Diversification strategy
Engineering:Uhde CEO Dr Wolfgang Essig about engineering strategies

With more than 2,000 plants to its credit, Uhde belongs to the world’s leading engineering companies in the design and construction of chemical, refining and other industrial plants. The 2003/2004 business year has been a record year for Uhde. The corporation is currently pursuing a diversification strategy. It booked orders worth 1.4 billion euros and had to assimilate EnCoke, Edeleanu, Inventa Fischer and Chemgineering, four very diverse companies, within a short period of time. Wolfgang Essig, CEO, about the engineering company plans sustain continued success in the competitive marketplace.

PROCESS: Mr. Essig, everybody is talking about the booming Chinese market. Uhde has only had modest success in the country. Why is that?Dr. Essig: The Chinese want 30% to 40% of goods and services to come from domestic sources. For 60% of the order, they want us to accept 100% of the risk. This is not in line with our company policy. We also did not have the right contacts to the decision makers in the design institutes. We have recently founded a management company in Shanghai and are taking a different approach. We are pursuing a “lead engineer” strategy in order to strengthen our market position. With our portfolio and the more effective use of our worldwide network of subsidiaries we will be better positioned for the future.

PROCESS: How strong is the Chinese competition in the engineering sector?Dr. Essig: It is difficult to say, but there is competition over the horizon. We will see it in five years plus X. In principle, Chinese design engineering organizations do not have in-house know-how. For the most part, the large licensors have not granted them any licenses.However, some of this know-how is found in Chinese plants. Nevertheless, I do not expect to encounter a competitive situation in our core business. Entry to the WHO should be used as an opportunity to improve patent protection. The Chinese will then be in a position where they either have to develop their own processes or, like us, they will have to take out licenses. They will then have to pay license fees, and the competitiveness issue will become less dramatic.PROCESS: Uhde had a lot of success selling fertilizer plants in 2004. Is this another area were the trend is to build larger and larger plants?Dr. Essig: Yes. The world scale concept, which we have implemented in Saudi Arabia, has been very successful, because anyone in the future who can make enough feedstock available for world scale plants will probably have to come to us, even the Chinese. However, large plants mean that
fewer orders will be placed in the future. The competition for each individual order
will become significantly more intense.PROCESS: One area that you are currently focusing on is the MENA region (Middle East and North
Africa). Is this not somewhat risky given the security issues?
Dr. Essig: There is no assessment which indicates that the MENA market as a whole is at risk. You have to look at the situation in each country. Egypt is stable. We have a new attractive market in Libya. The situation in Saudi Arabia gives us cause for concern, despite the fact that investments are still relatively large. Qatar on the other hand is secure. In Iran, we expect that the project business will decline somewhat because of the need to finance the enormous investments that have been made recently. PROCESS: Despite the fact that you have a broad base, do you still have gaps in your portfolio?Dr. Essig: Uhde continues to be an EPC contractor with our own technologies, and we want to retain this business model. We are a European-scale engineering firm, so we have to offer a broad portfolio and diversify. Of course there are still gaps in our portfolio, and if opportunities present themselves to acquire third-party technology, we will take advantage of them. PROCESS: Has claim management become a bigger issue?Dr. Essig: You cannot afford not to have claim management. However, it would be an illusion to think that you can acquire contracts at unfavorable conditions and then earn money with claims. There are hardly any loopholes for claims in our contracts. Customers even transfer their risks to us. In the past, the customer was willing to accept the risk that the site matches the description in the construction specifications. Now, the engineering companies
often accepts that risk. Costing becomes difficult if drilling samples become part of the up-front services you provide. The bottom line is that you need claim management, but I do not see it as a big success factor. PROCESS: Time to market has been reduced significantly in recent years. Do you have any leeway?
Dr. Essig: In a few cases, but on the whole the answer is definitely no. At the end of the day, the effects of duplication and the resulting learning curves are among the factors that affect time to market, i.e. the engineering phase is complete, and we can start placing orders more or less right away. The key factor in the timeline is the lead time for key equipment. If you order a compressor set today, you will have to wait 14 or sometimes as much as 20 months for delivery. You obviously cannot promise a total construction period of19 months. You still have to ship, install and test the equipment, etc. Repetition factors and unrestricted re-use of engineering documentation can provide some breathing space, as can mobilization of the workforce, but that is a delicate subject. PROCESS: What percentage of your subsystems are sourced in Europe?Dr. Essig: For companies affiliated with AGAB, the current level is 60% from Western Europe. It used to be 80%. Although the European mechanical engineering industry still plays a major role, the situation is slowly changing.
PROCESS: How important are quality and delivery performance?Dr. Essig: I would like to tell you that it is worth paying a higher price, but that is unfortunately not the case. Despite the fact that we still source a high percentage of our components and equipment in Western Europe, quality and delivery performance have declined significantly.
PROCESS: Where do you see Uhde in a benchmark comparison of large European engineering firms?Dr. Essig: We are not first or last with our current technology. However, what our competitor Technip has achieved in recent years is quite remarkable. They are the undisputed number one in Europe. We see ourselves in the top five. Our goal is to be number two.
PROCESS: Given the international competitive environment, do you see a need for consolidation in the industry?Dr. Essig: Yes. I do not believe that we will see the same constellation in the plant construction industry ten years from now.
PROCESS: Where will Uhde be in five years?Dr. Essig: Our current plan is to achieve on our own average turnover of 1.5 billion euros with some investment and to stabilize at that level. We want to establish regional centers, and that means relocating more of our operations outside of the country. We have to make our customers understand that when they need a plant in the future, they will be dealing with the regional office and not Uhde GmbH. We want to more than double the foreign contribution, from 150 to 400 million if possible, and we will have to work hard to achieve that.