Document 2NzwyRR0vXvdD7ognV36q9VqL

FILE NAME: Eternit (ETER) DATE: 1971 DOC#: ETER119 DOCUMENT DESCRIPTION: Unpublished Consultant Report - Discussion of Relationship between Swiss-Eternit Group & Johns-Manville TO Johns-M anville Case Team FROM DATE: s. T illes and T. Pyle A ugust 31, 1971 SUBJECT: Tho B o sto n C o n su ltin g G rou p T hese notes a re from a d iscu ssio n betw een Sy T illes and Tom Pyle of The Boston Consulting G roup with D r. Max Schm idheiny, M r. Claus K reis {Managing D ire c to r of E te rn it's operating com pany in Sw itzerland), M r. Hans Stoffel (an aide to D r, Schm idheiny), and M r. R obert D orner (M anager, A sbestos D ivision - A m iantus S. A .) of the Sw iss E te rn it group, held on A ugust 13th a t D r. Schm idheiny's villa in H errbrugg, Sw itzerland. M ajor Points of D iscussion 1. Swiss E tern it saw J-M as acting in a very uncoordinated way. E v id en ce: handling of original contract negotiation the Advocate m ine controversy J-M purchases of blue fiber from Cape the B elgian problem 2. W hile Sw iss E te rn it saw J-M as a p a rtn e r, they w ere som ew hat disconcerted by the fact that J-M apparently did not view them in this w ay. 3. Swiss E tern it was concerned about the statu re of the person w ithin J -M w ith whom they w ill deal. They want top-level contact w ith J-M , som eone whose prom ises are backed up. They feel their position in the w orld asbestos m ark et ju stifies it, and they a re fully p rep ared to recip ro cate. 4. E tern it views J-M as a "sleeping giant" th at does no m arketing and is v ery susceptible to the vag aries of the m ark et place. G-15 1-6 WIT 011397 SUBJEpT PAGE 2 The E ternit Group A sbestos cem ent outside the U ,S . is la rg e ly dom inated by the Eternit group. This group consists of com panies in each of the con tinental E uropean co u n tries. The two prin cip al controlling groups a re the Swiss Schm idheiny fam ily (see Attachm ent) and the Belgian Em sens fam ily. A French group has a m inor position. The G erm an E te r n it co m p an y (in w h ich J - M h a s a 10% s h a r e and h a s re p u te d ly earned a huge return) is dom inated by the Sw iss group. The Belgians control Holland and F ran ce. O utside of Europe, the Swiss group controls the M iddle E ast, C entral A m erican, and n o rth east p a rt of South A m erica (B ra z il, Colom bia, E cuador, e tc .). The B elgian group controls the r e s t of South A m erica (A rgentina, P e ru , U ruguay). In South A m erica it is cu sto m ary fo r the ow nership to be divided th re e w ays: Swiss group, B elgian group, and local p a rtn e r. In each c a s e , th e c o n tro llin g E u ro p e a n g ro u p w ill h a v e 60% of th e n o n -lo c a l ow nership and the other E uropean group 40%. T h e re seem s to be no single c e n tra l coordinative agency for the whole of E tern it. In fact, the relationship betw een the Swiss E tern it group and Belgian E tern it group seem quite arm slength. M r. Schm idheiny pointed out that the B elgian group is about to go through a tran sitio n of m anagerial generation, and it is not yet clear who w ill em erge as th eir undisputed le ad e r. Given M r. Schm idheiny's age (63), it is quite likely th at in the next 5-7 y ears the sam e thing w ill occur w ithin Swiss E tern it. F o r purposes of dealing w ith fib er p ro d u cers, the B elgians handle Q .A .M .A , p ro d u cers, w hile the Swiss deal w ith T u rn er & Newall, C assiar, B ell, the R ussians, and the S. A frican p ro d u cers. D uring the la s t 40 y e a rs, the ro le and sta tu re of Sw iss E te rn it has changed substantially. M r. D orner pointed out that during and sh o rtly a fte r W orld W ar II th e ir ow nership position w ithin the E u ro p e a n E te r n it fa m ily had gone fro m a ro u n d 3% to a ro u n d 50% including 20% of the B elg ian g ro u p . The B elgians a re pro u d and resen t the dom inant role of the Sw iss. / D r. Schm idheiny a s s e rts that overall E tern it is la rg e r than J - M and is grow ing a t a ro u n d 5% p e r y e a r . O-109A 6-69 MT 011398 SUBJECT: PAGE 3 F ib e r Supply