Editor's Note: This article originally appeared in European Coatings Journal, issue 1-2/2003.
The global coatings industry faces enormous challenges: margins are being eroded and markets are shrinking. What strategies are available for tackling this problem? Are there any philosophies that can offer new perspectives?
Leading coatings magnates met in Nassau, The Bahamas, on Jan. 13-14 for the first-ever global Coatings Summit. They analyzed the situation, discussed business models and presented their common vision of the future.
The invitations to a two-day coatings strategy conference came from hosts Neville D. Petersen, president of International Paint and Printing Ink Council (IPPIC) and JArgen Nowak, publisher at Vincentz Netzwork. Thirteen top-ranking speakers, including the heads of global top-10 players PPG, BASF Coatings, SigmaKalon, RPM and Valspar, shared their visions of the sector's future. Altogether 71 presidents, managing directors and senior managers from 17 countries raised issues, discussed and philosophized in the British Colonial Hilton Hotel in Nassau. Interactive forums offered further opportunities to engage in networking; this proved an exceptionally intensive but rewarding way of exchanging ideas on a formal and informal basis. The global significance of this assembled community was pointed out during the proceedings: the cumulative financial strength of the participants came to some $20 billion (U.S.), or about one third of the world market.
Don't Sell Below ValueIn a gripping introduction, Charles E. Bunch, president and CEO of PPG came straight to the point: consolidation is sweeping the sector, and is most pronounced in segments such as automotive, coil and marine coatings. Additionally, there are profitability problems everywhere, especially in Europe. With analytical precision, he identified and isolated the driving forces and also presented his vision of the future. Dr. Alan Barton, vice president/BU director of Coatings, Rohm and Haas, delivered his argument in a similar vein, albeit from another perspective. His charts painted an unpleasant picture of the value-added chain for the coatings sector. The petrochemical industry, right at the source, is earning very well; the next link in the chain - the suppliers - are holding their margins at a satisfactory level. Next in line, the coatings manufacturers are in crisis, yet their successors, the retail trade, are enjoying, in some cases, dizzy profits. Why is this? The coatings industry has seemingly let itself be forced too much into a downward price spiral. Manufacturers are selling "below value" and failing to convey the real benefit to customers that has always existed. Quite a number of participants commented that U.S. coatings manufacturers are in a far healthier condition relative to the rest of the world. He confirmed this assertion, but then cast some doubts on it. Top American companies would definitely be found in the double-digit profit zone, a delegate also said, but the bulk would "also only enjoy a 4-5% return."
With regard to cost management, the Old and New Worlds are equally uneasy about upcoming challenges, but have totally different concerns. The one side is muttering about having to build up massive reserves for potential, astronomic compensation claims (keyword: lead and asbestos), while the other is grumbling about collective wage agreements and barriers to redundancies. Thomas C. Sullivan, president of RPM, astutely observed, "I'll gladly take on your European social-welfare obligations if you'll assume my costs for litigation liability!"
Investing in MarketingWhile manufacturers cannot change the fundamentals, they can change their own policies. To be sure, noted Charles Bunch, intensive cost-cutting programs had borne fruit, but that was only one side of the coin. Essential issues had been lost sight of on occasion, namely new technologies spearheading uncompromising customer-focused company philosophy. Supporting evidence was adduced by Dr. Alan Barton. According to one study, one in every two British buyers from manufacturers of architectural coatings is dissatisfied. This can be traced back to a deplorable distance between coatings manufacturers and their customers. "Our industry is far too academic," he admonished, speaking out against what he believed to be the outmoded dominance of chemists in top management. His guiding principles: market research, market proximity and market urgency. Know what customers want and make yourself unique with properly designed products - from technology to packaging right through to branding. A lack of disposable finance is not the problem at all, he said, adding that there is always enough of that available for consumption purposes, at least in the West. The coatings industry, rather, worries more about competitors' market share and raw materials prices than about end users' wallets. "Yet that's where the money is!"
Acquisitions ContinueA few companies consider acquisitions to point the way forward. There are different ways of pursuing this strategy. Some buy according to the "stand alone" principle, granting a large amount of autonomy to the unit that has been acquired. Others believe in a fair degree of centrally controlled integration. Both approaches can be successful, as evidenced by the two coatings giants RPM and Valspar, which enjoy continual sales growth and consistently high profits. RPM and Valspar aspire to doubling their volume every five years. Skeptics in the lecture-hall were unconvinced about this, given that the global market is growing at just 2%. Richard M. Rompala, chairman, president and CEO of Valspar, demonstrated to them, though, that even the market leader had only a 3% market share. Given a total of 1,500 coatings manufacturers worldwide - a surprisingly low figure for many participants, but probably an expression of a certain acceptance threshold - he believed he could definitely press ahead profitably with his acquisitions strategy for some time yet ("there's still plenty of scope"). Thomas C. Sullivan, RPM, agreed with him wholeheartedly. Rompala did concede, however, that the European coatings market is not very attractive to him at the moment because of its low profitability. Sullivan, by contrast, was happy with his flourishing European businesses, which amply cover specialty niches.
