by Liz White, editor
“It’s probably the right time to invest in Russia,” said Juan Antonio Merino, general manager of Dow Formulated Systems, discussing Dow’s new systems house in the country.
The Dow executive is aware that some commentators feel that potential political instability in Russia, and too much concentration on the oil and gas businesses, make investment unwise.
“I respect those opinions, but it is not my view or Dow’s,” Merino said, in a 19 Jan telephone interview from his Milan, Italy, office.
Russia’s economy is recovering from a very bad 2009, when gross domestic product dipped by up to 8 percent. But observers feel that there is plenty of opportunity for strong domestic growth in consumer goods, automotive and construction products.
Dow’s aim is to get “a very solid position in Russia,” Merino said, and its new systems plant is “designed for future growth,” with the ability to easily double capacity (see box below).
Huntsman Polyurethanes has also recently invested in new systems facilities in Russia, as “part of our long-term strategy for the region,” said Simon Baker, Huntsman’s commercial director (see box on p23).
Merino noted that companies have to adopt specific strategies in doing business in Russia: “You cannot enter Russia from different points at the same time. You need to start at one place and build-up your local knowledge and relationships.” He said the way to do this is to “set up a centre and decide where else you need offices warehouses and other facilities, to meet customer needs.
“The culture is different, the business structure in Russia is different,” he commented.
And Baker at Huntsman made similar points, in a 22 Jan telephone interview from his Brussels base: “It’s like every country. If you come in from outside, or you do it without the understanding, you find the experience culturally very difficult.” But while doing business in Russia is different to working in Europe, Baker said, “I don’t think we see any obstacles in Russia that can’t be overcome.” One reason for this view is that, “We have invested in local people, and ... they know how to do business in Russia.” Baker said, adding “We have been in Russia ... for over 25 years.
We have a lot of experience.” The secret in Russia is “obviously to make sure you have good local people [who] understand how the market works. It is hard to run any business remotely,” he observed.
Importing materials into Russia is complex, and the distances are great, Merino said, pointing out that, “You have to adapt to local conditions to provide to customers what they need.” Supply chain logistics are important, and warehousing and storage of the right level of stock in the cold climate is critical, he added.
Russian economy: upturn has started
The concensus is that Russia has been less affected by the economic downturn than its neighbours, Ukraine and Byelorussia.
At Huntsman, Baker feels this is “because it has a pretty reasonably developed manufacturing industry base and a lot of indigenous raw materials.” Dow’s Merino noted that the Ukrainian market dropped in 2009 by perhaps 70 percent, while in Russia, the worst hit sector was automotive, where business dropped by a half, while construction was 30-35 percent down.
Merino also remarked on continued signs of recovery since June in Russia and the Republics.
Baker agreed: “Now we are starting to see an upturn in economic activity,” with the latest official forecasting from Russia of 3.8 percent GDP growth for 2010. “That is quite good, after some parts saw closer to minus 8 percent in 2009,” Baker said.
“One thing is very clear … it is quite a seasonal market,” because a lot of construction stops over winter. When I was in Russia last week it was minus 18°C,” the Huntsman executive said, “So a lot of construction activity can take long periods — especially in Siberia,” said Baker.
Merino also noted the seasonality of the business, with January always a low month. “I am expecting, from February onwards, little by little, a move back to 2008 demand levels.” Last year, Russian demand dipped by 30 percent below, Merino said, and then recovery started. So at an annualised rate demand was 20 percent below that in 2008.
Dow Izolan has made good inroads into automotive, especially with the implants, but there have been a lot of delays, Merino said, adding that projects are picking up now.
Agreeing that automotive was hard hit, Baker said this was, “particularly because of the credit issue. Manufacturers were struggling to get the credit to operate.” Last year “was a very tough year in Russia,” but Huntsman is confident that 2010 will be better, he said.
Merino also cited lack of credit as a major factor. “My personal view is that this crisis has been provoked by a huge lack of cash and credit — followed by a complete lack of motivation from the consumer.” “In Russia, what I have seen killing commerce for hundreds of small companies is lack of credit,” with governments subsidies going to the big companies. Now banks are giving credit and consumer motivation is coming back again slowly, he continued.
