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Interview

with Linhu Ma, Country Manager, National Oilwell Varco Grant Prideco China

21.03.2012 / Energyboardroom

Mr. Ma, you began your career as an engineer for CNPC, but have worked for foreign companies in China since 1993. How would you say the dynamic between domestic and foreign players in China has developed over the years?

I think it would be best to split our discussion according to period. China opened its doors just over 30 years ago. Before, say, 1995, the infrastructure in this country was very poor, and the majority—in some niches, 80-100%—of innovative technology, equipment, and techniques for things like facility construction had to be imported. Foreign companies actively entered the market to grab these opportunities.

During this period, Western enterprises established joint ventures with Chinese manufacturers and R&D centers. From these experiences, Chinese organizations learned quite a bit. Furthermore, since 1995, the economic situation in China became better and better. Gradually, China became a competitor to foreign companies.

Let us call 1995-2000 a learning stage. In the beginning of the 2000s, China gradually needed more and more oil & gas, and, at this stage, it had learned much about international standards of technology and manufacturing skill. Hence, Chinese enterprises began to expand: not only inside China, but abroad, as well. The rate of international activity amongst Chinese companies has risen very steeply over the last years. Still, we cannot say that they are truly ‘internationalized’—this is a different concept.

Before 1995, foreign companies had huge businesses here in China, in cooperation with domestic partners. In the ensuing years, as the Chinese have become more competitive, foreign companies have lost market share. In recent years, I believe that the situation has become increasingly difficult for foreign players doing business here. If they do not change their mode of thinking, and if they do not change their strategies, they can no longer be successful here.

We have certainly heard this before: many of the most successful foreign players in this market have indeed changed their global ways of doing business to better adapt to this distinctive environment. For example, the country managers of companies like Shell, WorleyParsons, and Emerson Process Management have all cited localization as one of their most effective strategies. How has National Oilwell Varco’s Grant Prideco division localized its own activities?

Grant Prideco has tried to localize both staff and products from the early stages of our business here. Within drill pipes, pipes and tool joints compose 99% of the cost of the product. We have fully localized the materials that go into these components. For the pipes, we have a joint venture with China’s largest pipe manufacturer—Tianjin pipe mill (TPCO). For tool joints, we similarly have a domestic supplier.

Grant Prideco’s added value to this scenario can be described as follows. Firstly, we have research and engineering departments located in the United States, which continues to lead in innovation. Secondly, Grant Prideco, in accordance with the words of our president Randall Edwards, has for years implemented a policy of “global engineering; global quality.” This means that, regardless of whether our product is made in China, the Middle East, Houston, or in any of our other facilities, it should have equal quality and we should deliver this quality to each customer in each of our markets.

This equal quality extends not only to our finished products: we also help our partners to guarantee the quality of the basic materials that they supply to Grant Prideco.

How difficult is it to achieve such standards in an environment like China, which, in some cases, still has not developed the internal standards of U.S. enterprises?

In the very beginning, it was quite difficult. We are talking about matters like chemical composition, quality control standards, and etc. As I began to mention, foreign companies bring value to their partners in these respects. Our partnership allows our partners to improve their processes and systems, and to become more competitive in other aspects of their business.

Today, our partners—and, I am sure, the domestic joint venture collaborators of other foreign companies—have learned much and made a wealth of changes. Today, they meet our technical requirements without any problems.

Does your manufacturing operation in China serve only the local market, or are the products you manufacture here exported to other regions within your global operation?

We at Grant Prideco China actually have a very particular way of doing business. Many foreign companies take China only as a low-cost production base for other regions. Grant Prideco is different: we use our China facilities partially for delivery outside of China, but we mostly focus on the Chinese market.

The Chinese market is, for us, more important. If have a capacity issue, the local market will certainly receive preference. This market is very important for our company globally.

How is Grant Prideco able to compete within this market as an equipment manufacturer? As you mentioned, you have international quality standards—this surely entails higher overhead costs. How, then, are you able to compete with some of the local manufacturers that not only have lower overhead, but are in many cases the preferred partners of China’s national oil companies?

While Chinese local manufacturers do indeed enjoy lower costs, in most cases, they also produce lower-value products. For more complex environments—deeper wells, harsh weather conditions, etc.—Grant Prideco often offers superior solutions.

Still, you have a valid point—we must always look to reduce our costs and increase our margins. We must do this to survive and to compete with local competitors. We have to control our costs, and we have to discuss solutions with our supplier partners. We share our profits with them; we share, also, market difficulties with them. If we win a low-price contract, we need for our partners to reduce their prices as well.

However, this is not what is most important: it is more important for us to pursue high-added-value product contracts that allow us to generate higher margins. To sell these products to the market, we must build a strong dialogue with our customers. For this reason, we have built a very strong team: we are able to have higher-level, more technical discussions with our clients, and to help them face their technological difficulties. We must provide them with a good solution that other manufacturers cannot provide.

