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with Yann Reynaud, Vice-President, Head of Infrastructure Business, Schneider Electric China

25.05.2012 / Energyboardroom

Mr. Reynaud, can you please begin with an overview of Schneider Electric’s newly formed Infrastructure division and its key strengths here in China?

Before we delve specifically into this aspect of our business, I would like to frame the discussion by explicating whom, exactly, we are as Schneider Electric. As a group, we generate approximately 22-23Bn EUR annually. We are quite proud of the fact that today, approximately 40% of those sales are generated by emerging economies outside of North America and Western Europe.

When we speak of Oil & Gas, it is a sector that we put under our Utilities and Infrastructure divisions. At the same time, Oil & Gas is a segment in of itself. For instance, within the Infrastructure BU, we liaise with our colleagues across other BUs in order to be able to deliver a total solution to the client. Oil & Gas is, hence, a single segment covered by multiple Schneider business units, with a single BU—Infrastructure—leading the show.

Concerning the China subsidiary of Schneider Electric, I will not go too deeply into detail, but it is important to note that we have enjoyed 25-30 years of very, very solid growth in this market. I do not believe that we have had growth margins of less than double digits throughout this history. Furthermore, due to several acquisitions and our approach to development, we have gone from selling a few low-voltage MCV products in China to today encompassing a very full portfolio of locally implemented solutions.

The Infrastructure business represents about 5.7Bn of our 22.4Bn EUR in global turnover—around 25%. In the emerging economies, our sales are yet larger—in China, Infrastructure sales represent more than half of business. Today, we consider ourselves the number one company in the world for medium voltage.

The Infrastructure BU was formed in 2010 with the acquisition of AREVA T&D. The D portion was integrated into Schneider. The portfolio of AREVA—which was, for instance, quite strong in Oil & Gas—melded quite well with that of Schneider. Schneider had very strong geographic sales and distribution networks, while AREVA D was more concentrated on large-scale projects and solutions management. Hence, the sales coverage, on one side, was married with strong project management capability on the other side.

Two years after the acquisition, the combination has worked quite well thus far. In China, we in the Infrastructure division continue to achieve double-digit growth. We have been able to develop quite rapidly; specifically on the Oil & Gas side, we have really been able to integrate this project-based, solution-based approach.

China used to be a market driven by product purchases. Today, things are totally changing: when you address CNOOC, Sinopec, CNPC—they want you to be a partner. They do not want to simply have their vendors sell them a circuit breaker or a transformer. We have been able to respond to their changing demand and to collaborate with them in developing solutions. Our changing approach has not been easy—it has meant that we must totally change our concept.

Today in China, the Infrastructure BU has seven factories, and five design and R&D centers, and employs 4000 people. We insist on having this infrastructural presence because—and, of course, I am not the first to introduce this concept—we truly focus on ‘in China for China.’ We are innovating for the local market. We do not subcontract or import the technologies from America or Europe. We produce local innovations. We answer to local demand.

This evolution is quite natural. First, it is based on competencies, and, second, it is based on the market itself. If we look at CNPC today, it is the 7th largest company on the Forbes Global 500. CNOOC and Sinopec are not far behind. This means that these companies are, on their own, generating more than enough demand for local innovation. It is absolutely essential for us to align with them.

How does Schneider Infrastructure work? We consider ourselves a unique service provider, for one very simple reason: we are integrating our leading position in products—where we have been a leader in developing unique approaches to mass production, etc.—and adding layers of holistic solutions. We are starting to put into place something that we call ETO: Engineering to Other. This is an approach that calls for us to adapt to customer’s wants. We integrate this approach with the idea that we are not ‘Mr. Medium Voltage’; rather, we think as ‘Mr. Segment.’

This is in line with what I had mentioned previously: when we address an Oil & Gas customer, perhaps they need our medium voltage solutions on a particular project, but perhaps they are also interested in the security systems, and the low voltage equipment, and the data control, that our other divisions in Schneider Electric can provide—which is quite fortunate for us! We bring the full power of this group to the customer. Last year, we made an additional acquisition that had a notable impact on building our capabilities as the Infrastructure BU: that of Telvent. In terms of integration of total solutions—including the control system and the customized software portions—this has boosted our capability to serve customers. As of today, we can address the customer from the plug all the way to the control center. That is our philosophy, and we have continuously pushed it forward.

When it comes to Oil & Gas, we cover most relevant segments. Whether we are talking about a FPSO, access to electricity in a remote location with a harsh environment, oil field management, pipeline management, etc.—we are there. In China, for instance, pipelines are currently a major topic of discussion as the authorities seek to better transfer oil around the territories. We are talking about thousands of kilometers of pipe. Managing this midstream process is not a simple task.