as Seen by Sw iss E te rn it B efore W orld W ar II, all of Swiss E ternit's fib e r supply cam e fro m R ussia and from T u rn er & N ew all. D uring the w ar, both suppliers cut off Eternit*s supplies. A fter the w ar, they decided to sp read th e ir so u rces of supply, and contacted J -M . In addition, they integrated backw ards with the p u rch ase of m ines in South A frica and in R hodesia. They now p ro duce 50% o f th e w o rld output of b lu e f ib e r . T hey s e e th e ir o w n e rsh ip in th ese m in es as supply in su ran ce, even though they d o n 't cu rren tly use m uch of th eir output. (A pparently the Belgian group opposed this integration). They reported that there had been a very severe shortage of fib er from 1946 to 1958, but th at a fte r 1958, the w orld supply situation eased som ew hat. Up until I960, they bought about 1/3 of th e ir ton nage from J-M . H ow ever, in I960, they began to ap p reciate that they w ere running considerable risk s in having virtually all of th eir fib er coming from the sam e geographic a re a . They w ere at th at tim e buying la rg e ly fro m J-M , ASARCO, and A sbestos C orporation, a ll of them in the sam e g e n e ra l area.- (They o rig in ally began buying from ASARCO because they w ere concerned that th a t com pany's inability to m ove its fiber m ight cause it to enter the asbestos cem ent b u sin ess.) They w ere concerned that a shipping o r m in e r's strik e m ight leave them w ithout m a te ria l. As a re su lt, they started to develop other so u rc es, esp ecially C a ssia r and South A frica. A nother is R ussia (they viewed as idiocy the m agnitude of the Canadian contribution to the R u ssian 's ability to produce fiber). They indicated th at R u ssian fib er w as often available a t a p ric e about 10-15% below C anadian fib e r on one y ear co n tracts and they d idn't feel they could leave this p ric e differential to th e ir co m p etito rs. They view the R ussians as a possible source of m ajor m arket disruption. A th ird source is A dvocate, w here E tern it has recently increased its ow nership to 50%. A fourth source is local m ines in underdeveloped countries w here Swiss E tern it has a producing plant. As an exam ple, they cited Colom bia, w here they have a plant, and w here a sm all m ine w as developed by N icollette. H ow ever, the developm ent of this m ine req u ired m o re m oney than N icollette wanted to invest, and Swiss E tern it w anted to have the m ine, since they w ere su re the governm ent would prohibit fiber im ports as soon as the m ine w as open. G-1&9A 6-69 j\flT 01139 SUBJECT: PAGE 4 A nother exam ple w as B razil, w here a large deposit is jointly controlled by both Swiss E te rn it and P ont-a-M ousson, w ith the la tte r having the m anagem ent contract fo r the m in e s. D orner felt th ere would continue to be a g en eral shortage of f ib e r . H e s a id th a t a n a n n u al in c r e a s e o f 5% in fib e r c o n su m p tio n required a new m ine the size of Jeffrey each year, and he didn't see w here th is w as going to com e fro m . H ow ever, he felt that th ere m ight be a surplus in som e of the p o o rer g rad es, since he believed th at J-M could undoubtedly produce m o re of grade 7 than it was now selling. He felt th ere w as som e danger th at the Jap an ese could be an upsetting influence on the m ark et. He said that in m any of the places in the w orld w here th ere was known to be asbestos fib e r w hich had not yet been com m ercially developed, the Japanese had been th ere talking up the m agnitude of th eir future requirem ents, and offering firm contracts as a way of facilitating financing. He said that this w as how the A ustralian m ines had come into production, but he d id n 't think th at they would m ake m oney. On the o th er hand, he adm itted that once a m ine cam e into production, it very ra re ly shut down until the o re ra n out. As fa r as M r. D orner knows, no one had done a carefu l study of the future of asbestos dem and or supply. M r. D o rn er felt th at it w as quite p o ssib le to m ake m oney with sm