At the same time, we must fight for commodity products. We cannot only focus on added-value contracts, because there are only so many out there in the market. Here, we compete on price—we actually have no problem competing on price with domestic suppliers. Our cost-control measures are highly efficient.

You mentioned the difficulties in the market, and, prior to this interview, you presented us with some figures about your sales slump in 2009. While you attributed the slump in large part to the global recession, you noted that perhaps the company’s sales suffered more than they should have. Since your appointment in 2010, the business has returned to growth. What strategies did you implement to affect this turnaround?

When I joined Grant Prideco, I found that we enjoyed the strong support of our colleagues in Houston—especially Mr. Randall Edwards. We built up a very good, and very complete, team: with more sales people, and more technical staff.

We approach our customers more directly than before; as I have said, we have more high-level technical discussions. My entire core team travels every week, and most of them never stay in office for an entire week! I expect the same from myself—I have not stayed in-office for more than three days at a time since Chinese New Year.

We also briefly discussed this company’s R&D prowess—indeed, Grant Prideco is an innovative company and was recently honored with a “Best Innovation” award for the successful development of the first Sulfide Stress Cracking (SSC) Resistant Friction Weld. China is actively seeking to move up the value chain from “Made in China” to “Created in China”—does NOV incorporate this country into its global research and innovation efforts?

Currently we do not. I must point out that in China, we still experience IP problems. Grant Prideco products are already often copied here, and to bring an added level of high-value development here is, for us, currently quite difficult.

Do these concerns extend to your basic manufacturing operations in China as well, then?

Of course. Nonetheless, we face these conditions as they are: again, China is a very important market for the company.

What do you believe is the role that Grant Prideco China plays within the global Grant Prideco organization?

To give you an idea of China’s significance, Grant Prideco China has a complete team on the ground. We have a very integrated group—a country manager, operations manager, sales manager, technical manager, financial controller, etc.

China is an excellent place to invest. It has low costs, and the people are quite intelligent, hard-working, and loyal. I find these qualities in both my top staff and our plant employees. Of course, there are difficulties at times—but, from my experience of other markets, China offers truly excellent human resources. This, and the market is growing very quickly!

What kind of growth do you expect for your own company to achieve, over the next five years?

I believe that we can realistically expect to grow between 5-10% per year. But it will not be easy. Firstly, local, private manufacturers are fast catching up; but this is not the greatest issue—the greater challenge is the market protection affected by China’s national companies. China’s NOCs have manufacturing subsidiaries of their own, and this reality makes certain market niches inaccessible for us.

Mr. Ma, you began your career as an engineer for CNPC, but have worked for foreign companies in China since 1993. How would you say the dynamic between domestic and foreign players in China has developed over the years?

I think it would be best to split our discussion according to period. China opened its doors just over 30 years ago. Before, say, 1995, the infrastructure in this country was very poor, and the majority—in some niches, 80-100%—of innovative technology, equipment, and techniques for things like facility construction had to be imported. Foreign companies actively entered the market to grab these opportunities.

During this period, Western enterprises established joint ventures with Chinese manufacturers and R&D centers. From these experiences, Chinese organizations learned quite a bit. Furthermore, since 1995, the economic situation in China became better and better. Gradually, China became a competitor to foreign companies.

Let us call 1995-2000 a learning stage. In the beginning of the 2000s, China gradually needed more and more oil & gas, and, at this stage, it had learned much about international standards of technology and manufacturing skill. Hence, Chinese enterprises began to expand: not only inside China, but abroad, as well. The rate of international activity amongst Chinese companies has risen very steeply over the last years. Still, we cannot say that they are truly ‘internationalized’—this is a different concept.

Before 1995, foreign companies had huge businesses here in China, in cooperation with domestic partners. In the ensuing years, as the Chinese have become more competitive, foreign companies have lost market share. In recent years, I believe that the situation has become increasingly difficult for foreign players doing business here. If they do not change their mode of thinking, and if they do not change their strategies, they can no longer be successful here.

We have certainly heard this before: many of the most successful foreign players in this market have indeed changed their global ways of doing business to better adapt to this distinctive environment. For example, the country managers of companies like Shell, WorleyParsons, and Emerson Process Management have all cited localization as one of their most effective strategies. How has National Oilwell Varco’s Grant Prideco division localized its own activities?

Grant Prideco has tried to localize both staff and products from the early stages of our business here. Within drill pipes, pipes and tool joints compose 99% of the cost of the product. We have fully localized the materials that go into these components. For the pipes, we have a joint venture with China’s largest pipe manufacturer—Tianjin pipe mill (TPCO). For tool joints, we similarly have a domestic supplier.

