Document baRzd6aEBkwNrJpMK7R1m8GBo

FILE NAME: Eternit (ETER) DATE: 1971 Aug 31 DOC#: ETER060 DOCUMENT DESCRIPTION: Consultant Report RE Swiss Eternit & Johns-Manville TO. J o h n s -M anviile C ase Team FROM. date. s. T ille s and T . P y le A u g u s t 31, 1971 ------- SUBJECT. The Boston C o n s u ltin g Group T hese notes a re from a d iscu ssio n betw een Sy T illes and Tom P yle of The B oston C onsulting G roup w ith D r. Max Schm idheiny, M r. C laus K reis {M anaging D ire c to r of E te rn it's o p eratin g com pany in Sw itzerland), M r. H ans 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 th e S w iss E te rn it group, held on A ugust 13th a t D r. S ch m id h ein y 's villa in H errbrugg, Sw itzerland. M ajor Points of D iscussion 1. Swiss E te rn it saw J-M as acting in a very uncoordinated way. E v id en ce: - handling of orig in al co n tract negotiation - the A dvocate m ine controversy - J-M pu rch ases of blue fiber from Cape - the B elgian problem in light of th e ir being the la rg e st buyer of asbestos fib e r. 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 d isconcerted by the fact that J-M app aren tly did not view them in this w ay. 3. Sw iss E te rn it w as concerned about the sta tu re of th e p erso n w ithin J-M w ith whom they w ill deal. They w ant to p -lev el contact w ith J-M , som eone w hose prom ises a re backed up. They feel th eir position in the w orld asb esto s m a rk e t ju stifies it, and they a re fully p re p a re d to re c ip ro c a te . 4. E te rn it view s J-M as a "sleeping giant" th at does no m ark etin g and is v ery susceptible to the v ag aries of the m a rk e t p lace. G-19 1-68 MT 011397 SUBJEpT: PACE 2 The E tern it G roup A sbestos cem ent outside the U .S . is larg e ly dom inated by the E tern it group. This group co n sists of com panies in each of the con tin en tal E uropean c o u n trie s. The two p rin cip al controlling groups a re the Sw iss Schm idheiny fam ily (see A ttachm ent) and the B elgian E m sens fam ily. A F rench group has a m inor position. The G erm an E t e r n it co m p an y (in w h ic h 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 B elgians control H olland and F ran ce. O utside of E urope, the Sw iss group controls the M iddle E ast, C en tral A m erican, and n o rth ea st p a rt of South A m erica (B ra z il, C olom bia, E cu ad o r, e tc .). The B elgian group co n tro ls 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 av e 60% of th e n o n -lo c a l ow nership and the other E uropean group 40%. ' T h ere seem s to be no single c e n tra l coordinative agency for the w hole of E te rn it. In fact, the relatio n sh ip betw een the Sw iss E tern it group and B elgian E te rn it group seem quite arm slength. M r. Schm idheiny pointed out th at the B elgian group is about to go through a tran sitio n of m an ag erial generation, and it is not yet c le a r who w ill em erge as th e ir undisputed le a d e r. G iven M r. Schm idheiny's age (63), it is quite lik ely th at in the next 5-7 y ears the sam e thing w ill occur w ithin Sw iss E te rn 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 Sw iss deal w ith T u rn er & N ew all, C a ssia r, B ell, the R u ssian s, and the S. A frican p ro d u c e rs. D uring the la s t 40 y e a rs, the ro le and s ta tu re of Sw iss E te rn it has changed su b stan tially . M r. D orner pointed out that during and sh o rtly afte r W orld W ar II th e ir ow nership position w ithin the E u r o p e a n E t e r n i t f a m ily h ad gone f r o m a ro u n d 3% to a ro u n d 50% in clu d in g 20% of th e B elg ian g ro u p . The B elg ian s a r e p ro u d and resen t the dom inant role of the S w iss. D r. Schm idheiny a s s e rts th at o v erall E te rn it is la rg e r than J - M an d i s g ro w in g a t a ro u n d 5% p e r y e a r . G-1B9A 6-69 WIT 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 Sw iss E te rn it's fib e r supply cam e fro m R u ssia and fro m T u rn e r & N ew all. D uring the w ar, both su p p liers cut off E te rn it's su p p lies. . 