SPANISH GRANITE INDUSTRY - HALF WAY ON THE ROAD TO BEING NO.1

( This article appeared in the print edition of Litos in September,98).

When the history of this decade "s stone industry is finally written, ( and that will not be too much in the future ), at least two developments from Spain will stand out deserving special mention among the chroniclers. One, of course, will refer to the astonishing world wide success of the Crema Marfil based Novelda stone industry. But an equally important mention will be made of how the Spanish granite sector , which began the decade as an important quarrying based industry along with possessing a minor elaboration capacity ended it having converted into a formidable, modern and highly competitive elaboration sector with an increasingly international presence.

There has been growing speculation of how the Spanish granite sector compares today with its eternal reference point - the Italian granite sector. How far does the Spanish granite sector have to go before catching up with the Italian one in size and surpass it, what are its medium term prospects ( in the long term we are all dead, you know), what is needed to close the gap in size with Italy, these are the questions that many people now openly ask in the stone sector and which we will address in this article. The answers are not always easy, the statistics are usually unreliable and frequently no more than intelligent guesses, but the increasing importance of Spain in the world granite industry and the fact that it is among the most dynamic of all makes these more than academic questions. These questions also form the key points of analysis for many businessmen in the sector developing future strategies and making investment decisions.

GROWTH IN RECENT YEARS

Of one fact there is no doubt in the minds of anyone who has closely been following the granite sector - that the Spanish elaboration industry has grown enormously in the last six years. If the number of gangsaws and multi-disk block cutters installed in this decade is any indication, and taking into account the productivity of the newer models now in the market, one can safely say the granite sector has doubled in capacity in 6 years. This statement, backed by other indicators like the consumption of grit and steel blades, is actually not so spectacular if you consider that doubling in 6 years means keeping an annual growth of 13%. Now a growth of 13 or 15% every year may look quite ordinary unless one realises that from 1992 onward until only a year ago, the Spanish economy in general, and the construction sector in particular( one of the main areas of consumption), passed through a serious and prolonged crisis.

Two factors helped push along the growth. From being a sector almost totally focused on the national market at the end of the eighties and early nineties ( except for two or three honourable exceptions), in the nineties growth came about also through increased exports. The statistics tell the story - exports in 1992 of elaborated granite were less than US$ 20 million, while in 1998 they reached almost US$120 million. Secondly, in spite of a sluggish Spanish economy granite also became during the nineties an increasingly popular material among the architects and they began using it in large quantities especially in floorings of high traffic. The number of gangsaws installed during this period ( an approximate but convenient measure) increased to 378 in 1997 of which 227 came in the post 1989 period. The production of slabs in 1997 was of the order of 10 million square metres. In the beginning of the decade there were very few block cutters and tile plants in Spain. In 1998 there were 40 block cutters most of them working at full capacity.

But the main reason why Spain has clearly become the country to watch in granite is not simply the impressive growth in size of which many examples can be found elsewhere but the fact that the Spanish companies are now able to deliver top quality granite slabs or tiles or cut to size anywhere in the world on time at the best prices and at the same time make profit. In other words, the Spanish granite sector is extraordinarily competitive - world wide. And this competitiveness is what we examine next.

WHY IS SPAIN IS SO COMPETITIVE IN GRANITE ?

Long before the salesmen from Spain started offering to an increasing number of buyers in far away countries slabs and tiles at very competitive prices many Spanish materials were already introduced in foreign markets. The quarrying sector in Spain was already highly sophisticated incorporating the latest extraction techniques and able to supply big "gangsaw" size perfectly squared blocks. This fact is of fundamental importance in explaining the success of the factories though far too often it is taken for granted. The Spanish factories could get hold of cheap and well dimensioned good quality blocks of a wide range of colours extracted locally with the quarries often located only a few kilometres from the factories. The case of India serves as a contrast. No one doubts the range and beauty of Indian materials, but the generally poor quality of extraction has blocked the development of a vibrant elaboration sector. So the existence of a highly modern, extremely productive and experienced local quarrying industry provided the first building block of a competitive elaboration industry in Spain. The production capacity of the quarries was, and remains even today, in excess of the elaboration capacity in Spain - according to the statistics as much as 40 % of the blocks are still exported, a figure that often leads some to conclude that in the world of free trade there is still scope for greater local elaboration capacity. But more on that later.

The location of the quarries in Galicia gives us a second important reason for explaining the success. The closeness to the port of Vigo has meant lower transport cost for the blocks, and the fact the factories are located nearby has meant lower transport costs for the finished goods too. This is not so trivial an argument. In a highly competitive environment savings of even US$ 1per square metre can make all the difference between winning or losing major (and not so major) contracts. So the unique combination of well run quarries of commercially attractive materials often located close to the ports and with modern factories set up near them created the conditions of a world class industry.