all m in e s, and said that E tern it w as doing it. He indicated that the s e c re t of doing so w as to have the m in es in the sam e a re a . This m ade possible the blending of fib er from each-m ine, w hich he felt w as essential; and also m ade possible the sharing of overhead expenses such as the cost of head office and m ining engineers. A nother essential ingredient is location on a low -cost labor a re a . This observation is in sharp co n trast to the feelings of J-M people about the econom ies of scale in m ining operations. O ther Supply O bservations . T here is a difference of opinion w ithin E tern it as to how soon N ordenham w ill w ork. But there is unanim ity that when it does, it w ill spoil the existing m a rk e t. Having inventory available in E urope is G-l8% 6-69 NIT 011400 SUBJECT: page 5 p a rtic u la rly attractiv e to E tern it, enabling it to reduce its safety stocks. . ASARCO (Lake) and A sbestos C orp. a re both currently oversold. . T here is "as m uch R ussian fib e r as you want" available this year. A sbestos Cement The overw helm ing m ajo rity of output of the Swiss group's output is sh ee t--both flat and corru g ated . The m ajor application for flat is for resid en tial building. The m ajo r application for corrugated is for in d u strial building. In addition to o rd in ary la rg e sheets, the Swiss group produces a flat shingle w hich seem s to have wide acceptance w ith in S w itz e rla n d . D o rn e r e s tim a te s th a t s h e e t is 657o of o v e ra ll A /C p ro d u ctio n and 85% in E u ro p e. The Swiss group does not understand why the asbestos-cem ent sheet m ark et in the U .S . has been exploited so little by J-M . They feel th at if they had been active in the U .S . m ark et, m o re would have been done w ith sh eet. They have also been m ore ag g ressiv e with pipe; n o n -p ressu re A /C pipe up to 7 feet in d iam eter is m arketed. An im portant new product for Swiss E tern it is A /C colored panels for residential construction. A sbestos Corporation fibers a re ideal for this because they a re white and g rit-fre e . E tern it believes through such product innovation A /C can have a strong future; in fact, they a s s e rt its past growth has been obscured by im provem ents in asbestos fiber quality (grade 5 has im proved from 55 s tre n g th u n its to 70 s tre n g th u n its in the la s t 5 y e a r s ) . On the o th e r hand', K re is w as co n cern ed about th e im p a c t of e sc a la tin g fib e r p r ic e s (4-6% p r ic e in c r e a s e p lu s 7% re v a lu a tio n of C an ad ian d o lla r la st year) encouraging substitution of steel and alum inum products for A/ C sheet. E te rn it expects grow th of 10-15% p er year fo r A /C in the LDC's . It is in terestin g to note th at E te rn it does not view itse lf as a producer of building products, but ra th e r as an A /C producer. They G-1B9A 6-69 MT 011401 SUBJECT: PAGE 6 have been unsuccessful w ith PVC and a re closing down th e ir Techite plant. L a te r, Schrafl (Schm idheiny's nephew) told m e they w ill diversify ra th e r than attem pt to build a position in substitute products. How ev er, he hopes to p ro tect th e ir position in cem ent and draw s the analogy to J - M 's p o sitio n in f ib e r . Sw iss E te rn it View of J-M Swiss E tern it feels that J-M has been a sleeping giant, un coordinated, and changing its policies without adequate explanation to its m ajo r cu sto m ers. They believe J-M should have one coordinator for all asbestos m a tte rs . Among the specific com plaints Swiss E tern it has a re the following: 1) T he fib e r supply c o n tra c t: In I9 6 0 , E te r n it b e g a n lo n g -te rm co n tracts w ith a few su p p liers. They said that th ree y ears ago they received a u n ilateral revocation of the supply contract that they had w ith J - M . T h ree y e a rs notice w as re q u ire d , and th is w as given by J-M w ithout any attem pt to explain why they w ere doing so, o r what a lte rn ativ e supply te rm s they would p re fe r. T hese supply a rra n g e m ents a re cu rren tly being continued on an in terim b asis, but E tern it re m a in s p u z z le d a b o u t J - M `s b e h a v io r. E v e n m o re p u zzlin g w as th e 1 1 / 2 years w hich J-M took to re je c t a proposed renew al at higher p ric e s . T he la te s t p ro p o sal is to continue the old c o n tra ct, but w ith E tern it purchasing a g reater share of its requirem ents from J-M . E tern it views this as a foolish concentration for J-M (im plica tion w as m ade th at J-M overly co n cen trates on a few c u sto m e rs.). 