with Swee Chee Lee, Vice President & General Manager, Emerson Process Management China
When Mr. Lim Haw-Kuang was selected to grow Shell’s business in China, his first steps were to localize his global company, while globalizing his local talent. A 2008 article about your reception of the Shanghai Magnolia Gold Award describes how you followed a similar path with Emerson. Can you give our readers some insight into the realization of this strategy to date, touching on the broader evolution of the business since you took the helm in 2001?
Emerson is not a new player in China. We have been here for more than 30 years, starting with technology transfers in the 1970s, establishing a gateway to China with our Hong Kong office in 1984, and building a representative office presence in 1986. In China, foreign businesses in their early stages start with rep offices; then, when the government allows it, the business can go deeper and establish joint ventures; this, eventually, can be followed by a WFOE—a Wholly Foreign-Owned Enterprise. This is how Emerson itself evolved in this country.
I came to China relatively early with our competitor Honeywell. Honeywell set up an office here in 1993. I spent a number of years with them, and then I joined Emerson Process Management to lead the China group in 2001. We were an approximately a $100Mn business, with about 200 people then, but today, we have grown the business seven-fold and the staff size five-fold.
I have been in China for nearly 20 years, and I have seen customer perceptions and the adoption of technology constantly evolve. The Chinese are very fast learners. Our expansion may be a stroke of luck; on the other hand, I really believe that we have a good team. When I first started in Emerson, my direct reports consisted of primarily expats—but we decided to build up local talents for both management and technical positions. My challenge, therefore, was to find good people to fill these senior positions. This program was intentional and was executed with discipline and speed and the result is just amazing, today, 85% of my direct reports are locals.
We want to bring our people—especially our local people—across developmental gaps and make them stronger. As the business has grown, our success has allowed us to really invest in our staff—in training, in hiring, etc. All in all, almost 98% of Emerson Process Management staffs in China are locals.
You mentioned the skills that the Chinese have developed over the years, and that they are fast learners. Presumably, this has facilitated your ability to take on local staff—would it have been possible to boast 98% domestic personnel 10 years ago?
No, it might be tough to do that 10 years ago. I remember that on our early projects, I had to bring in people from Singapore, India and Malaysia to assist on our projects, particularly on the project management side as well as engineering standardization discipline as well as in depth technical skill.
Project management and technical skill are very different competencies. Managers have to oversee so many dimensions. I am proud to say that, because Emerson has allowed us to develop our talent—sending them to business school if they do not understand business, or to technology training for new products, on job training, etc.—over the years we have elevated the skills of our Chinese employees.
The values of dual culture are very important. As Emerson, we are a Western company—an American company—and we have certain values as an organization. However, we are dealing with local Chinese customers, who have a different set of values. Neither is right nor wrong—they are simply different. The challenge is to understand and to satisfy both, and to do that successfully is certainly a competitive edge.
While we are on the subject, I would note that beyond Emerson, the evolution of EPCs in China can tell you much about the story of this industry. When we undertook a project on a BASF-Sinopec JV in 2002, all the EPCs were foreign: 100%! They sometimes sub-contracted work to local EPCs such as SEI and Shanghai Design Institute, who focused on the ‘C’ part—construction—of the work. From these experiences, the local service companies learned and advanced. On our SECCO ethylene facility project for BP and Sinopec in 2003, rather than sub-contractors, we saw Chinese EPCs become 50-50 partners. Finally, on our Fujian project in 2007—a Sinopec–Exxon Mobil–Saudi Aramco venture—100% of the EPCs involved were Chinese, including for the ‘E’ and ‘P’ aspects of a project. This transformation has, incidentally, allowed Chinese companies to become competitive globally, as well.
In the case of the EPC service sector, it seems that today, many of the large international players use China as an important procurement or business development center, but do not have engineering projects here. This is the case, for example, for Petrofac and Larson & Toubro. These companies’ China managers have cited that there is too much competition from local EPC players, who receive preference from China’s NOCs—especially on traditional projects. This seems in line with your own remarks. How would you describe the competitive environment for automation? How has Emerson positioned itself?
In the process automation industry, we are definitely the market leader. None of our competitors come close. The reason, first of all, is that we have strong technologies and products. Secondly, we have the right people to deliver our offerings and able to put everything together—to provide solutions for our customers in various indutries. We are here to solve customers’ problems.
We have a good understanding of our local customers’ needs and wants. We have involved in many projects in China and had encountered many interesting incidents in these industries. For example, we have seen some of our competitors bid at ridiculously low prices in some projects and we believed that this practice is unsustainable, and will not add value to anyone, not even to the customers. Most could not deliver and even if they did, will incurred more cost from all sides. It does not make sense at all. This is not our strategy.
Our view is that process automation cost is minimal in the overall project capital cost, a 3-5% of total project investment. On the other hand, if you cannot efficiently and safely startup the automation piece, the entire undertaking will be grossly delayed. Potential losses are huge! We are, therefore, a small part of a client’s investment, but we play a very important role in the overall scheme of things. Customers are learning to understand that. When Emerson takes on a project, our people become part of the customer’s team. Our goals will follow the goals of the customer. We provide the process automation solutions to the customers and we work as one team. This is another aspect of the added value we bring. Our customers return again and again, because we deliver. Of course, they want to evaluate their costs on each new project—and our job is to continually improve our cost-efficiency. One way to do this is to localize: we localize our people, as we have discussed; we also look into localizing our products, making them more tailored for the local market while lowering costs without sacrificing functionality, reliability, or our high global standard.
