements. So we’re in every way prepared to solve that problem for our customers and the only issue is whether they will start now, or wait and see if the presidential election will result in a postponement of the legislation.

ICR: Why did your O&M orders suffer in 2011, given the high level of capacity additions in recent years before the crash. It’s surprising there wasn’t more uptake?

JHR: Well the thing is that it’s lumpy. We’re still breaking into a tradition, the tradition being that the cement producer considers cement production as his core business, which is understandable. We tell him to see his customers and his strategic quarries and his logistics as his core business. We’ll help him with all the practical manufacturing. So that’s changing a mindset and it takes time. But there will be new waves and we’re confident that this is the solution of the future and it will continue to grow.

ICR: In terms of the competitive landscape for equipment suppliers, what’s your vision of the big trends going forward?

JHR: Today, we’re the market leader with approximately one-third and it’ll jump up and down with a couple of percentage points from year to year. We have two or three western competitors, and I suggest that over time it will probably be reduced. We’ll probably see some more concentration among western competitors – that would be the logical development. And then there are a number of other smaller Chinese competitors and they could probably merge to form, say, one medium-size company.

So that I could see a picture with say two main Chinese and two main western suppliers. But the pressure will come from the Chinese competition. That’s the big thing. 

ICR: And you’re confident that FLSmidth will be the one still standing in this scenario?

JHR: For sure, yes, no doubt.  For a number of reasons that I’ve tried to explain.

ICR: FLSmidth has been very acquisitive in recent years, making a number of bolt-on acquisitions. Will this continue?

JHR: Yes, that’s been a very successful strategy for us. We haven’t had any negative surprises with any of the acquisitions we’ve done in the last 10 years. And they’ve all contributed to the group with new technologies or a strong service organisation or a better market coverage. There are still a handful of niche technologies out there that could be of interest, but I can’t share them with you today!

ICR: And in terms of your market penetration into China, what is it in percentage terms?

JHR: It’s small. A good guess is that, say five per cent of the products for the Chinese cement are imported, and we would have maybe a 60-70 per cent market share of that. So you could say we have a very strong position on the imported goods.

ICR: As a consumer of cement equipment, is there any difference in buying FLSmidth products in different parts of the world?

JHR: If you buy a plant in China, it’s different from the one you get internationally. But you can’t buy that plant anywhere else because it’s for China, manufactured in China, can only be supplied in China.

Anywhere outside China, it’s exactly the same plant, whether it’s in the US or elsewhere. And parts of it may be manufactured in China but we do whatever it takes in quality assurance and quality control to ensure that it’s the same quality.

ICR: Looking at price competition, lifecycle costs are very important. How does FLSmidth compare?

JHR: We have done comparable studies demonstrating that in a number of cases we have lower lifecycle costs on our equipment than any other competitors – both western and Chinese. And it’s a focus area in our new strategy.

ICR: In terms of technological advancement, are there any step changes that you can see on the horizon, or will we see only incremental improvements in the future?

JHR: We don’t see the game changes just round the corner. I think the important aspect is probably to see an increasing speed of incremental improvements. So we have to be very focused on sustaining development efforts.

ICR: Are you able to quantify how much investment goes to R&D each year?

JHR: We have typically invested around 1.5 per cent of our turnover each year. And our target is to gradually increase that to two per cent, but of course what’s more important is what we get out of the investments than the target itself.

ICR: On a personal note, what is your background, and what did you do before joining FLSmidth?

JHR: I joined FLSmidth in 2004. Before joining the company, I was CEO of Hoffmann A/S, the oldest Danish construction company. I think that role gave me the possibility to contribute here with a project orientation, the fact that it’s not all about technology. We do have the strongest technology, but it’s also about putting that into use in a way that’s important to the customer.

ICR: What has been your greatest achievement while in charge?
 

JHR: I think it’s been to channel that unique technological competence of FLSmidth in a more commercial way than was done before.

ICR: And what do you see as the biggest challenge going forward?

JHR: Now, it is to continue to grow, and not rest on our achievements to-date, because there’s a lot of potential to take this further. This year, we plan to expand revenues by 15 per cent at group level. What we’re saying in the trade is that we want always to grow more than the market. Of course, that’s a clear signal to our competitors that we plan to take market share. And we believe we have the tools to do that.

Article first published in International Cement Review, May 2012.