2) T h e A dvocate M in e : E te r n it o rig in a lly had ab o u t a 30% ow nership, but subsequently increased its ow nership to somewhat m o re than 50%. It is c le a r to them that A dvocate should run at full capacity, and they a re p rep ared to take all of its output, if n ecessary , in o rd e r to a ssu re that the m ine m akes m oney. The m ore they take from Advocate, the le ss they w ill take from Jeffrey. J-M has a m anagem ent co n tract for A dvocate, which E tern it im plies is generous. E tern it is unhappy about sev eral aspects of the way this is being c a rrie d out. F irs t, they feel th at J-M is running Advocate as if it w ere p a rt of the J-M system , rath er than in the best in terests of E te rn it. Thus, they feel that any trad e-o ff betw een Jeffrey and Advocate is autom atically m ade in favor of Jeffrey and for J-M 's in tern al fib er req u irem en ts. D r. Schm idheiny claim s that J-M has G-1B9A 6-69 MT 011402 SUBJECT: PAGE 7 never sold any Advocate fib er on the open m ark et and fu rth er that it becam e angry w hen E tern it reso ld som e Advocate fib e r. Second, they a re v ery unhappy w ith the quality of the financial planning at A dvocate, som ething they pay alot of attention to w ithin Swiss E tern it. At A dvocate, the e rro rs in the profit projections have been very la rg e and consistently negative. Third, they feel that J-M is using, the Advocate m ine as an executive training grounds at th e ir expense. D r. Schm idheiny feels a need to discu ss the Advocate problem s with so m eo n e fr o m J - M , b u t c la im s h e d o e sn 't know w ith w hom to ta lk . 3) J -M B elgium : S w iss E te r n it d o es not u n d e rs ta n d why J -M would jeo p ard ize its relationship w ith a very larg e fiber custom er by perm itting its Mol plant to be an ag g ressiv e price com petitor in th at c u sto m e r's a re a of in te re st. It is a m a tte r of som e e m b arassm ent that this plant com petes against G erm an E tern it, in w hich J-M has an in te re st. Sw iss E tern it would buy the J-M plant, but the B elgians a re "too cheap" to do so. 4) ACE: Sw iss E te rn it has see n J-M blow both hot and cold on this subject. At firs t courted and encouraged to take a licen se, they have since been tre a ted very coldly by J-M when they trie d to v isit an ACE plant in prep aratio n for building a G erm an factory. Colton has a sse rte d that the licen se did not include know-how, which he adm its is v ital to the product's p ro fitab ility . In this and other m a tte rs , J-M is seen as a leg alistic n it-p ick er given to hiding behind te c h n ic a litie s . 5) K now -how : S w iss E te r n it is c o n ce rn e d about J - M 's giving away know-how to asbestos fib er buyers who a re com petitors of E te rn it w ithin its own re a of in te re st. E specially d istre ssin g is the relationship w ith the Indian m achinery m anufacturer, w hich tried to take on E tern it in Saudi A rabia. O ther O bservations: . The m ajo r advantage of Jeffrey is that it is big-the la rg e st known deposit. The m ajor disadvantage of Jeffrey is that its fiber contains a g reat deal of ''t a l c " . . E tern it is generally satisfied in the a re a of sales se rv ic e . G-109A 6-69 NIT 011403 `SUBJECT: PAGE g . E tern it feels that despite the fact that J-M spends a lot of m oney on re sea rc h , it h asn 't done very m uch to develop new uses for fib er. . E te rn it feels that B urnett did not p ro p erly handle the health hazard problem . They feel he should have switched to d u st-free bags, and absorbed the cost of about $2/bag. Instead, he chose sim ply to