with Jonathan C H Hui, CEO, SBI Offshore Limited
As a venture capitalist, you invested in SBI Offshore in 2007. What lead you to take up the role of CEO at SBI Offshore the year after?
I came from a financial background, having worked for companies such as Merrill Lynch and UBS, which resulted in an interest to become a venture capitalist for SBI Offshore in 2007. SBI Offshore itself was founded by David Tan whom I had faith in because of his strong marketing and commercial skills. He was looking for a partner to help manage the growth of the company. He wanted to move the business away from pure marketing and distribution, into an integrated engineering solutions provider. As Asia now builds at least 80 to 90% of all rigs and offshore vessels worldwide, of which 65% of their cost is in equipment, construction companies will increasingly seek to procure their equipment locally from Asia. When you build a semi-submersible for example, it does not make sense to ship thousands of tons of equipment all the way from Europe or the USA to the shipyards in Asia. It thus makes common sense to manufacture and assemble bulky equipment in Asia. Now SBI Offshore can offer subcontracting of such manufacturing services to the equipment OEMs in Europe and the USA. This allows them to save on the delivery costs which can amount to 5 to 10% of the equipment cost. Moreover, being closer to the customers offers greater flexibility in terms of production. With that in mind, SBI Offshore decided to expand into manufacturing. Earlier this year, a number of European equipment OEMs audited and certified SBI to become one of their subcontractors. In fact, SBI has become the only subcontractor to many of these equipment OEMs from Europe. As far as we are aware, SBI Offshore has become the only subcontractor in China for the drilling equipment manufacturer Aker MH of Norway.
How do you manage to be cost and price competitive by Asian levels when you import or distribute technology coming from expensive markets such as Norway and the USA?
This is the reason why SBI Offshore is moving away from marketing and distribution. The company is moving towards becoming an integrated engineering solutions provider, assembling or fabricating equipment in Asia. For delivery in Asia, SBI will now only source the design and critical components from the USA or Europe while the actual manufacturing will take place in Asia. This saves costs and reduces delivery lead times from one month to a couple of days to ship from our facility in China to anywhere in Asia.
When we met with ASME, we were told that Singapore is a great place to start a business with the country being a door opener to other markets in Asia such as China and India. How do you leverage on this positioning of Singapore to attract more clients?
SBI Offshore concentrates its engineering in Singapore to support the production facilities in China. At the same time, the company also has design centres in Houston and the Netherlands for design and concept engineering. These concepts and designs are transferred to Singapore where the detailed engineering takes place. Singapore is a very important technology centre for SBI Offshore. It is only the manufacturing business that is concentrated mainly in China or other parts of Asia – depending on where the customer is. In a way, Singapore serves as the company’s technology hub.
You arrived in the company in 2008. What were your key achievements since your arrival and what are your priorities for the future?
Since I arrived, I have taken the company public in November 2009 and obtained a listing on the Singapore Exchange. In March 2010, the facility in China was qualified by Aker as its only subcontractor for the Aker MH division in China. SBI Offshore has also acquired a company in the USA called Sea Reef, which is involved in the design and engineering of deck equipment as well as offshore cranes. In a short period of time, SBI Offshore has gone beyond being just a marketing and distribution provider to an integrated engineering solutions provider.
Following the IPO in November and the raising of capital this May, you were named as a stock to watch by the Singapore Edge? Why should investors consider SBI Offshore?
SBI Offshore is the first mover in the outsourcing of proprietary technology in offshore equipment to Asia. SBI Offshore has worked together with mainly European and American principals reflecting a high sense of trust in the company’s ambitions. These principals are aware of the value SBI Offshore can bring to them. Companies that simply approach an equipment OEM in the USA or Europe promising 30% lower costs will have difficulties doing so. In the oil and gas industry, you do not want something to happen as what just occurred in the Gulf of Mexico. You can get cheaper equipment, but it needs to be reliable and have all the quality standards and certifications. In this industry, almost 90% of the equipment going onboard an offshore rig comes from either a European or an American brand. SBI Offshore therefore needs to be very careful in the way it approaches the market. Rather than reinventing the wheel by selling under its own branding, it cooperates very closely with its own principals.
Following the IPO, how would you rate the initiatives and incentives that Singapore is putting in place in order to help companies grow and how easy is it to raise capital in Singapore to nurture growth?
Compared to many other Asian countries, Singapore is ahead, but it can still learn quite a bit from European and American markets. In Norway for example, many investors know about the offshore industry and even the small shareholders are willing to invest in small but promising companies. In Singapore, although there is a Catalyst market to cater to smaller companies, a lot of retail investors still need to be educated on the merits of investing in the offshore industry. There is still a need for a lot of education.
In your financial report of 2009, there was a growth in revenue of 47% and an increase in gross profit of 72% which is quite high with the economic slowdown. How did you manage to realize these results and what were the main factors that lead to increasing margins?
SBI Offshore has received a lot of new orders in the last couple of years which were due for delivery 18 to 24 months down the road, so there is a lot of spillover from two years ago. Just like the offshore industry, SBI Offshore has also experienced a slowdown. The company is expanding its product portfolio which is why Sea Reef in the USA was acquired. Sea Reef has high-value products with cranes easily selling for 10 to 20 million US dollars. If you compare that to SBI’s turnover of 12 million US dollars last year, the company expects to see significant growth in its business in the next few years, especially as the company goes into the subcontracting business.
What are the niches where SBI will develop its capacities and expand further?
Last year, approximately 95% of the annual turnover came from the marketing and distribution business. SBI Offshore expects this ratio to decline to 30% in three years from now. The remaining 70% will come from either subcontracting or SBI’s own proprietary products such as the Sea Reef solutions. This shift is of course relative as the company still expects to see its marketing and distribution grow in absolute terms.