Construction may surprise everyone
Merino feels optimistic about recovery in construction: “We may see a faster recovery than we think today in construction in Russia and even in the rest of Europe. My personal opinion is that it may recover much faster than we think.” Here, energy saving is a clear driver, he said, as regulations in all countries, even developing ones, become ever tighter, and more complex building codes are adopted, Merino stressed.
“For me one of the challenges in this industry is to have enough material to cover those markets — if they grow much faster than we think [at present].” Asked if this may lead to a stage when supply cannot keep up with demand, he said: “Yes. Not because the industry is not investing, but because it is investing based on best-known plans. We tend to underestimate the peaks in the construction industry. They come much faster and those are huge markets that can change the supply/demand balance completely.”
Russian authorities supportive
Both companies dismissed the notion that there is any issue with corruption in Russia and said they apply the same ethical and accounting standards to doing business in Russia that they use everywhere.
And Merino was quick to praise the help Dow has been given. ”My experience in the entire process since 2006 ... at a local and municipality level in Vladimir, has been of a huge level of support,” he said. And he does not believe Russia suffers with political instability. “I also think that if Russia continues with this sort of support they will be able to attract a lot of investment.” Baker also commented that he travels to Russia often and is, “amazed how quickly things change — in terms of the infrastructure.” Russia is definitely investing in the future, “It is a thriving, vibrant country, you see the same consumer goods that you see in the UK in Russia.” Paolo Casciato, communications manager for Dow Formulated Systems, concurred, noting that an “enormous, powerful, immense driver for economic recovery and consumption is the Russian people.” He said they travel much more and “want the same domestic goods, the same cars, the standard of living, the food, the same clothes,” they find outside Russia. “That’s why the market will recover and recover fast.”
MERINO EXCITED ABOUT RUSSIA
Dow Izolan’s $40-50 million polyurethane systems house venture in Russia is, “extremely exciting for us,” said Juan Antonio Merino, general manager of Dow Formulated Systems, noting that Russia is a big market and “a very interesting one.” In line with this market size, Dow’s new 50- kilotonnes-per-annum systems plant at the Izolan site in Vladimir is also a big unit: “One of largest we have built in the world,” Merino said. And Dow, ”can double its capacity easily to 100 ktpa, with relatively minimal investment, so it is a plant for the future,” he said. The plant covers needs in the coming 5-6 years for PU systems throughout Russia, Merino said.
In the new unit, Dow Izolan will make a broad range of rigid and flexible foam systems for construction, automotive, footwear and other uses.
“We are completely committed to Russia,” Merino stressed, claiming that Dow is the market leader in Russia, although it does not disclose market share.
Since Dow’s PU systems business set up its joint venture with Izolan, in Vladimir, 100 km east of Moscow, in November 2006 it has been developing a warehouse/distribution system.
“Building a base in Vladimir was not by chance,” Merino noted. “We did it because Vladimir was the starting point of the PU industry in Russia,” and this has a noticeable effect. “All our employees have an excellent background and training.” “In these three years we have established an excellent relationship with our partner Mikhail Tsarfin from Izolan, and formed one single organisation out of the two,” said Merino.
Now Dow is taking the next step, building service centres in different parts of Russia, said Merino. It has a site in St Petersburg, and warehouses in Moscow and in Kazan, about 1500 km east of Moscow. “That for us is an interesting area, we think it will develop.
It is closer to Siberia,” and so forms a bridge to that region, Merino noted.
Dow is also considering service centres — consisting of a sales office with warehouse and laboratory — in other republics, such as Uzbekistan and Kazakhstan. The systems business already has a small service centre in the Ukraine, Merino noted.
Izolan has been strong in systems for insulating oil pipelines and district heating pipes, and the JV supplies more than 700 customers in construction, automotive, shipbuilding and refrigeration.
Dow has seen a lot of growth in one-component spray foams (OCFs), and in footwear, wood lamination and general elastomers – which is a relatively small but good market, Merino said. “These have been developed using all the technologies we bought from Hyperlast,” he added.
Dow plans to feed Russia with raw materials from its Western European facilities, Merino said. Supply and demand information “tells us we have enough capacity to do this,” he said.
“I don’t see issues for PU in Russia from a raw materials point of view,” said Merino, noting that Russia is accessible from Europe and from China, so raw materials may come from both sides.