In a statement to investors, Emerson Chief Executive David Farr reported that business conditions in China are becoming increasingly difficult as the country boosts interest rates to combat inflation. As a result, Emerson is now seeing softening demand from customers in China, while at the same time inflation pushes up expenses for labor and materials. At the time of the announcement mid-last year, the Emerson Group’s growth in China was quite slow compared to Latin America and even the U.S. How is the Process Management division faring in this environment?
At process industries market, it lags approximately 6 months behind the residential or consumer markets. For example, we had a slow year in 2009 and 2010, even though the residential & consumer markets are picking up, we only see that in 2011, where we came back strongly. This momentum continues even into first quarter of 2012 where we grew 38% relative to the same quarter last year. Emerson Process Management globally, is also growing rapidly across the globe.
There are leading indicators, and trailing indicators. Mr. Farr was discussing leading indicators for the entire China business. As the Process Management division, we are, as I said, traditionally some months behind, and we will perhaps catch up to the general slow-down with time. However, as of today, we are growing very, very well.
Even though we do foresee a slow-down, in China slower growth will still equate to positive growth. We will continue to look for new market space in China like coal chemicals, deep sea production, or even shale gas, for example. And we know this: to continue to develop our business in a slowing economy, it is important that we remain relevant. It is important for us to play a role where our clients need us.
It is also extremely important for us to be open and honest with our clients. This is something I have stressed from my first day as leader of the Process group in Emerson. If we accept a contractual obligation from our customers, we must deliver; otherwise, we do not accept the contract and walk away. This is our reputation.
I have spoken about our technology, and our people. Our honesty and our reputation complete the package. As a company, you must look at what Emerson represents. Who are we, as Emerson? People look at us and remark: “They are a safe bet, and they delivered.” We are able to compete with the low-cost local players because of this excellent reputation. It is a competitive environment, and we must always look to differentiate ourselves.
Emerson has opened an Engineering and Development Center within the recently expanded Asia Flow Technology Center in Nanjing, China. This brings the company’s investment in the site up to $35Mn-plus. What are the advantages of having a center of excellence in China, and what role does the facility play in your commitment to serving your customers in Asia, from Asia?
Emerson Process Management has many business units. The Asia Flow Technology Center belongs to three of them: Micro Motion, Rosemount Flow, and Daniel. Together, these units form the core of our expertise in flow technology.
Emerson has been very successful in selling global technology into a local market. Now the time has come for a shift. China has become the second-largest economy in the world; they are set to become the largest. We cannot continue to sell products in this market under foreign specifications. Instead, we must understand what customers in China, specifically, want. In order to do that, we must set up E&D—engineering and development—locally. Then, we can listen to the customer: what kind of price range are they interested in? What kind of features do they require? What do they prefer in design elements? By doing this, we can tweak our existing products; and, in the future, we can come out with brand new products uniquely designed for China—and from China, we can release them into the rest of Asia. That is our thinking.
Are needs really so unique here, in terms of component and design requirements, etc.?
I believe they are. Look at a product like an iPhone, and how many of its features are actually utilized by a typical user? Or look at the automobile industry: the users might not be interested in many of the features that Western carmakers offer today. A lot of foreign companies’ products sold in China have a slew of features that the customer does not need. The customer, furthermore, is asking for a lower price point, but the company cannot offer it because of their cost structure in products that have features which were irrelevant to the local “good enough” market. We have to adjust to our customers’ needs and wants.
That is what we have started doing with the technology center. We want to design products that are tailored to our customer’s needs. At the same time, we will maintain the technological lead that we have globally. Within the next five to ten years, we expect to see the full realization of this strategy. And our customers will recognize this: that we are here, speaking with them and listening to them, and we are not designing products for them out of a room in Boulder, Colorado but we will be designing Asian products for Asia.
What do you see as the future direction of this country’s energy sector and how will Emerson Process Management’s role evolve here over the next five years?
China is a country of 1.3 billion people; every year 18.5Mn cars are sold here. Tens of millions of people are joining the middle class. They will drive demand. Demand for better livings and demand for food, water and energy. This will continue to make China a net importer of energy, especially in oil and gas. China national oil companies (NOCs) continue to look for energy sources both offshore and onshore and within and outside of China. In this area, Emerson can play a major role. For the process management business globally, 40% of our business comes from oil & gas. In China, as oil companies venture out looking for oil and gas resources or as they develop unconventional sources, Emerson is there to work with them and help them. We know how work in this sphere: we know how to measure the resource; we know how to control it; we know how to automate it. This is what we do! From production, to liquefaction, to transportation, to loading and re-gasification, we are there. Our instruments and regulators and valves, our fiscal measurement devices, our control systems, are ready.
The question is how we can work with the national oil companies, the local EPCs, and the multinationals coming in. Companies like Shell are beginning to very actively exploring shale gas, and our people are in discussions with them, and we will continue to work together to see how we can collaborate.
We are in an exciting moment. I believe shale gas will change the world—especially for the U.S. and China. We, as automation experts, have raised our hand and said, “Here we are, work with us.” We have a wealth of experience with gas, as witnessed by our track record on, for example, Australian LNG projects.
There is no better place in the world, in my view, to be a process automation company than in China. The industry is moving so fast that we are seeing construction companies—people who build houses, and have no prior experience in the energy sector—enter into new businesses like coal chemicals. This makes Emerson more important, as a company that really knows the industry and that will be there to help such clients and work with them.
The worst scenario is if so much is happening in China, and a company is not ready or prepared to respond to the Chinese’s needs and wants.
Are you prepared?
Absolutely. We are versatile, flexible, and agile. We have the full support of our global organization. Emerson is ready for whatever may come.