Managing globalisation

CBS 25 February 2013 Jørgen Huno Rasmussen Jørgen Huno Rasmussen

. Education

M.Sc. (Civil Eng.), DTU, 1976; HD (Organisation), CBS, 1977; Ph.D. (Construction Management), Stanford University, California, 1978 + DTU, 1979

. Career 1.12.2003- Group CEO, FLSmidth & Co. A/S 2000-03 Group Director, Veidekke ASA, N 1987-03 President & CEO, Hoffmann A/S 1986-87 International Director, Hoffmann A/S, UK 1983-86 Dept. Manager, H. Hoffmann & Sønner A/S 1981-83 Dept. Manager, Chr. Islef & Co. A/S 1979-81 Project Manager, A. Jespersen & Søn A/S

. Non-executive posts Chairman of the Board of Lundbeckfonden and LFI A/S, Vice Chairman of the Board of Tryghedsgruppen, member of the Board of Tryg Forsikring A/S, Wind Systems A/S, Bladt Industries A/S, Industriens Arbejdsgivere i København and DI’s Board of Representatives.

. Publications 70’s: articles on organisation; 90’s: articles on the Construction Industry and ATV white paper on future engineering education; 2001: ATV white paper on deterioration of Danish Infrastructure. Conclusion

. Globalisation is here to stay

. Try to hide from it and sooner or later be helplessly destroyed by it

. Or embrace it unconditionally and make it work wonders in your interest Agenda

. The inevitable globalisation

. Management response

. Global split of work: – Centralisation of R&D in Western technology centres – ”Off-shoring” of standard engineering to India – ”3C-sourcing” of manufactured components in China – Global decentralisation of Sales & Customer Services

. Culture and other complexities Why do some companies win and some loose under the same circumstances?

∑ CGJ/Sk, H&S, M&T, MT Højgaard < 0 ”No science in managerial work”

. Professor Henry Mintzberg, McGill University, Montreal, 1973: First ever empirical study of managers!

. An MBA can help but is not the solution for all managers

. You need talent + lots of practical experience

. Arguing for managers to: – Strive for balance – Employee involvement – Long-term perspectives Research now popular and easily accessible

. Jim Collins, Stanford Bus. School, 2001

. No theoretical basis

. But combining empirical facts:

– ”Great companies” do consistently better than all peers ≥ 15 years – Killing myths: they are not more innovative! – They ”face the brutal facts” and – Focus on the core business, where they can excel: – ”If it’s not core, we don’t do it. Period!” Facilitates shared concepts and language

. Why do some companies excel and former market leaders disappear? – Bethlehem Steel, the world’s largest steel co. building 1 Liberty ship a week, went bankrupt on the day of my first visit to FLSmidth’s US head office in Bethlehem, PA

. ”Good to Great” became mandatory reading for Global Management in FLSmidth and inspired us to fanatic focusing! Globalisation is here to stay

. Professor Jagdish Bhagwati, Columbia University, N.Y., 2004:

– Globalisation influences all aspects of life – Not an ”evil process” you can make go away – Potentially an extraordinary powerful force for social goods – Promoting open societies through free exchange of ideas and goods Jagdish Bhagwati speaker at FLSmidth’s global 125th anniversary seminars, May 2007

Reminding us that no one can hide from globalisation!

Political globalisation from China - Spring 2004

The Chinese Government concentrates the country’s cement competence under the umbrella company Sinoma, which internationally offers turnkey cement factories 30-40% below world market price! The Chinese offensive: The international cement kiln market excl. China

2003 2004 9% 9% 14% 34% 22% 13% 60% 21% 0% 18% FLSmidth Sinoma (CHINA) Polysius KHD Others 7% 11% 2005 2007 16% 29% 33% 12% 17% 19% 24% 32%

Product development doubled

M DKK R&D investments 400 in FLSmidth 339 350 315 300 268 281 250 210 200 169 145 143 Dania, Mariager, DK 150 Special R&D focus on: 100 50 1. Reduced power 0 consumption 20042005200620072008200920102011 2. Reduced emissions 3. Increased capacity 4. Reliability Global split of work is a solution – but not for everything ”Off-shoring” of engineering to India

. Transfer to our Indian subsidiary of order-related standard engineering

. From 600 in 2004 to 4,000 employees or 28% of workforce in India

. Attrition 8% < DK

. More than 90% of standard engineering executed in India for any global cement project

. Next phases: – Minerals eng. 40% 90% – Administrative functions (Financial Shared Service centres) FLSmidth House, Chennai Designed by C. F. Møller, Aarhus

”3C-sourcing” of ”hardware”

. 80% of sales prices are ”hardware” = manufactured components and equipment (+10% ”software” = engineering + 10% profit)

. 80% of manufactured goods are outsourced }

. External sourcing single most important cost factor

. In 2004 95% of all external sourcing was from the most expensive regions in the world – near head offices in and Pennsylvania!