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 in teg rated backw ards w ith the p u rch ase of m in es in South A frica and in R hodesia. They now p ro d u ce 50% o f th e w o rld o u tp u t of b lu e f ib e r . T hey s e e th e ir o w n e rsh ip in th e se m in es as supply in su ran ce , even though they d o n 't cu rren tly use m uch of th e ir output. (A pparently the B elgian group opposed this integration). They rep o rted that th e re had been a v ery sev ere sh o rtag e of fib er fro m 1946 to 1958, but th at a fte r 1958, the w orld supply situ atio n eased som ew hat. Up until I960, they bought about 1/3 of th e ir ton nage fro m J-M . H ow ever, in I960, they began to a p p re c ia te th at they w ere running considerable risk s in having v irtu ally all of th e ir fib e r com ing from the sam e geographic a re a . They w ere a t th at tim e buying la rg e ly fro m J-M , ASARCO, and A sbestos C orporation, all of th em in the sam e g e n e ra l area.- (T hey o rig in a lly began buying fro m ASARCO b ecau se they w e re concerned th at th a t com pany's inability to m ove its fib er m ight cause it to enter the asbestos cem ent b u sin e ss.) They w ere concerned that a shipping or 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 o th er so u rc e s, esp ecially C a ssia r and South A frica. A nother is R ussia (they viewed as idiocy the m agnitude of the C anadian contribution to the R u ssian 's ability to produce fib er). They indicated th a t R u ssian fib e r w as often available a t a p ric e about 10-15% below C anadian fib er on one y ear co n tra cts and they d id n 't feel they could leave this p ric e d ifferen tial to th e ir co m p etito rs. They view the . R ussians as a possible source of m ajo r m ark et disruption. A th ird source is A dvocate, w here E tern it has recen tly in creased its ow nership to 50%. A fourth so u rce is local m ines in underdeveloped countries w h ere Sw iss E te rn it has a producing plant. As an exam ple, they cited C olom 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 ire d m o re m oney than N icollette w anted to invest, and Swiss E te rn it w anted to have the m ine, since they w ere su re the governm ent would p ro h ib it fib er im p o rts as soon as the m ine w as open. G-1B9A 6-69 WIT 011399 SUBJECT; PAGE 4 A nother exam ple w as B razil, w here a larg e deposit is jointly co ntrolled by both Sw iss E te r nit and P ont-a-M ous son, w ith the la tte r having the m anagem ent co n tract for the m in e s, D o rn er felt th e re would continue to be a g e n e ra l sh o rtag e of f ib e r . H e s a id th a t a n a n n u a l i n c r e a s e o f 5% in f ib e r c o n s u m p tio n req u ired a new m ine the size of Je ffre y each y ear, and he did n 't see w h ere th is w as going to com e fro m . H ow ever, he fe lt th a t th e re m ight be a surplus in som e of the p o o rer g rad es, since he believed th a t J-M could undoubtedly produce m o re of g rad e 7 than it w as now sellin g . H e felt th e re w as som e danger th at the Jap an ese could be an upsetting influence on the m a rk e t. He said that in m any of the places in the w orld w here th e re w as known to be asb esto s 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 e ir future req u irem en ts, and offering firm con tracts as a way of facilitating financing. He said that this w as how the A u stralian m ines had com e into production, but he d id n 't think th a t they would m a k e m oney. On the o th e r hand, he adm itted th at once a m ine cam e into production, it very ra re ly shut down u ntil the o re ran out. As fa r as M r. D orner know s, no one had done a carefu l study of the future of asb esto s 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 s m a ll m in e s , and s a id th a t E t e r n it w a s doing it. He indicated th a t 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 fro m each m ine, w hich he felt w as essen tial; and also m ade possible the sharing of overhead expenses such as the cost of head office and m ining en g in eers. A nother essen tial ingredient is location on a low -cost lab o r a re a . This observation is in sh arp co n trast to the feelings of J-M people about the econom ies of scale in m ining operatio n s. O ther Supply O bservations . T h ere is a d ifferen ce of opinion w ithin E te rn it as to how soon N ordenham w ill w ork. But th ere is unanim ity that when it does, it w ill spoil the existing m a rk e t. H aving inventory av ailab le in E u ro p e is G-189A 6-69 WIT 011400 SUBJECT: PAGE 5 p a rtic u la rly a ttra c tiv e to E te rn it, enabling it to reduce its safety stocks, . ASARCO (Lake) and A sb esto s C orp. a re both currently oversold. . T h ere is "as m uch R u ssian fib e r as you w ant" available this year. A sbestos Cem ent The overw helm ing m a jo rity of output of the Sw iss group's output is sh eet--b o th flat and co rru g ated . The m ajo r application