Russia also has its own polyol production.
Dow Izolan employs 120 people and will raise this to 140 -150, including sales, manufacturing and service, said Merino noting that the “level of automation in the new plant is huge.” There is a rail connection into the site, to feed the storage tanks for bulk raw materials. Merino said the site is also impressive because the Russian climate means everything has to be inside — so all the tanks are under cover in heated facilities.
Merino emphasised that, “it has been extremely difficult to build a plant in the current environment. ...
At the start of 2009, we were asked to review all investment plans.” Dow “asked us to delay or cancel all plans,” he said.
For Dow, Merino said, specifically tough circumstances applied: on top of the economic crisis, Dow was also in the throes of acquiring speciality chemicals company Rohm and Haas for $14 000- $16 000 million. But it had also just seen the failure of its K-Dow joint venture in commodity plastics, which would have bought in $7000-9000 million.
So in January 2008, with sales 50-percent down and a lot of payments to make for Rohm and Haas, it is no surprise that Dow put a hold on plans.
To continue with the Russian systems house was, “a conscious decision, not only by the business but also by the corporation,” Merino said. “This tells you the commitment of Dow to the formulated systems business,” and that Dow is “extremely serious about its stated strategy of becoming a speciality company,”commented the business chief.
HUNTSMAN: STRATEGIC MOVE
Huntsman’s recent inauguration of a new 35- kilotonnes-per-annum systems unit, at the site of its existing HNMG joint venture in Obninsk, 100-km south-west of Moscow, “is part of our long-term strategy for the region,” said Simon Baker, Huntsman’s commercial director, who is responsible for the emerging markets of Eastern Europe and Russia.
The unit will extend HNMG’s existing “state-of the-art lines,” said Huntsman. The group’s investment — of an undisclosed amount — means it can now “produce a much wider range of products locally, helping to further strengthen our established market position,” said Baker.
Huntsman’s original joint venture with NMG is focussed on the adhesives, coatings and elastomers (ACE) side of the market. The new systems house aims for the full range of MDI-based PU systems, indicated Baker. HNMG, with over 150 employees, supplies ACE systems markets in Russia and other former Soviet Union (FSU) countries.
The operation has manufacturing and distribution facilities in Obninsk, with offices in Belarus, the Ukraine and other parts of the region.
“By combining local production facilities with efficient logistics and a regional distribution network, we aim to provide our customers with the highest levels of service and quality, across the whole region,” Baker continued.
Insulation is a big market for HNMG, said Baker, since Russia has a lot of district-heating pipelines and much new construction, requiring insulation materials.
Looking at the distances involved in serving the Russian market, Baker said that, as well as setting up the systems house, Huntsman has “also invested in a distribution network ... to get our products much closer to the customer.” “What we are trying to do is to deliver a quality product, in a short lead time — but also to be present where the customers are in all the major industry locations in Russia.” Instead of waiting for product from western Europe, local processors will be able to go to a supply point in Russia. “That is a very big difference in the lead time and distances involved,” Baker said.
SYSTEMS IN THE SPOTLIGHT
Noting that Dow’s strategy is to “become the largest speciality chemicals business in the world, so ... preferential investment in specialities is clear,” Merino said, “this does not mean that we will forget the basic products,” (isocyanates and polyols in polyurethanes).
“You need those materials to generate the specialities and to provide the cash to put into the specialities,” he said. However, “In PU, we will focus more on systems, the formulated area,” the Dow executive said — noting also that Dow continues to look for acquisitions.
Currently the PU business sells some 35-40 percent of its materials as systems, Casciato said, while Merino said that this is a grey area, because there are a lot of semi-formulated products on the market.
Merino is a strong believer that PU “gives infinite possibilities,” and that small systems houses can incubate a market rapidly. But he said, “Once that has happened, I don’t think they then have the resources to expand outside the country, for example. Or they have financial constraints in investment; or technological limitations in improving technology that has been developed.
Sometimes they also have limitations in getting access to raw materials.” At this stage the “characteristics of the multinationals come into play in developing chemistry, in expanding globally, with raw materials resources.” And he said the PU systems business is still very fragmented, with a disproportionate number of systems houses compared to other industries.