Intouch Spring/Summer 2008
Industrial growth in developing markets
It takes leaders with vision, energy and technical skills to make sure industrial businesses take advantage of the opportunities for rapid growth in the developing world.
The developing economies ofAsia, Central Europe and SouthAmerica are expanding up to three times quicker than developedmarkets, and they are hungry for highly specialised engineering components for everything from production lines to cars to consumer goods.
For established European and US engineering companies this presents a great opportunity to achieve levels of growth not possible elsewhere. Take Hyva, the Netherlands-headquartered provider of high quality hydraulics solutions for trucks, for example. In just four years, strong organic growth in China and India has helped lift this 3i-backed company’s turnover from €146m to €446m.
This opportunity is not just about the short term. As these developing economies take giant strides towards maturity, there is a chance to establish strong market positions ahead of local competition. This also prevents local companies from growing up to use their bases in these fertile economies as sources of competitive advantage in world markets.
“We rarely go to low cost countries to bring the product back out, we go to supply it locally,” asserts Hamdi Conger, who serves as independent Chairman for the 3i-backed companies AES Engineering, Hyva, Mold-Masters and NORMA. “This has been an importantstrategy for me since the 1990s. If you go to China to use low cost labour for export, that is an approach that will only work until wages there increase.”
Combining vision and action
Breaking into these countries takes what Conger describes as a clear 0future vision. Working closely with management, he crafts a view of what the business should look like in five years’ time. At the top level, this breaks down into quantitative and qualitative goals – respectively financial targets and ambitions for the shape of the business – which are detailed by geography and sector.
But these goals have to be matched by action. Paraphrasing management guru Peter Drucker, Conger observes that vision without action is dreaming; action without vision is random activity; vision and action together can change the world.
“If you want to achieve your vision then you have to show people how to get down the actions needed into specific steps and get middle management involved in the planning process. We have to get the sense of ownership, to excite and energise people.”
In the case of NORMA, a Germany-based technology leader in clamping and connecting technology, a five-year financial target has been reached in two years. When Conger became Chairman in 2006 following 3i’s investment, he set a goal of €500m revenues by 2010, up from €240m at the time. NORMA swiftly acquired ABA in Sweden, Breeze Corp in the United States and is looking for further acquisitions in South America.
Additionally, it is expanding production facilities in China and India. With the €500m goal due to be achieved this year, Conger and his management are busy setting new targets for 2012.
As part of the planning process, Conger and management decide whether a business should be grown organically, or by acquisition, or by a combination of both. The route taken will depend largely on how much time they have to enter a market before competitors become too entrenched, and whether there are any suitable companies willing to be acquired.
Managing and planning growth
Yet growing a business this fast can present significant operational difficulties. Achieving higher sales and profits is only part of the challenge. Controlling a rapidly expanding business requires introducing new layers of management and new systems. This is especially so when entering markets with very different commercial cultures for the first time.
“Managing growth is more difficult than managing decline,” says Conger. “When I want to grow a company, the first thing I do is set the vision for the next five years. We then train people in how to manage change, and assess where the business needs additional resources to manage growth.”
At Hyva, for example, operations were strengthened in order to prepare the company to cope with being a far bigger business. The board has hired a new COO, as well as more manufacturing, quality and logistics experts. The financial side of the business has also been reinforced with new hires.
Hiring people who have managed far bigger and more complex businesses, and the staff to support them, is essential.Hyva now generates almost half of its sales from China and India alone. And it has recently expanded its facilities in southern Brazil. Quality of production has to be consistently high across these countries, and the financial systems must be robust.
Conger believes that in planning and implementing corporate transformations such as these, the chemistry of the board is important. He forms boards that are part strategic and part working boards. When he has 3i partners on his boards, he gives them specific tasks, such as asking them to chair the audit committee. Furthermore, he makes use of 3i’s network, especially when making acquisitions, hiring for key management posts and expanding to new parts of the world.
He adds that he has been fortunate to work with exceptionally talented management teams, who have turned corporate visions into reality with great competence.
“When we look back at these businesses in 10 years’ time we want to feel proud,” explains Conger. “We are putting in the foundations for these companies to grow profitably. For a sustainable future, they have to be present in the fast-growing parts of the world.”