. New sourcing from Cost Competitive Countries (= China): – Invest in extra QA/QC to ensure same quality – Global benchmark: Landed cost from China sourcing + transport + duty – Dual suppliers of everything – 800 potential suppliers evaluated – Typical net saving 20-50% – 3C-sourcing from 5% 40% of all external group spend in 2011 The Chinese threat not a coincidence

. Prof. Peter Williamson, INSEAD and Singapore, June 2007: . Provided the theoretical explanation of what we had just experienced - and why it will continue! The new facts

. Chinese advantages – All types of low-cost talents – State assets and IP at low cost – Management autonomy from shareholders: • Fast decisions • Long term goals – Strong personal incentives to innovate and take risks + . New gateways into world markets through globalisation – Outsourcing opens the gates ~ FLSmidth “CITIC” mills – Modularisation of products and services: • enter core industry without figuring out everything at once – Codified knowledge through IT – Liberalised M&A The brutal consequences: Chinese ”Cost Innovation”

. High technology at low cost – Latest technology to mass market at discount prices – Using high technology to make things cheaper, not more complex

. Variety and customisation at low cost – Process flexibility and recombination of existing technology in new ways (CEO Zhang Min of Haier, world leader of consumer electronics: ”recombinative innovation”)

. Specialty products at low cost (former niches) – Lower R&D and design costs lower breakeven – Further reduced by sharing costs across multiple specialties – Turning niches to mass markets through lower prices – Hopping from one niche to the next The loose bricks in our defences

. Segments where cost innovation (not just low costs) is especially competitive

. and / or we are reluctant to release full counterattack – Low-end segments – Geographically peripheral markets – Troublesome customers

. The first loose brick gives a foothold and a platform for self- reinforcing cost innovation – Dragons chase volume aggressively – High technology, variety and customisation at low cost Fortunately Dragons also have weak spots

. Experience in running complex systemic business

. Lack of strong brands

. Limitations of cost innovation for early stages of product life cycle – novel functionality more important than value for money

. Markets that are immature in China: Several key minerals : Unlike cement, China is a consumer not a producer of minerals BCC version 2.0 = Be Competitive in China

. Early 2008 task force: Reduce our prices in China by 50% through re-design of√ products to enable 100% local content – Chinese business set-up – Chinese vendor components – Chinese manufacturing – Chinese materials – Chinese sourcing – Chinese standards – Chinese language – Strong Customer Service set-up . But price reductions only increase sales moderately – political barriers? . Early 2012: Acquired majority in local company China sourcing is also in-house manufacturing of critical components to protect IP rights

38,000 m2 inauguratedDoubling capacity January in 2012 Qingdao 2004 - Planning again 2005

Ready 48 weeks later

Next expansions Service is another way to beat Chinese competition

. A global Chinese supplier of infrastructure will typically – Sell on a hit and run basis – Design and manufacture in China – Erect and assemble locally with imported Chinese labour – Pull out after hand over

. But for the typical customer – Operational costs are far higher than depreciation and interests of capital investment – Lead times for wear and spare parts critical – Support and continuous production key for profitability – Energy costs are increasing – Authorities' demands to environmental emissions increasing } – Constant upgrade and optimisation necessary

. Globalised response – Establish and maintain global footprint for sales and services – Stay close to the customer for the long term – Continuously develop new concepts and services – Align standards and qualities globally Global reach in FLSmidth with presence in 50 countries So FLSmidth focused on Customer Services

. All types of services before, during and after the supply of new plants

. 8 “SuperCenters” with regional warehouse of critical spares , repair and training facilities

. FLSmidth Institute is the industry’s leading provider of seminars and training in cement and minerals plant operation, production and maintenance topics

. Complete “Operation & Maintenance” contracts of entire plants for 4-7 years

. Latest updated strategy 2012:

– Vision to be our customers’ preferred full- service provider

– Products are no longer “the end” but rather “the means” to obtain service for customers and it worked: ”Customer Services” now 5 x 2003

Customer Services (CS) order intake 10 9 8 7

6 5

DKK bn DKK 2012 Q3 4 39% of all 3 group activities 2 1 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 F2010P2011P2012 CS Cement CS Cement O&M CS Cement Product Companies

CS Minerals CS Minerals O&M CS Minerals Product Companies Religious globalisation from the Middle East - Spring 2006

The Muhammed Crisis

The press wrote off FLSmidth’s markets

Serious background Geographical distribution of new cement plants in 2005

Middle East 2/3 in Muslim 50% countries

North America EU 4% 2% Pakistan 20% Latin America 7% Africa 8% Rest Asia 9%

Danish firm wins $72m Egypt deal

COPENHAGEN: Danish engineering company FLSmidth yesterday received an Egyptian order worth $72 million despite a widespread boycott of Danish products throughout the Arab world over Prophet Muhammed cartoons.