for flat is for resid en tial building. The m ajo r application for corrugated is fo r in d u stria l building. In addition to o rd in ary la rg e sh eets, the Sw iss group produces a flat shingle w hich seem s to have w ide 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 sh e e t is 65% of o v e ra ll A /C p ro d u c tio n and 85% in E u ro p e . The Sw iss group does not understand why the asb esto s-cem en t sh eet m a rk e t in the U .S . has been exploited so little by J-M . They fe e l th a t if th ey had been activ e in the U .S . m a rk e t, m o re would have been done w ith sh eet. They have also been m o re ag g ressiv e w ith pipe; n o n -p re ssu re A /C pipe up to 7 feet in d iam eter is m ark eted . An im p o rtan t new product fo r Sw iss E tern it is A /C colored panels for resid en tial construction. A sbestos C orporation fibers a re id eal for this because they a re w hite 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 p ast grow th has been obscured by im provem ents in asb esto s 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 th e la s t 5 y e a r s ) . O n the other hand, K reis w as concerned about the im pact of escalating fiber p r i c e s (4-6% p r i c e i n c r e a s e p lu s 7% r e v a lu a tio n of C a n a d ia n 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 y ear fo r A /C in the L D C 'S. ` It is in te re stin g to note th at E te rn it does not view itse lf as a p ro d u cer of building products, but ra th e r as an A /C p ro d u cer. They G-109A 6-69 MT 011401 SUBJECT: PAGE 6 have been unsu ccessfu l w ith PVC and a re closing down th e ir Techite p lan t. L a te r, S ch rafl (S chm idheiny's nephew) told m e they w ill d iv ersify ra th e r than attem pt to build a position in substitute pro d u cts. How e v e r, he hopes to p ro te c t th e ir position in cem ent and draw s the analogy to J-M 's position in fib er. S w iss E te rn it View of J-M Sw iss E tern it feels that J-M has been a sleeping giant, un coordinated, and changing its policies w ithout adequate explanation to its m a jo r c u sto m e rs. They believe J-M should have one coordinator for all asb esto s m a tte rs . Among the specific com plaints Swiss E tern it has a re th e following: 1) T h e f ib e r su p p ly c o n tra c t: In I9 6 0 , E t e r n it b e g a n lo n g - te r m co n tracts w ith a few su p p lie rs. They said that th ree y ears ago they receiv ed a u n ila te ra l revocation of the supply co n tract th at they had w ith J -M . T h ree y ears notice w as req u ire d , and th is w as given by J-M w ithout any attem p t to explain why they w ere doing so, o r w hat a lte rn a tiv e supply te rm s they would p re fe r. T h ese supply a rra n g e m ents a re cu rren tly being continued on an in te rim b a sis, but E tern it rem ain s puzzled about J -M 's behavior. E ven m o re puzzling w as the 1 1 / 2 y ears w hich J-M took to re je c t a proposed renew al at higher p r ic e s . T he la te s t p ro p o sa l is to continue the old c o n tra c t, but w ith E tern it purchasing a g re a te r sh are of its requirem ents from J-M . E te rn it view s this as a foolish concentration for J-M (im plica tio n w as m ade th a t J-M o v erly co n cen trates on a few c u s to m e rs.). 2) T he A d v o cate M in e : E te r n it o rig in a lly had ab o u t a 30% ow nership, but subsequently in creased its ow nership to som ew hat m o re than 50%. It is c le a r to them th at A dvocate should run at full capacity, and they a re p re p a re d to take a ll of its output, if n e c e ssa ry , in o rd e r to a ssu re th at the m ine m akes m oney. The m o re they take fro m A dvocate, the le ss they w ill take fro m Jeffrey . J-M has a m anagem ent co n tract fo r A dvocate, w hich E tern it im p lies is g en ero u s. E te rn it is unhappy about se v e ra l 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 sy stem , ra th e r than in the b est in te re sts of E te rn it. Thus, they feel that any trad e -o ff betw een Jeffrey and A dvocate is autom atically m ade in favor of Je ffre y and for J-M 's in te rn a l fib er re q u ire m e n ts. D r. Schm idheiny claim s that J-M has G-189A 6-69 MT 011402 SUBJECT; PACE 7 never sold any A dvocate fib er on the open m a rk e t and fu rth e r that it becam e angry w hen E te rn it reso ld som e Advocate fib e r. Second, they a re v ery unhappy w ith the q uality of the financial planning at A dvocate, som ething they pay alo t of attention to w ithin Sw iss E te rn it. At A dvocate, the e rro rs in the profit projections have been very la rg e and co n sisten tly negative. T hird, they feel that J-M is using, the A dvocate m ine as an executive training grounds at th e ir expense. D r. Schm idheiny feels a need to d iscu ss the A dvocate problem s w ith som eone fro m J-M , but claim s he d o e sn 't know w ith w hom to talk . 