'India is the only market globally with substantial growth': RHI Magnesita CEO Stefan Borgas

Q: What makes India a different place to be?

A: India is the one place in the world that you want to come to when you want to get energised. Right now, every [other] place in the world, at least in the industrial space, is depressed, with low morale and low energy.

This is a country with a lot of improvisation and talent. I was at one of our plants in northwestern India recently. Two years ago, it was horrible, [but] now it is world-class. We didn’t spend too much on it, apart from using a lot of energy, ingenuity, discipline, and rigour. It is a good example of how well Indians can work. The plan is to send some of our managers from Europe and the US to take a look at the plant to understand what can be done if you just apply common sense, good energy and fantastic teamwork.

Q: RHI Magnesita’s growth in India and many other geographies, to a large extent, has been through M&As. RHI and Magnesita also came together courtesy a merger in 2016 (RHI was a German company and Magnesita was from Brazil) to create a new entity...

A: That was a catalytic merger and kind of life-changing for the company. You had two companies with almost the same size, more or less with the same portfolio, with a regional, complementary setup. The whole thing was managed by me, and I had never worked in refractories [earlier].

I came [on board] a few months before the contract was signed. When I spoke with the owners of RHI, there was some nervousness on whether the big investment would pay off. They wanted someone with a process industry background and importantly, one who understands the cultural part of a merger.

We had almost a year to prepare for this merger since the antitrust authorities had to clear it. Now, when you have two companies of the same size, there was a chance to clean up all the bad habits from the past; for instance, we calculated prices for customers on the basis of cost-plus margins or putting volume growth before margin growth or not valuing working capital. This was an old-fashioned industry... And on the other hand, there was a belief in this being a mature business. On the Magnesita side, there was very little innovation and research.

We changed the management team across levels. At our 60-odd plants, most of the managers have been in their jobs for less than three years. There was a view that refractories is an old business—dirty and dusty. Not everyone liked the idea of a clean plant because it was too expensive, and customers would not pay.

Q: What is your growth strategy for India and how has it played out?

A: We have to go back about 15 years, when we decided to have a trading office in Delhi to import... At that time, there was a very small refractory industry in India, and customers loved these Austrian products. We then decided to build a plant in Visakhapatnam with the Raju family through a joint venture. That was very successful, but almost exclusively for exports.

Nobody thought about the Indian market then. We also bought into a listed company (Orient Refractories). By that time, we had different pieces to the Indian business operating independently and it was time to get them together. We merged the joint venture into Orient and then bought Orient. The Raju family became a shareholder in Orient, and then the import business was acquired step by step. That was followed by acquisitions.

Q: What makes India unique to you?

A: India is the only market in the world with substantial growth.... [And] in India we have an abundance of super energetic and smart people; we can tap into this unlimited potential. There’s a true hunger to improve and develop. The difference between India’s development now and that of China 30 years ago is that India is developing with 25 more years of technology and experience. From a sustainability perspective, it’s very clear that the newly constructed operations in our industry are built with the focus on eventually being decarbonised. The other difference is specific to our industry and that relates to a large part of the raw materials not being available here. That gives it a special level of complexity since they are such a large part of our value chain and make up 70% of our cost of goods. Unfortunately, those raw materials are predominantly produced in China. It’s early days, but we have found some interesting opportunities.

Q: Your annual report allocates about €450 million—the largest chunk—to M&As. Why?

A: It’s very simple. We are in a zero-growth market with over-capacity. If you build additional production facilities to grow, it means you have to replace someone else, because the market is already served... The options are to build a different business outside of refractories; and if we want to stay in refractories, we have to make acquisitions. The result of this is our M&A strategy. We have done 12 M&A deals over the past two and a half years. When we merge these plants together with our network, we create synergies. That’s what pays back in our M&A strategy.

Q: Is the M&A process tougher in India?

A: The competition in India is still very fragmented. There are a lot of small players in small niches and many of them are not very mature. That leads to a lot of M&A opportunities, but then the competition in India is characterised by a lust for negotiation (laughs). But other than this, there is not much of a difference. India is more value-oriented than China because it’s mostly about private entrepreneurs who need some payback. China is mostly government money that doesn’t need any payback. In India, businesses are built ground up.

Q: You have had interesting buyouts in India. Can you pick one to tell us how you went through the process, and some learnings?

A: Not every M&A integration goes the way we plan it... There are also cases where things go much better than we expect. That’s exactly what happened with the Dalmia acquisition, where the turnaround of one of the plants was faster than we thought.

But one of the things we wanted to do was to take the Dalmia products, many of which RHI Magnesita never made, and offer them on our global network. We failed at the beginning and that was because we did not connect the people who had the knowledge in the Dalmia organisation to our global organisation. It’s much better now but we are two years late. In M&A, the real work starts after you make the payment.

Q: How do you see your business in India looking over time?

A: It will be 100% different in five years. We are speaking of a dynamic market, and it is hard for customers to say what they will need in five years. This year, growth of steel production in India was not 6-7%, but 2.5 %. Then you have to scale back, or you have to compete against subsidised Chinese steel imports. All this affects us a lot since 75% of steel plants built in India are served by RHI Magnesita.

We bring our experience, toolbox and product portfolio to help the start-up phase of a steel plant... two years until everything runs smoothly. But a lot of these projects get delayed now because [steel] prices are not high. It affects us since the capacity we have installed is now on hold and we need to wait. The important thing is not to panic and think long-term all the time.

@krishnagopalan