We also help develop control centers for our Oil & Gas clients. We have an activity—mostly developed in Europe—that focuses on subsea, ensuring that clients can operate efficiently on the seabed. We are developing oilfields layer by layer. From upstream to midstream to downstream, we have a strong offering.

You transitioned to your present role after Schneider Electric completed the AREVA acquisition. At AREVA, you once lead in-country sales in Indonesia—what struck you most about the Chinese market?

I first worked in China in 1994. Having returned to this market, what surprised me most was that, over these 18 years, the country has evolved extremely, extremely quickly.

If we look at the Chinese Oil & Gas industry in the ‘90s, it relied for the most part on imported technology and the involvement of international companies. Today, while international companies still certainly play a role, China has built three major, global companies in this sector, which are able to operate in every relevant niche of the business—and they have demonstrated that they can be leaders in each of these niches. The speed at which they are learning is astounding.

As of today, China’s NOCs have been able to move beyond their identities purely as state-owned companies—with all of the administrative weight such an identity carries—to very efficient organizations that are able to move very fast: whether in the field of acquisitions or the field of operations.

A few years ago, we were looking at companies that were focused on top line and revenue expansion. Today, these companies are focused on efficiency. They are focused on truly being the best in class in their segments. Few countries have the ability to build such organizations—organizations that have the drive to reinvent themselves, and to do it so quickly.

You earlier mentioned an interesting point, which was that China’s national players are not interested in purchasing discreet products, but rather seek to take on international companies as partners, building a relationship that can lead to a more holistic amalgamation of products, services, and ultimate solutions. However, throughout our interviews, many foreign players have told us a different story: that the NOCs are interested only in the technology, and would prefer to purchase the product and then install, maintain, and utilize it on their own. We have heard that they are not particularly interested in building the service relationship you spoke of.

Our philosophy is quite different in this case. What we have learned through thirty years of Schneider’s activities here is that we must, indeed, build partnerships. Our success in China is founded upon this notion. If we do not create mutual trust then we may be here for opportunistic jobs—but we would have no longevity. This could be a choice made by some companies, but not Schneider. As Schneider, we cultivate long-term relationships as partners.

We try to understand what the customer wants, and where we can help. We propose a turnkey approach, which includes the supply of both products and services. And we consider ourselves a part of each project: for our portion of the undertaking, we consider it our full responsibility to make it work.

I can tell you that some years ago, this kind of discussion was not possible, and the reality was more in line with what you mentioned. The local customer would purchase what they want, and install it themselves in an effort to save cost. But as I said, the top line is not any longer the concern. The concern is efficiency—based on this, China’s domestic companies are calculating total cost, above and beyond initial purchasing cost. In looking at total cost, they have slowly discovered that it is better to have an expert with them.

One of the strengths of Schneider Electric is that today, we are in more than 100 countries. That means that wherever our partners want to go—whether it is China mainland, or Brazil, or the Middle East, they will find our service colleagues ready to support them. That is extremely important. They know if they have an issue with a refinery at 3 A.M. somewhere in the world, within a couple of hours someone from our organization will be there to help. This is a very, very valuable argument for a solution and partnership-based approach.

Another point you mentioned is the fact that Schneider has 5 design and R&D centers on the mainland here. As you said, you seek to make products in China for China. And yet, many companies are still skittish about establishing R&D infrastructure in what some still view as a market that is plagued by IP issues and a lack of the Western knack for innovation. For those that are skeptical about making such a commitment in this region, what would you cite as the appeal, and the benefits, of establishing research facilities in China?

It is a choice we have to make as international companies. China might not be the perfect place for IP. However, we must make an investment choice. We must look at the potential return.

I do not believe it is more risky to invest in product development in China than any other country, as long as we take the proper measures to protect our property. At the same time, such an investment opens the doors both to the domestic and export markets. This, by far, is a larger return than sitting around and waiting for IP conditions to change. Whatever you do, your competitors will come to this market and develop products here—whether these competitors are international or local. It is very naïve to think that just because you are not present in this manner, that the Chinese customer will not gain access to the technology they want. If they do not get it from you, they will get it from someone else. As Schneider, we would prefer to have this presence, and to help influence the standards, and influence the manner of design, rather than wait, and later discover in a year or two that a major competitor from China is the preferred partner of Sinopec, and we can no longer gain that market share.

This is perhaps an obvious answer, but it is truly the way we view the subject. You cannot stop the forward progress of this market. You must really think about how you can best participate—and localization of product design is one of the best ways to do so. We simply must make absolutely sure that we protect our IP, that we protect software like Telvent.

On the subject of Telvent, to what degree would you say the Infrastructure BU has fully integrated both Telvent and AREVA D, and is today a mature division within Schneider?