Spanish-Egyptian joint venture Arabian Cement Company placed the order for engineering services and equipment for the construction of a cement plant near the city of Suez.

"The reason we have received this order, despite all the chaos surrounding the newspaper drawings, is our very good contacts created in the Middle East over many years," FLSmidth chief executive Joergen Huno Rasmussen said.

From Havarti cheese to Lego toys, products made in have been yanked off store shelves throughout the Middle East and in other Muslim countries where governments and consumers have demanded an apology for the printing of 12 cartoons in a Danish newspaper.

One of Europe's largest dairy companies, the Danish-Swedish Arla Foods, is thought to be the worst hit, losing an estimated $1.6m each day. Source: Gulf-Daily-News.com

New Strategy Formulation: Top-Down, Bottom-Up

Corporate 1.Explain the choice that has been made and the Top- rationale for it. Down 2.Explicitly identify the Business unit next downstream choice. 3.Assist in making the ... downstream choice as needed. Bottom- 4.Commit to revisiting and modifying the choice Up Department based on downstream feedback.

Individual Strategy and Execution The Choice Cascade- Model (Martin, 2010) How to become the market leader?

Context …by: (technology, industry, demographics, regulations, etc.) . Creating partnerships with key customers

. Eventually One Source for our Competitors’ customers’ needs offerings

. First bundling and combining Customers’ FLSmidth’s offerings (full service) needs capabilities Sweet . Supplied by integrating our spot products and capabilities

. Avoiding head-to-head competition

After Collis & Rukstad (2008) How can we grow?

…by: . Focusing on our customers long-term

interest and customer intimacy Product Development -new products in several industries

. Being full service provider -turnkey in cement Current -full service provid.

. Develop new markets in focus

industries Markets

. Develop sustainable solutions New

. Product Leadership

Current New . Operational Excellence Products . Within processing equipment & material handling Ansoff’s Growth Vector (1987) ...and by that we started the strategy implementation...

. Engaged the organisation in strategy formulation and implementation – We received positive feedback externally and internally – Ongoing process with many initiatives – Engaging the organisation in strategic thinking

. Changed reporting structure – Poses new opportunities and challenges as we become more transparent – We compiled new structure in record time – “Hit the ground running” – “Fine tuning” ongoing

. Change in Group Executive Management 5 – From 4 to 6 directors, 4 being new – Many new exiting initiatives and good momentum in the implementation

Group functions Group HR * Group IT ** Group Helios & Business Processes Alignment * Group Finance1 ** Executive Group Marketing & Business Development * Shared Services2 ** Management CFO CEO Communications * & Investor Relations ** Legal3 ** Ben Guren Jørgen Huno Rasmussen Group EPC Support ****

Customer Service Material Handling Mineral Processing Cement Bjarne Moltke Hansen Carsten R. Lund Peter Flanagan Per Mejnert Kristensen

CS Materials Material Pyromet GTC Cement Handling Handling GTC & Global Exec. Hydromet CS Min. Processing GTC EMEA & APAC Material Handling GTC

Concentrators CS Cement Sales & Execution Americas BUs & Territories GTC

Hydro & Conc. O&M Automation China Global Process Hydro & Conc. Excel Airtech India Global Execution

MP Global Cembrit MAAG Pfister Engineering

MP Sales & Ventomatic Execution Territories

Abon Krebs Ludowici

Group Supply Chain & Quality ***

Group Engineering (Chennai) ****

Group Research and Product Review *

* Reports to CEO *** Reports to EVP, Cement ** Reports to CFO **** Reports to EVP, Customer Service

1. No separate unit – represents Tax & Structure, Trade Finance & Treasury, Group Control & Consolidation 2. Includes Accounting 3. Includes Risk Management Note: GTC = Global Technology Center; O&M = Operation & Maintenance; CS = Customer Services; BUs = Business Units; Conc.= Concentrators; Exec. = Execution MP – Mineral Processing; MH – Material Handling

4 December 2012 Inspiration to final implementation: Translation from new Vision to daily guidance

. Follow-up by Jim Collins in 2011

. In cooperation with Prof. Morten Hansen, UC Berkeley and INSEAD, who joined our global Management meeting 12.9.12 and assisted us with:

. Defining our own SMaC recipe – Specific – Methodical and – Consistent – Recipe for operating practices

37 SMaC recipe for FLSmidth

. Always prioritize long-term Group interest above individual units . First response to customer inquiries always within 24 hours . No deviations from 10 Commandments (contract conditions) . Never split sales and execution (execution = project management and procurement), i.e. must always be within same Operating Business Unit . FLSmidth shall stay asset light, i.e. max. 25 % in-house production . No in-house civil construction . In-house suppliers always preferred . 75 % 3C sourcing . No purchase of category items outside the category management system . 90 % of all standard engineering to be made in India . Only actions that we would be prepared to see on the front page Cultural challenges changing over time

Vestergade, Cph., 1906? . But Scandinavian values and leadership styles have proven to be very sustainable in global integration...