With your entrepreneurial spirit, you have achieved public listing and market entry into China. What do you see as the next challenge for SBI Offshore?
The next challenge is to convince both the company’s principals and customers to allow companies like SBI Offshore to manufacture or subcontract some of the equipment. To do so, the company needs to ensure that it meets all the quality standards, maintains a skilled workforce and complies with the very stringent oil and gas industry standards. By working in partnership with its principals and enjoying continuous support from its customers, SBI Offshore will receive guidance in addressing this challenge. If the company has the technology from Europe or the USA while manufacturing under guidance of its principals, SBI offshore believes it can achieve the same quality standards while delivering its solutions on time.
In practice, how can SBI Offshore reach the same level of quality? Do you expect to see times of lower levels of quality that will require adjustments or do you believe that you can reach your targets very quickly through hard work?
The process will take a lot of hard work. It took us 2 years to convince Aker to trust us. The company invested a lot of time and resources in preparation, which it will continue to do so. SBI is very fortunate that virtually every one of its principals has accepted its quality standards and manufacturing capabilities, and is willing to work with SBI to deliver better value to its customers. In a way, the downturn in the past two years has been a blessing in disguise. It has led to customers demanding lower prices, forcing the OEMs to analyze how to fundamentally change their cost factors. It is not a question of a 5 to 10% reduction. Customers are now looking for at least 20% price reduction. This is very difficult to achieve when you continue to manufacture in the USA and Europe.
In Malaysia, there was a great need for technology transfer and training of human resources. How will SBI Offshore learn from its principals and implement this new know-how in China for example?
That is the point where Singapore acts as an important catalyst. We have been building many jack up rigs and semi-submersibles in Singapore and therefore have a lot of qualified engineers, production people, and so on. If they can build a rig, they have the core l competencies to build equipment as well. That is why SBI Offshore has trained a lot of people in Singapore to deploy them into China. The HSE manager, production manager and some of the supervisors are from Singapore. We hope this can shorten the learning curve.
With the problems in the Gulf of Mexico, have you seen hesitation among your principals to outsource their production to China or Asia, or have their requirements remained the same?
Everyone will have to reconsider the production processes and production-related technology. Whether you will manufacture in Europe, the USA or Asia, the same quality-stringent controls have to be applied.
China and India are growing cost-competitive markets. What makes SBI Offshore a competitive market and what will be your competitive edge?
In terms of cost, we do not expect to see a significant reduction in the near future, especially because SBI incurred significant start-up costs in terms of facilities and technology transfer. The company will not go in the industry telling it will be cheaper. What SBI tries to tell them is that the customers are the ones that want the equipment being built in an area close to their production facilities. That is the main driving force. Saving on delivery and shipping cost is very obvious. As the company climbs the learning curve, it should be able to deliver cost savings to its customers. Nevertheless, the principals do not agree to subcontract to SBI because it is cheaper. One of the principals for example, a new one, decided to appoint SBI as their distributor for Asia last year. At the same time, they needed to deliver a piece of equipment within one month to their customer in China. With a delivery lead time from Europe to China of one month, the equipment would have had to be produced in one day if a European manufacturing facility was used. SBI managed to manufacture within 2 weeks and deliver within 2 days. Because of this, our principal did not have to pay a penalty. We did not quote them a low price because it was not a repeat order, but SBI did save them from incurring a hefty penalty fee.
When you obtained the public listing, your vision was to become Asia’s leading integrated provider of offshore equipment. You also had 4 main goals to transfer your production to China, expanding your range of products, expanding your geographical reach and to form strategic alliances. What are the priorities and what do you want to achieve in 2010?
The focus in 2010 still relates to the same goals. SBI is receiving more subcontracting enquiries and orders, is expanding its portfolio with the Sea Reef acquisition as well as the geographic coverage with currently 4 people in Brazil trying to open up that market. Moreover, production was transferred to China while the Singapore office continues to be used as a technical support hub.
If we imagine SBI Offshore in 5 years, what do you envision for the company by 2015?
SBI Offshore wants to be the largest integrated equipment provider to the rig builders in Asia, delivering value to them in partnership with technology companies in Europe and in the US. When looking at the rig building market in Asia, there is a substantial amount of dollar value of rigs that will be built in Asia in the near future. If you for example imagine 10 billion USD of total revenue per year from rig building and support vessel construction in Asia with 65%, or 6.5 billion USD, being in equipment, SBI Offshore will target that 6.5 billion USD by having the biggest market share.
Since you have a background in finance, how do you use that knowledge to lead an oil and gas company in Singapore?
Having a finance background is both a strength and a weakness. What counts is to assemble the best team of people with different skill sets such as marketers and engineers, to complement missing skills. Having worked in the financial services industry for many years, I have many options with regards to M&A. Thus, when SBI Offshore forms strategic alliances with technology companies in the USA and Europe, I have more options up my sleeve. I can do a strategic alliance with them, an acquisition, a merger, a joint venture etc. These are very familiar to me, so it depends on what makes sense. You first of all look at the opportunity from the operational and strategic view. You must look at whether the company in the USA or Europe has possible synergies with our business. Our strength is in marketing and manufacturing. Thus, if they have good technology, they can complement SBI by partnering us to become a strong global competitor together. If they need capital, SBI can invest in them. If they just want the company’s marketing and manufacturing, there is the possibility to simply form a joint venture. I think my background in finance allows me to look at finance as an enabler to form a globally competitive and integrated equipment provider.
If you can send out one last message to the readers of Oil and Gas Financial Journal worldwide, what kind of message would you like to send out?
Investors worldwide have a unique opportunity to invest in a company that will be a leading integrated equipment provider in Asia like no other.