Managing Globalisation

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, Vestas 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 Copenhagen 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

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