NOTHING VENTURED

KNAUF Group:

Russia remains a strategically important market

KNAUF has been a long-term partner of Russia, having established business contacts here all the way back in 1970’s. In 1993, the company started to heavily invest in its business activities in Russia. Janis Kraulis, the head of Knauf Group CIS, talked about the company in an interview with Capital Ideas.

Mr. Kraulis, KNAUF started to invest in Russia right after the collapse of the USSR. What informed the decision to enter the Russian market?

The first contacts between KNAUF experts and the USSR’s scientific community were established way back in the 1970s, when there were very few threats to the economy and the USSR as a state. The Soviet gypsum industry was in need of research and technology and KNAUF had always been very strong in terms of research and development. We had the experience and the know-how. We quickly opened KNAUF Engineering in the USSR, which was an engineering company that was part of Knauf Group. So when the Russian market opened up, KNAUF was familiar with the gypsum industry. Incidentally, this knowledge didn’t necessarily give us the confidence we needed to invest in the Russian market. In the 1990s, most gypsum enterprises were in bad shape, both financially and in terms of technology. Moreover, the political and economic climate was unstable, the rules were constantly changing and there wasn’t much potential for foreign investors. A key argument for investing in the Russian market was the significant potential of the Russian construction materials market. Russia is a huge country where millions of people need better residential conditions and a good quality, comfortable environment for work and life in general.

Was it hard to start doing business here? How was your company able to establish itself on the Russian market?

It was very difficult. At the time, the Russian market had encountered somewhat of a paradox – there was a lot of demand for modern, high-performance construction finishing materials and no knowledge or skill when it came down to working with them. So the company had to put in a lot of education efforts, to train and retrain professional staff. By 1995, KNAUF opened its first training center in Russia outside of Moscow.

KNAUF has its own production facilities in Russia. Where are your company’s enterprises located and what do they manufacture?

These are mining enterprises that provide natural gypsum stone for our own enterprises, as well as companies in the cement industry and other gypsum-based construction materials manufacturers. We also have metal enterprises, factories that manufacture gypsum boards and plasters, primers, thermal and acoustic insulation materials, building chemicals, as well as Russia's largest plant producing cardboard from waste paper. In 23 years, KNAUF has erected or acquired and renovated 15 production facilities, which are located all over the country. We want to provide our clients with the optimal conditions for acquiring KNAUF products and solutions.

Did you acquire your production facilities in Russia or did you build them from scratch?

In the beginning, KNAUF was interested in participating in the capital of construction material manufacturers that already existed at the time. We purchased shares at investment tenders. KNAUF’s investment activities in Russia commenced in 1993 with the purchase of a share in TIGI, a thermal insulation and gypsum products factory at the Krasnogorsk plant. We then purchased shares in Kubansky Gips in Krasnodar region, Pobeda and the cardboard plant in St. Petersburg and Leningrad Oblast, Gips in Tula region and Avangard in Nizhny Novgorod region. The existing lines were renovated or partially replaced with new ones. The second phase was the construction of new plants, first in the industrial buildings already available to us, then in the surrounding areas. Finally, in 2003 the first KNAUF manufacturing enterprise in Russia built from scratch opened its doors. The KNAUF GIPS Kungur location had never housed a production plant before – just unfinished buildings of a future plant for the production of parts for large-panel buildings. Nonetheless, there was already some infrastructure in place there. We did build our new plant in Irkutsk Oblast completely from scratch. However, we still haven’t been able to secure access to natural gas there and have to use the more expensive CNG option. Today, the situation for investors who want to erect their own production facilities in Russia is completely different from what it used to be in the mid-2000s. This year we are finishing up construction on a new plasters production plant at in industrial park in Chapayevsk, Samara Oblast. The support we are getting from the local government there is tangible.

How many people does KNAUF employ in Russia and where do you find the right people?

We employ about 4,000 people in Russia. Our staff members include different kinds of specialists: miners, drivers, assembly line workers and office workers. Only a few of our employees here are foreign professionals. We use local labor markets to do the vast majority of our hiring, recruiting employees from communities located nearby. Moreover, I want to point out that our situation now is fundamentally different from what we were dealing with when KNAUF first entered the Russian market.

Now, specialists at Russian KNAUF enterprises go on business trips to other parts of the world to work on establishing new plants with international teams. The people sent on these business trips must have unique competencies and experience, and Russian specialists definitely meet these requirements.

Your company opened a KNAUF Academy in Russia, and there are KNAUF training centers all over the country. Could you talk a little bit about what these centers are? Where are they located and what do they do?