Fragmented European Coatings MarketAs Pierre-Marie De Leener, CEO of SigmaKalon, the Netherlands, pointed out, the level of consolidation within the architectural coatings sector in western Europe varies considerably. Scandinavia, UK, Benelux (Luxembourg) and Portugal, followed by Germany and France all have a high consolidation rate (number 1 + number 2 = more than 80%). Italy and Spain, however, are still highly fragmented. His assessment of the East was received with great interest. Whereas, for example, Poland and the Czech Republic are producing strong local players, their neighbours tend to be dominated more by western companies. As for Russia and the Ukraine, they are "still completely unstructured!"
Of course, expansion and acquisition, which are loved and practiced by one and all, also have their pitfalls. Jean-Pierre Monteny, president and CEO of BASF Coatings can testify to this. He traced the history of his company, recapping its forays in those "foreign countries" of America and Japan. But the company has since learned from its experiences - and is now an enthusiastic proponent of "transnationalism." By this, he was referring to the creation of a network of highly autonomous units instead of centrally organized, enforced integration.
Small- and medium-sized coatings companies see themselves increasingly in a catch-22 situation. While not everybody can be a global player, nobody wants to submit to the highest bidder without a fight either. So, what alternatives are there?
Competitive Advantages through ExpertiseAhmet Yigitbasi, president of the Paint and Chemicals Group, Yasar Holding A.S., knows where his strengths lie. This Turkish coatings company, number 1 on the Bosporus, has systematically acquired intimate knowledge of its international target markets. Yigitbasi impressively presented the differentiated approaches adopted by his company, for example, in Egypt, Russia and Romania.
Another option for medium-sized coatings companies is to form an alliance, as Peter A. Rieck, CEO of Sonneborn & Rieck explained. This presupposes "equal partners, a shared vision of the whole picture, sound mutual trust and generally a great deal of energy."
Genuine opportunities will then present themselves - as evidenced by his company's alliance with Red Spot and Fujikura Kasei (Japan).
Next up, Kees Zaal, general manager of the TransOcean Coatings Association, advocated a somewhat different model. He described his organization as an association of small manufacturers from around the world whose collaboration is confined to marine coatings and corrosion protection. The keystones of its success since 1959 have been a common brand and coordinated R&D.
Brands, Brands, BrandsSteen Bjerre, president and CEO of Dyrup, Denmark, told his coatings colleagues that it will become even more important to juggle brands skilfully. It was vital to get away from technology-laden brand names and toward names that clearly describe the benefit to customers. Anybody faced with a choice between "acrylic paint" and "Permanently White" would always opt for the latter.
It was also essential to have sufficient capital for launching and establishing the brand.
Peter M. Surgey, CEO of Barloworld Coatings, South Africa, emphasized that not all markets can be opened up with brands. For example, the as-yet unstructured Russian market was proving resistant to this approach - so far. Price and availability are the ruling factors there, he said.
What Gets Measured, Gets DoneA company can only be profitable and healthy in the long term if it is measured not only "statically and conventionally," but also "dynamically." Visa Pekkarinen, president of Tikkurila, explained his KPIs (key performance indicators) in detail and with great clarity. All employees were bound to their goals (which were "ambitious, but feasible"). Furthermore, monetary and non-monetary compensation at Tikkurila vary extensively and fundamentally according to company division and local conditions. Thus, incentives granted in Eastern Europe are completely different from those in his native Finland.
Ditlev Engel, president and CEO of Hempel's Marine Paints, Denmark, championed "soft stuff." A globally active group with many widely dispersed units needs a "mission." Employees must know their company's goals and values so as to be motivated and successful. "The soft stuff is really the hard stuff!" Engel's charismatic presence and passionate rhetoric were extremely well received.
Thomas Sullivan, who by the end of the summit had advanced to become the community's elder statesman and is an expert with detailed knowledge of over 500 coatings companies - after all, he oversaw about 90 acquisitions over a period spanning 30 years - provided a spontaneous summing-up of proceedings: "We are accused of being boring and lethargic. The New Economy laughed at us. I say to you: Forget that nonsense. The coatings industry is and remains exciting and dynamic."