Grant Prideco’s added value to this scenario can be described as follows. Firstly, we have research and engineering departments located in the United States, which continues to lead in innovation. Secondly, Grant Prideco, in accordance with the words of our president Randall Edwards, has for years implemented a policy of “global engineering; global quality.” This means that, regardless of whether our product is made in China, the Middle East, Houston, or in any of our other facilities, it should have equal quality and we should deliver this quality to each customer in each of our markets.

This equal quality extends not only to our finished products: we also help our partners to guarantee the quality of the basic materials that they supply to Grant Prideco.

How difficult is it to achieve such standards in an environment like China, which, in some cases, still has not developed the internal standards of U.S. enterprises?

In the very beginning, it was quite difficult. We are talking about matters like chemical composition, quality control standards, and etc. As I began to mention, foreign companies bring value to their partners in these respects. Our partnership allows our partners to improve their processes and systems, and to become more competitive in other aspects of their business.

Today, our partners—and, I am sure, the domestic joint venture collaborators of other foreign companies—have learned much and made a wealth of changes. Today, they meet our technical requirements without any problems.

Does your manufacturing operation in China serve only the local market, or are the products you manufacture here exported to other regions within your global operation?

We at Grant Prideco China actually have a very particular way of doing business. Many foreign companies take China only as a low-cost production base for other regions. Grant Prideco is different: we use our China facilities partially for delivery outside of China, but we mostly focus on the Chinese market.

The Chinese market is, for us, more important. If have a capacity issue, the local market will certainly receive preference. This market is very important for our company globally.

How is Grant Prideco able to compete within this market as an equipment manufacturer? As you mentioned, you have international quality standards—this surely entails higher overhead costs. How, then, are you able to compete with some of the local manufacturers that not only have lower overhead, but are in many cases the preferred partners of China’s national oil companies?

While Chinese local manufacturers do indeed enjoy lower costs, in most cases, they also produce lower-value products. For more complex environments—deeper wells, harsh weather conditions, etc.—Grant Prideco often offers superior solutions.

Still, you have a valid point—we must always look to reduce our costs and increase our margins. We must do this to survive and to compete with local competitors. We have to control our costs, and we have to discuss solutions with our supplier partners. We share our profits with them; we share, also, market difficulties with them. If we win a low-price contract, we need for our partners to reduce their prices as well.

However, this is not what is most important: it is more important for us to pursue high-added-value product contracts that allow us to generate higher margins. To sell these products to the market, we must build a strong dialogue with our customers. For this reason, we have built a very strong team: we are able to have higher-level, more technical discussions with our clients, and to help them face their technological difficulties. We must provide them with a good solution that other manufacturers cannot provide.

At the same time, we must fight for commodity products. We cannot only focus on added-value contracts, because there are only so many out there in the market. Here, we compete on price—we actually have no problem competing on price with domestic suppliers. Our cost-control measures are highly efficient.

You mentioned the difficulties in the market, and, prior to this interview, you presented us with some figures about your sales slump in 2009. While you attributed the slump in large part to the global recession, you noted that perhaps the company’s sales suffered more than they should have. Since your appointment in 2010, the business has returned to growth. What strategies did you implement to affect this turnaround?

When I joined Grant Prideco, I found that we enjoyed the strong support of our colleagues in Houston—especially Mr. Randall Edwards. We built up a very good, and very complete, team: with more sales people, and more technical staff.

We approach our customers more directly than before; as I have said, we have more high-level technical discussions. My entire core team travels every week, and most of them never stay in office for an entire week! I expect the same from myself—I have not stayed in-office for more than three days at a time since Chinese New Year.

We also briefly discussed this company’s R&D prowess—indeed, Grant Prideco is an innovative company and was recently honored with a “Best Innovation” award for the successful development of the first Sulfide Stress Cracking (SSC) Resistant Friction Weld. China is actively seeking to move up the value chain from “Made in China” to “Created in China”—does NOV incorporate this country into its global research and innovation efforts?

Currently we do not. I must point out that in China, we still experience IP problems. Grant Prideco products are already often copied here, and to bring an added level of high-value development here is, for us, currently quite difficult.

Do these concerns extend to your basic manufacturing operations in China as well, then?

Of course. Nonetheless, we face these conditions as they are: again, China is a very important market for the company.

What do you believe is the role that Grant Prideco China plays within the global Grant Prideco organization?

To give you an idea of China’s significance, Grant Prideco China has a complete team on the ground. We have a very integrated group—a country manager, operations manager, sales manager, technical manager, financial controller, etc.

China is an excellent place to invest. It has low costs, and the people are quite intelligent, hard-working, and loyal. I find these qualities in both my top staff and our plant employees. Of course, there are difficulties at times—but, from my experience of other markets, China offers truly excellent human resources. This, and the market is growing very quickly!