The KNAUF Academy includes 78 KNAUF training centers, a big community of experts, gurus of industrial training and demonstrators. There are 10 KNAUF training centers in the CIS that are based out of our enterprises. There are 54 resource centers operating in primary and secondary vocational education institutions. Finally, there are also 14 KNAUF consulting centers based out of universities.

How effective are the training centers in terms of promoting KNAUF in Russia?

KNAUF is proud of our systemic approach to our work with clients, which means that we go beyond simply supplying finishing materials – we offer comprehensive solutions for construction projects. Education is one of the components of our system, along with consulting support, delivery and documentation, for example. We want clients to use our construction materials correctly. This guarantees that the consumer will get top quality results that meet expectations and we won’t have to process any complaints. Of course, these centers also serve as an excellent platform for promoting drywall construction technologies in Russia, since there are still people who are biased against it. Expanding the sales market is especially important for the industry right now, since existing manufacturing facilities in Russia exceeded market capacity several years ago.

The main consumers of drywall systems are commercial real estate construction projects. They are ahead of the curve in terms of assessing and implementing new technology.

In anticipation of the FIFA World Cup 2018, a lot of attention is focused on erecting athletic facilities for the event. Is KNAUF taking part in preparing for this athletic celebration?

Hosting the World Cup in 2018 is a big responsibility and a unique opportunity for Russia and the construction industry. On our part, we are providing multi-faceted support, from developing the initial design to finishing the facilities. Especially since KNAUF has accumulated a lot of experience in providing support for the construction of new athletic facilities, from football stadiums for the European championship in Germany and the last World Cup in Rio to multiple facilities in Sochi, which hosted the Winter Olympic Games in 2014. Every time, KNAUF was ready to offer a comprehensive approach for the project, supplying systems and solutions as well as providing technical support at the facilities.

Could you give specific examples? Which 2018 WC facilities are built with KNAUF construction materials and technologies?

I think that KNAUF construction materials are used in the construction of all these facilities to some extent, along with hotels, media centers and other infrastructure elements. KNAUF offers a whole series of unique solutions that are a lot more efficient than their alternatives. For example, we supplied a large number of our innovative Aquapanel cement boards for the reconstruction of Luzhniki.

Last year wasn’t exactly the best in terms of relations between Russia and the West, and this was reflected in the economic indicators. Was 2016 a successful year for KNAUF in Russia? Could you give us your thoughts?

KNAUF is engaged in business and, according to the company co-founder Nikolaus Knauf, does not have any economic reasons for altering its business strategy in Russia. 2016 was a difficult year, but KNAUF CIS was still able to reach our objectives. Our ruble turnover didn’t fall compared to the previous period and we were able to retain our market share. We were able to achieve these results thanks to our programs targeting the reduction of production costs, resource base optimization, increased efficiency of the production processes, introducing new product on the market and continuing our localization processes. We are trying to use more components made in Russia for our products.

Judging by the number of KNAUF plants in Russia and by their product line, your company is playing a lot of attention to localizing production. Will this trend continue into the future? Is KNAUF planning any new investments in Russia?

According to KNAUF’s Managing Partner Manfred Grundke, Russia is a strategically important market for the company. Over the past 24 years, KNAUF has invested over $1.6 billion into the Russian construction industry. We continued to invest in 2015 and 2016, and plan on modernizing our enterprises in the future as well. About 80% of our business in Russia has been localized.

Of course, considering the current state of the economy, significantly investing into development is not a simple decision. At the same time, it’s a testament to the fact that we are serious about working in Russia and plan to be here in the future. The main objectives for KNAUF CIS are increasing localization, optimizing production processes, promoting new products and searching for new product niches.

We plan the launch of several new production lines and enterprises in 2017. These include the plasters plant in Samara Oblast, the modernization and construction of a similar plant in the Mari El Republic, as well as the plant for Aquapanel moisture-resistant cement boards in Tula Oblast. We also plan on launching a large-scale investment project to improve the production of cardboard at the KNAUF PETROBOARD plant in Leningrad Oblast.

Note from Capital Ideas:

Today Knauf is one of the world’s leading manufacturers of modern insulation materials, drylining systems, plasters and accessories, thermal insulation composite systems, paints, floor screed, floor systems, and construction equipment and tools. With over 200 production facilities and sales organisations in over 80 countries, 26,000 employees worldwide, the Knauf Group is without doubt one of the big players on the market – in Europe, the USA, South America, Russia, Asia, Africa, and Australia.

 

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