This is a bit of a tricky question. In terms of AREVA, we are today two years removed from the acquisition, and the greatest measurement of the state of integration is our results. I believe that, in China, we can say that things have been so far, so good—especially because at the time of acquisition there was almost no overlap in terms of portfolio. The sales forces have combined quite well. The timing, too, was perfect: as I mentioned, China is moving from discreet products to solutions, and the solution approach garnered from AREVA has been a great boost for us.

As for Telvent: this case is a bit special. Again, Schneider is moving from products to engineering and solutions, but we are still largely based on hardware. Telvent, of course, is based on software. We work to integrate the company, but, at the same time, we work to maintain the spirit that has drove Telvent’s success. Telvent, therefore, remains Telvent—although totally integrated into Schneider Electric.

The Schneider Infrastructure BU is a diversified division with its hand in a number of industries. How significant is Oil & Gas as a revenue driver?

Today, it is our third segment. Our main segment is Utilities, which is quite natural because we sell a variety of medium voltage products. Our second segment is Commercial and Infrastructure—where we are speaking about things like commercial buildings and highways.

Oil & Gas is third, but it is beginning to weigh quite a bit on my balance sheet! We have major ambitions for this segment. I am confident that if we meet in another year, we will be happy to say that Oil & Gas is our second-largest business driver, and quite close to the first! We find this ambition quite reachable.

How do you believe Schneider’s operations in China complement, in a broader sense, the goals that China has delineated in the 12th 5-Year Plan?

Along with what I expect is the majority of our peers, we are analyzing the 12th 5-Year Plan quite deeply. This plan has been in place for about one year, and we have noticed several overarching elements: for instance, going green, and achieving greater energy efficiency. These targets are perfectly in line with Schneider’s own model—with the way we seek to promote ourselves, and the way we approach solution provision to our customers.

I will give you a small example of our work in green energy. For instance: wind power. The largest wind market in the world is now in China. There is a major point here—it is nice to have a wind farm; it is better to connect it to the grid. But this is not exactly a simple matter. We are here to support China’s wind power drive, and to help the country connect such resources to the grid.

China is increasingly looking for greater energy efficiency—whether we are speaking about LNG terminals, or otherwise. For Oil & Gas customers, Schneider is able to analyze their projects and their usage of energy, and go beyond connecting them to the grid and giving them the power to flow electricity to their remote projects. We are also able to help them to save on electro-intensiveness.

Our customers want solutions that are totally available: in a refinery, if the work stops for just a couple of minutes, millions of dollars are lost. The second point they are interested in, however, is their overall usage of electricity and the price. Oil & Gas assets have a huge consumption of electricity. Any percentage points that we can decrease in their energy bill, while maintaining reliability, are going directly to their bottom line. If the customer needs help, we are there; at the same time, we can help ensure that they match the KPIs that the government has delineated in the 12th 5-Year Plan. Last year, for example, a company working in the South of China received word that they had overdrawn their consumption in relation to the KPIs, so they were informed that they would be cut—simply, cut. No company wants that! For this reason, clever solutions are needed to help save on their energy bill. Schneider can provide that.

What do you believe are the main challenges for a company like Schneider as this Plan unfolds? Many would say that the environment is growing increasingly difficult for Western businesses in China.

I do not believe things are becoming more difficult. I believe it is a question of adaptation. I truly believe that if you want to continue to grow in China, you have to go at the speed of China. I will tell you more: you have to ensure that you are one step ahead. The market is moving from products to solutions, and you have to be there. The market wants local innovation, so you have to be there. You cannot take your time in dozens of meetings, and, a year removed, finally make your move. Sorry: someone else is already there!

It is not only a question of the 5-Year Plan. The Plan gives you the right track; and that is the beauty of China—you know that this track will be followed. Inside of this Plan, you yourself, as a multinational company, must follow the direction.

In this sense, Schneider is quite well positioned. Firstly, we have a wealth of China-based experience. Secondly, our top management is committed. Our CEO, for instance, has quite some experience in this market, having worked here for a number of years. He visits our local operation often, and his understanding of the environment has been a big help in the speed of our decision-making.

Our management team here on the ground, as well, is quite visionary. Fortunately for us, communication is not at all an issue.

What is, indeed, the vision of this ‘visionary’ local management?

We look at the concept of windows of opportunity. China often opens windows; what, sometimes, a European company does not catch, is the fact that these windows are not open for very long. You catch the window, and you capitalize, or you run after the train. And the train runs very fast, so usually if you are running behind it, you are already too latee must ensure that we accompany the domestic players—the CNOOCs, the PetroChinas—in their development. Domestically, and abroad. I believe we have the right arguments to do so. The key points are partnership, understanding, speed of execution, and, today, providing solutions—and providing those solutions exactly where they are needed.



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