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Interview

with Sami Ilkka, General Manager China/Taiwan/Korea, Outokumpu China

25.04.2012 / Energyboardroom

Outokumpu has very recently committed to the acquisition of ThyssenKrupp’s stainless steel business unit Inoxum, a 2.7bn EUR move that will make this company the world’s leading stainless steel producer. In the wake of this deal, in the words of Outokumpu CEO Mika Seitovirta, “Outokumpu will become global”—the company had been “suffering from being so dependent on Europe.” What is your understanding of the strategy behind this major acquisition?

First and foremost, this decision was initiated by a bearish situation in Europe. Europe has been suffering from overcapacity and something had to be done to secure the long-term competitiveness of the company.

Considering the broader perspective, the merger will result in some interesting side effects both in the Americas and in Asia. In regard to the Chinese market, we cannot go into details as negotiations are ongoing—however, I can say that Inoxum has a presence in China today that synergizes very well with Outokumpu’s established capacity in terms of manufacturing plants, sales offices and service centers. There is very little overlap in terms of products and the geographical location of infrastructure.

I anticipate that, with the completion of this merger, we will develop a presence in the Chinese market that is much more stable than the presence we have had historically. Outokumpu has been an important, but a relatively small player, in comparison to the local competition. This reality will change. On the other hand, the manufacturing capabilities that will result are also very interesting.

Outokumpu had embarked on a major investment program in September of 2007, but postponed many of the planned investments in October of 2008, due to the global financial crisis. In December of 2010, this meant that the company decided not to re-start the postponed investments in its Avesta facility in Sweden. Nonetheless, during this same period the company built a new service center in Kunshan, China, to the tune of 20Mn EUR. What do you believe this says about the significance of the Chinese and Asian markets for Outokumpu?

During my time as part of this company, the message has been very clear from the group: we want to be a long-term player in China.

The fact that the investment went ahead is indicative of that message. However, the scale of the investment in Sweden was much larger that here in China—so it was perhaps a more important decision to postpone the latter.

The company sells approximately 200,000 tons of stainless steel to Oil & Gas companies globally. How would you appraise your presence in Oil & Gas in China? How focused is the company on this client segment, and where do you see room for improvement?

This segment plays a role for us in China, albeit not a dominant one. However, our present focus in China is primarily on special grades—this is relevant in the oil and gas industry in terms of duplex grades. Outokumpu has been a front-runner for many years in providing duplex grades to industries. We are educating the customers, and the replacement of obsolete materials with the new duplex materials is an ongoing process within the industry.

Chinese demand grows by between 10% and 15% per year according to current estimates. We would obviously like to grow at a comparable pace. We are a niche player in China at the present moment. We select our niches based on where we are competitive and seek to pursue those applications.

This niche approach is a result of the way the industry has developed; we used to have a broader market presence until the local competition started manufacturing on a larger scale. Prices decreased. As the majority of our manufacturing capability is in Europe, this, together with import barriers in the form of import duties, put us into a niche position in Asia. Conversely, this situation works very well with regard to our focus on the special grades, which are not volume products in the way that the commercial grades are.

Do you intend to begin challenging the local manufacturers for a greater share of the broader market once more, or instead to continue to concentrate on the top tiers, retaining your niche identity?

The latter, as substantial increase in demand for the special grades is anticipated in China. This applies to both local and imported production. Are your clients primarily domestic, or multinational, companies?

Our clients are, measured by volume, primarily local. We do work with foreign clients as well, but we do not expect this client segment to be a dominant volume driver in future given the size of the domestic share of the market.

How would you describe your approach toward forming relationships with your local clients?

This is a question for all Western companies. My perspective is that we need to be a local company, acting here. The time in which international companies came to China and behaved as if they were still in Europe is over. We need to be a Chinese company; we need to act in accordance with Chinese business practices. We must not close our doors during the mid-Summer, for example. Such small things are of very high importance.

Stainless steel is an expensive choice of material. Nonetheless, in our interview with Mr. Singh, your counterpart at Outokumpu India, he stressed the benefits of a lower total life cycle cost—due to the longevity and durability of this material—outweighing the detriments of a higher up-front cost. Have you found it difficult to sell the idea of lower life cycle cost in what has traditionally been a rather frugal market?

This challenge certainly informs a significant portion of our work here. Part of the work is to turn the commercial grades into special grades whenever it makes sense to do so. That is part of the reason that we have a niche position in China.

We use the technical expertise that we have built up here to convince our customers to purchase our products. Once again, this relates to localization. We do not rely on our European colleagues coming from Europe with all the knowledge. We have developed local expertise to the extent that 75% – 85% of discussions can happen locally. In very specific instances, we will turn to experts from further afield.

It is crucial to understand the customer and to be able have meaningful discussion with them about their needs.

What kind of competition do you face from foreign companies here? Would you describe yourself as the leader in your niche?

Taking into consideration the establishment that we have here, there is no question. We have local stocks, we have local expertise and we have the service center; we are far beyond where the other European companies are in terms of establishing our presence in the market.

Hence, we are far ahead of other international companies in our field and are operating in a different area from local companies. We are continuing to invest in our niche and work it as best we can.

Obviously, the local competition is becoming aware of special grades. But In a way, this is positive as it is helping our marketing become more effective. Having other companies advertising duplex grades raises the awareness of potential customers. We can then provide them with the highest-quality product.

You are manager of China, South Korea and Taiwan; what is the significance of grouping these regions together? What synergy can be achieved between these three markets?

First of all, we operate in the APAC region, which covers also India, Australia and South-East Asia. Within that region our sales company operates in South Korea, Taiwan and China.

I do see a number of synergies between China and Taiwan and a lot of customers move between the two. This is true of South Korea also, but to a lesser extent.

There are synergies on the cost and centralizing our management as much as possible. These are the sorts of factors that have driven such decisions in the past.

You were with ABB for a long portion of your career; you have been with Outokumpu for the last two years. What mandate were you given when you took up this position?

My mission is to grow Outokumpu’s operations in China. The initial task was to get the service center operational, increase volumes and in parallel with that, develop the local market.

Are you satisfied with the performance of the service center so far?

I am very satisfied. We had a very successful second half of the year last year, volumes are increasing and everything is working well.

You have been in Asia for a number of years—what keeps you attracted to this region?

It is the business climate. This is where things are happening today! In Europe, everyone is talking about downsizing and cost-cutting. It is more stimulating to build up something, and create anew, rather than tearing down the old.

What advice can you give to fellow expatriates posted in Beijing about the best approach toward business success?

Being parachuted into China is easier today that it was 8 years ago when I first arrived. I was fortunate in that I came in through an organization that was somewhat international already and was accustomed to operating in such an environment; there was a support network. I learnt from my initial mistake of trying to implement a western model here and assuming the way that we always did things in Europe would work here too. I have seen that the important thing is to find a balance.

A successful mix is achieved by having people within the company who understand both cultures. This helps to bridge the communication gaps.

What is your final message to the international readers of Oil and Gas Financial Journal? Why were you interested in having the opportunity to communicate with this audience?

The timing of this opportunity was good for us. We have a considerable presence in this market and are able to provide solutions from the service centers, with small batches, short lead times and local stocks from across a large section of our overall product portfolio. Outokumpu is no longer a trader in the Chinese market; we are a service provider with a completely different set of capabilities than we have had in the past.

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