3) J -M B elgium ; S w iss E te r n it d o es not u n d e rsta n d w hy J -M would je o p ard ize its relatio n sh ip w ith a v ery la rg e fib er cu sto m er by p erm ittin g its M ol plant to be an ag g ressiv e price com petitor in th a t c u s to m e r's a re a of in te re s t. It is a m a tte r of som e e m b a ra s s- m en t th a t th is p lan t com petes a g a in st G erm an E te rn it, in which' J-M has an in te re s t. Sw iss E te rn it would buy the J-M plant, but the B elgians a re "too cheap" to do so. 4) A CE: Sw iss E te rn it h as se e n J-M blow both h o t and cold on this su b ject. At firs t courted and encouraged to take a licen se, they have sin ce been tre a te d v e ry coldly by J-M w hen they trie d to v isit an ACE plant in p rep aratio n for building a G erm an facto ry . Colton has a sse rte d that the licen se did not include know-how, w hich he ad m its is v ital to the p ro d u c t's p ro fitab ility . In this and o th er m a tte rs , J-M is seen as a le g a listic n it-p ic k e r given to hiding behind te c h n ic a litie s . 5) K n o w -h o w : S w is s E t e r n i t i s c o n c e rn e d a b o u t J - M 's giving aw ay know-how to asb esto s fib er buyers who a re co m p etito rs of E te rn it w ithin its own re a of in te re s t. E specially d istre ssin g is the relatio n sh ip w ith the Indian m achinery m a n u factu rer, w hich trie d 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 th at its fib er contains a g reat deal of "talc". . E te rn it is generally satisfied in the a re a of sales s e rv ic e . G-109A 6-69 MT 011403 `SUBJECT; pace 8 . E te rn it feels that despite the fact that J-M spends a lo t of m oney on re se a rc h , it h a sn 't done very m uch to develop new uses for fib er. . E te rn it feels th at B u rn ett did not p ro p e rly handle the health h azard p roblem . They feel he should have sw itched to d u st-fre e bags, and absorbed the cost of about $ 2 /bag. Instead, he chose sim ply to label the bags as potentially harm ful. . D r. Schm idheiny ex p ressed an in te re st in p a rti cipating in J-M 's d iv ersification activ ities. In a la te r conversation, D r. S chrafl m entioned land w hich they own in Ibeza w hich J-M m ight w ish to develop. N ote; We p rom ised to sh are our m a rk e t re se a rc h findings w ith them , and req u ested th e ir help in identifying other people who we m ight talk to. S T :jl A ttachm ent S. T illes G-189A 6-69 MT 011404 m SUBJECT: PAGE A ttachm ent 1 The Schm idheiny F am ily faiuily is active in a v a rie ty of industries 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 itz e r land; they o p erate about 50 cem ent plants around the w orld. They have a p la n t in th e U. S. a t D u n d ee, M ich ig an , w h ich by i t s e l f r e p r e s e n t s a b o u t 3% of total U .S. production. Many of th e other plants a re in underdeveloped co u n tries. M r. D orner pointed out that these w ere larg e gam bles, because w hile an a sb e sto s-c e m e n t plant could be b u ilt 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 w as any need for additional cem ent capacity in Sw itzerland. The approach was to plot a g eneral co rrelatio n betw een 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 re tro sp e c t, they felt this w as a w rong decision, because dem and in Sw itzerland was strongly pressing on supply. A second a re a of in te re s t of the fam ily is a sb e sto s cem ent. They pointed out th at the o rig in al a sb e sto s-c e m e n t p ro cess w as developed in A u stria, and they had been in terested in the p ro cess since about the e a rly '3 0 's. A th ird m ajo r activ ity of D r. Schm idheiny is the optical facto ry at W ild, w hich produces special optical d ev ices, 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 a n c e 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 Schm idheiny - 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 S w issair. ' - H err C laus K rie ss. Now m an ag er of Sw iss 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 e st son of the fam ily. - M iss Schm idheiny - now living in Isra e l. G-129A 6-69 MT 011405