What kind of growth do you expect for your own company to achieve, over the next five years?

I believe that we can realistically expect to grow between 5-10% per year. But it will not be easy. Firstly, local, private manufacturers are fast catching up; but this is not the greatest issue—the greater challenge is the market protection affected by China’s national companies. China’s NOCs have manufacturing subsidiaries of their own, and this reality makes certain market niches inaccessible for us.

Does this mean that when the national oil company equipment subsidiaries develop products that can truly match your own levels of quality and innovation, there will be no more room for your growth in China?

I do believe that there will be room for us. China is a large market. Furthermore, Chinese NOCs constantly evolve their policies. For example, last year, one big oil group had a set market share directly allocated to its own subsidiaries. However, this year, they have lifted this requirement, allowing for more competition. These policies fluctuate, but I see an overall positive direction.

Even last year, when a more protectionist matter is acted, we still enjoyed relatively good market share. This is because we differentiate ourselves. We have, for instance, a more full range of products than many of our competitors.

National Oilwell Varco acquired Grant Prideco in 2007, and, at the time, CEO Peter Miller said that the acquisition would help NOV expand its overseas business in markets like China over the long term. Have these words rung true?

The acquisition of this company by NOV was a great event. What Mr. Miller said is true not only in China, but also worldwide.

Let us take one example: the drilling rig. One of NOV’s key niches is the business of rig packaging. For this, drill pipes are required. With Grant Prideco assimilated into the NOV Group, NOV can supply everything from the platform, to the downhole tools, to the drill pipe. This makes NOV, as a holistic solution provider, very competitive. We can offer customers an excellent package price.

At Grant Prideco, we can also communicate with other staff within the organization that deal with the same customer, and share information. We help each other, and, hence, help the customer.

Incidentally, I would like to add that for the past year, NOV has been conducting quarterly China strategy meetings. This month, the sixth such meeting will be held, lead by Mr. Douq Bennet , the VP of NOC corporate. All regional managers, country managers, and sales managers will come to Beijing for a one-day meeting to share our experiences and ideas.

You have been with this company for two years now, having left your previous long-term position with a competitor. Why did you choose to come to Grant Prideco?

This is truly a great company: in terms of thinking, strategy, focus on the Chinese market, and the great measure of support and flexibility it gives to local staff. This is a company where headquarters trusts its country representatives, and allows them to make decisions. After all, local staff know their market best.

What is your final message to the international readers of Oil & Gas Financial Journal on behalf of NOV Grant Prideco?

We have participated in the development of the Chinese market for a long time. My belief is that Chinese people, once they become your friends and partners, will keep you as such forever. Do not miss the opportunities in China.

I do believe that there will be room for us. China is a large market. Furthermore, Chinese NOCs constantly evolve their policies. For example, last year, one big oil group had a set market share directly allocated to its own subsidiaries. However, this year, they have lifted this requirement, allowing for more competition. These policies fluctuate, but I see an overall positive direction.

Even last year, when a more protectionist matter is acted, we still enjoyed relatively good market share. This is because we differentiate ourselves. We have, for instance, a more full range of products than many of our competitors.

National Oilwell Varco acquired Grant Prideco in 2007, and, at the time, CEO Peter Miller said that the acquisition would help NOV expand its overseas business in markets like China over the long term. Have these words rung true?

The acquisition of this company by NOV was a great event. What Mr. Miller said is true not only in China, but also worldwide.

Let us take one example: the drilling rig. One of NOV’s key niches is the business of rig packaging. For this, drill pipes are required. With Grant Prideco assimilated into the NOV Group, NOV can supply everything from the platform, to the downhole tools, to the drill pipe. This makes NOV, as a holistic solution provider, very competitive. We can offer customers an excellent package price.

At Grant Prideco, we can also communicate with other staff within the organization that deal with the same customer, and share information. We help each other, and, hence, help the customer.

Incidentally, I would like to add that for the past year, NOV has been conducting quarterly China strategy meetings. This month, the sixth such meeting will be held, lead by Mr. Douq Bennet , the VP of NOC corporate. All regional managers, country managers, and sales managers will come to Beijing for a one-day meeting to share our experiences and ideas.

You have been with this company for two years now, having left your previous long-term position with a competitor. Why did you choose to come to Grant Prideco?

This is truly a great company: in terms of thinking, strategy, focus on the Chinese market, and the great measure of support and flexibility it gives to local staff. This is a company where headquarters trusts its country representatives, and allows them to make decisions. After all, local staff know their market best.

What is your final message to the international readers of Oil & Gas Financial Journal on behalf of NOV Grant Prideco?

We have participated in the development of the Chinese market for a long time. My belief is that Chinese people, once they become your friends and partners, will keep you as such forever. Do not miss the opportunities in China.

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