Chennai, India, 2006

Thank you for your attention

Back up slides Increasing output from R&D - and focus on minerals growth industries

Historic FLSmidth priority patent application filing

60

50 37 40 15 18 37 30 minerals 17 24 4 cement 20 34 3 27 10 21 24 14 15 13 0 3 2006 2007 2008 2009 2010 2011 2012 The Chinese threat cont.

. Warnings in the data: “Machinery show significant exposure to disruption from the new Chinese competition in the global market” – Protection from brand and historical references only temporary

. Counter measures – Increase own capability to penetrate China’s growing market and match their advantages from operating there – Introduce new technology in mature products, where a dominant technology is about to shift competition to variety and cost – Ramp up investments in intangible assets as brand building and proprietary technologies higher barriers The Chinese threat cont.

”No longer sufficient to approach China just as a huge prospective market or a source of low cost manufacturing capacity

- High-end niches are blown apart when customers get the same technology, features, choices or customisation elsewhere at better value for money” What is our main challenge?

. We choose to ”Be Competitive in China” - Why?

. Just as: ”we choose to go to the moon in this decade and do the other things (climb the highest mountain, fly the Atlantic), not because they are easy, but because they are hard, because that goal will serve to organize and measure the best of our energies and skills, because that challenge is one that we are willing to accept, one we are unwilling to postpone, and one which we intend to win!”

JFK, Rice Stadium, 1962 Consequences of globalisation are repetitive Spring 2008: Repetition of the Muhammed crisis

. Due to reprint in several papers because of attack on the artist Kurt Westergaard

. Jordan now leading the boycott against Denmark

. Then FLSmidth signed it’s first contract in Jordan for many years:

”FLSmidth to supply new cement plant in Jordan

Company Announcement to the Danish Financial Supervisory Authority No. 34-2008, 23 July 2008

FLSmidth has signed a contract worth EUR 119m (DKK 888m) with Modern Cement and Mining Company to supply equipment and civil design for a cement plant with a capacity of 3,500 tonnes clinker per day. The plant will be located northeast of the town of Qatraneh, 80 km south of Amman, the capital of Jordan. Modern Cement and Mining Company is owned by the Jordanian company Manaseer Group.” Strategy overview end 2012

DONE: TO DO: . Aligned execution in Cement projects, . Transfer best PM practices to MH Product Companies and Min. Proc. products . Ensure Customer Intimacy through global service culture . Grown Cust. Serv. offerings across industries and geographical markets . Maximise Group results across divisional silos . Established ownership to profitable – Customer needs above internal aspects Divisions – First right of refusal to all potential internal suppliers above divisional . Achieved market acceptance as ”One sub-optimisation Source” . From max EBIT to max ROCE

. Get on board shared Helios IT platform – Globally aligned procedures – Only implementation in 1 legal unit/country Vi skabte nyt begreb på børsen ...and it worked

. Everyone has tried to focus on doing the right things 1. Clear governance structure 2. Clear strategy and action plan 3. Execution 4. Execution

. We have been lucky – Markets have developed favourably – We have built a strong track record of results – Our business model has proven to be sustainable

. And even better, the long term outlook is bright – High emerging markets exposure – Untapped market opportunities in Minerals and customer services

Expansion in Minerals is sustainable

Mining investments 1978-2007

Source: Citigroup Evolution from OEM into full-service provider in key industries…

Sub Discrete Full- Full- Island For full optimisationOEM equip. flow flow supplier plants of singlesupplier sheet sheet machineries

Holistic complete flow sheet Plant Design Design, Full service EPC of EPC + inte- and supply & approachprovider – (or plants O&M gration supply construct. overall plantDBO) optimisation

Horisontal (partial vertical) integration of the value OEM = Original Equipment Manufacturer EPC = Engineering, Procurement & Construction O&M = Operation & Maintenance system DBO = Design, Build & Operate To prepare ourselves for the uncertain, fast- changing unforgiving environment

. We need to develop a SMaC recipe – Specific – Methodical and Fanatic DISCIPLINE – Consistent Level 5 AMBITION . And exercise (10X) leadership behaviour through: Productive Empirical PARANOIA CREATIVITY – Empirical creativity for developing it – Fanatic discipline for sticking to it – Productive paranoia for sensing necessary changes New 5 year plan 2012-2016

New factory, Qingdao January 2012