label the bags as potentially harm ful. . D r. Schmidheiny expressed an in te re st in p a rti cipating in J-M 's diversification activ ities. In a la te r conversation, D r. Schrafl m entioned land w hich they own in Ibeza which J-M m ight w ish to develop. Note: We prom ised to sh are our m ark et re se a rc h findings w ith them , and requested th eir help in identifying other people who we m ight talk to. S T :jl A ttachm ent S. Tilles G-109A 6-69 MT 011404 SUBJECT; PACS A ttachm ent 1 The Schmidheiny Fam ily The fam ily is active in a v ariety of in d u strie s, m o st significantly in cem ent. They a re not only the dom inant p ro d u cers of cem ent in S w itzer land; they operate about 50 cem ent plants around the w orld. They have a p la n t in the TJ. S. a t D undee, M ichigan, w hich by its e lf r e p r e s e n ts a b o u t 3% of total U .S. production. Many of th e other plants a re in underdeveloped countries. M r. D orner pointed out that these w ere large gam bles, because while an a sb e sto s-c e m e n t plant could be built for around $1 m illio n , a cem ent plant required an investm ent of $10-15 m illion. M r. D orner also pointed out that som e tim e ago, they had com m issioned a study by a Swiss p ro fesso r to decide w hether th ere was any need for additional cem ent capacity in Sw itzerland. The approach was to plot a general co rrelatio n between GNP grow th and per capita cem ent consum ption. Based on this study, they decided not to expand cem ent capacity in Sw itzerland. In retro sp ect, they felt this was a wrong decision, because demand in Sw itzerland was strongly pressing on supply. A second a re a of in te re st of the fam ily is asb esto s cem ent. They pointed out th at the o rig in al a sb e sto s-ce m e n t p ro cess was developed in A u stria, and they had been in terested in the p ro cess since about the early '3 0 's. A third m ajor activity of D r. Schm idheiny is the optical factory at W ild, which produces special optical devices, including theodolites, a i r c ra ft in stru m en ts, and a num ber of other things. The factory is ju st below the an ce stra l hom e, and em ploys m any of the people who live in the valley w here the Schm idheiny home is located. The fam ily m em bers are: - D r. Max Schmidheiny - aged 63. Leading in d u stria list in Sw itzerland. - His b ro th e r, E rn st, now re tire d . Aged 70. F o rm e r C hairm an of Sw issair. - H err C laus K riess. Now m anager of Swiss E te rn it plant. Son of M rs. Schm idheiny by a fo rm er m a rria g e , and considered to be the e ld est son of the fam ily. - M iss Schmidheiny - now living in Isra e l. C-129A 6-69 MT 011405 ETERNIT COMPANIES The Saudi Arabian Amiantit Co. Ltd. P. O. Box 589 Dammam, Saudi Arabia Amiantit S.p.A. ^ I - 25028 Verolanuova (Brescia) Italy Amiantit (Oman) Ltd. P. 0, Box 4807 Ruwi Muscat, Sultanate of Oman Asbestos Cement Ind. (Bangladesh) Ltd, 53 Kalurghat Heavy Ind. PO Mohara Chittagong Bangladesh Estate Asbestos Cement Industries P. 0. Box 32 Nahariya Israel Asbestos C^ant Prods PMB 1032 ' y , . . Ikeja Aixpofipt ^ Nigeria Asbestos Cement Industries Ltd, Shirin Manzil, Randil Rd. P, 0, Box 7429 Karachi 3 W. Pakistan Cimiauto de Angola Sari Estrada Co Cacuaco Caxa Postai n r 2437-0 Luanda Repblica Popular de Angola Angola Attns *T, - '* Coverit S,A, Fahrecim Harraignies Hainaut Belgium 1978 X ' Ductoven S.A. Apartado 10363 Carmelitas Caracas, Venezuela Cia. Ind. Y Com Eternit Argentina S.A. Casilla da Correo No. 1| Moron (Prov. Buenos Aires) Rep. Argentina Eternit AG 8867 Niederumen Switzerland Eternit Atlantico S.A. Apartado aereo 853 Barranguilla, Colombia Eternit Burundi . B.P. 465 - Bujumbura ^ ; Royaume Du Burundi Eternit Colombiana S.A. Apartado aereo 4256 Bogota, Colombia : Eternit Corporation P, O. Box 3364 ; Manila, Philippines Eternit Ecuadofciana S.A. Apartado 3340 Guayaquil, Ecuador P.T. Eternit Gresik Trorarnol pos 51 Surabaya Indonesia ,, _~! - Eternit-Werke Ludwig Hatschek Postfach 50 4840 Vocklabruck Upper Austria Attns Mr. F. Hatschek Industries Eternit S.A. . Caixa postal 30.484 Sao Paulo, Brasil MT 012607