Anyone who has visited the Spanish granite factories will have been impressed when seeing the shop floor in many of them- the gangsaws seem all to be neatly placed in one straight line, one after another and most of them consisting of the latest high production models. This is obviously not unique to Spain "s sector only but is definitely one indication of efficiency. Speak to the top men in any of these companies and if they open up to talk about their business, there is one common theme in all the conversations - how to reduce costs even more. The highly focused approach to cutting costs bordering on obsession stems partially from a highly competitive internal market where the only way to maintain ones clients and win new ones has usually been to undercut the competition with a lower price. Good quality is taken for granted. In absolute terms the price of granite slabs and tiles declined in the last six years by over 35%. The only way for the factories to survive this cut throat competition was to reduce costs. Squeezing suppliers and constantly modernising installations to produce even more square metres in a shorter time period have obviously been two methods ruthlessly employed by the factories. But cost reduction has meant more - a tremendous amount of thinking has gone into how to wring as little as 50 pesetas ( US$ 0.30) / per square metre of cost saving and devising production methods and organising work force in the factory to save as much money as possible and increase efficiency. It is hard to define this factor, call it " know how" or experience, but this accumulated knowledge as a result of constantly trying to constantly improving efficiency is surely one of the most important assets that the Spanish granite sector possesses today and an important factor in its success.

In the last decade in many parts of the world several countries took what they thought was the short cut aproach to amodern,profitable granite sector. All you had to do if you wanted to set up a plant was to take aflight to Italy, buy a few of the latest modern gangsaws, polishing lines and cutting machines, give your workers a few weeks of traing and you were in business. Pretty much the same mentality dominated when it came to quarrying in countries where local deposits were available. The fact that in many of these countries there was a construction boom thus providing a ready market for the finished product and that if you were well connected obtaining bank credit was almost as easy as taking money out of the automatic teller machines made things seemingly easier. The cautious step by step approach of developing the business seemed, in comparison, too conservative and out of times in the new fast moving world.As the story goes, it is the tortoise which won against the hare. In Spain the evolution of the granite sector has tended to be more tortoise like so the morale of that fable still hold true

The increase in the production capacity has not come about as much through new people entering the sector and setting up new factories but of existing companies either modernising or expanding production capacity by buying gangsaws or block cutters one by one. While production has doubled the number of companies has increased in the same period by 20%. This approach has two virtues. First, it suggests continuous re-investment into the business of profits generated( which many Portuguese companies failed to do and were wiped out by the Spanish factories located not far away). Secondly, this step by step organic growth did not create strong price distortions in the highly competitive market. Even if the businessmen have always complained of the low prices in the granite sector, the truth is the organic growth of the last decade was never disruptive enough to eliminate the profitability of the sector as a whole. A new factory with 6 gangsaws, for example, can do serious damage for the short term profitability of its immediate competitors by dropping prices sharply so as to enter the market but six existing companies all buying one gangsaw each will not affect the prices so much even though the total new production available in the market is exactly the same in both cases. In the case of Spain, even when new factories have been set up, it has usually been the existing businessmen in the sector setting up a new factory and not someone from outside the sector getting in. This lucky set of circumstances has not often been realised sufficiently enough . In many countries, especially in the Far East, a whole bunch of new people got into the sector overnight with new factories and even before the crisis began last year the granite sector in these countries was already beginning to suffer from over capacity.

Then there are other well known reasons why the Spaniards kept growing steadily while in other countries the granite sector remained stable or developed rapidly only to collapse a few years later. A local culture of granite ( especially in Galicia, the region where a house is not considered to be worthy enough if not made of stone), the construction boom in the eastern part of Germany where the pinks and grey granites from Spain proved to be very popular, a growing acceptance among architects in Spain that granite was the material to use in floors of high traffic, good infrastructure ( roads, electricity, water, ports, etc. all available), and a stable macro-economic environment ( in contrast to Brazil where high inflation, protectionist economic policies and unstable economy until recently discouraged new investment), all these helped in realising the potential of the granite sector. And, of course, in case anyone is wondering, a fairly wide range of attractive granite colours available locally obviously made a big difference.

So in 1998 the Spanish granite sector found itself in an enviable situation. It has modern installations, it is competitive, it is profitable, and with the Spanish and European economies all beginning to grow strongly it can look forward to two or three years of strong demand. The factories in Spain have all been working at full capacity now for almost a year finding it difficult to keep up with demand and, for the first time since 1991 there has even been a small increase in prices of finished products ( see our LIP section). So where does it go from here ?

A brief comparison with the Italian granite sector is now in order.

THE COMPARISON WITH ITALY

The impressive development in recent years may tempt one to think that Spain is close to surpassing Italy in granite elaboration. After all, if Spain "s factories are showing dynamism and growth while the Italians tending to remain stable and many of them functioning far below capacity, surely the distance between the two countries must be small now ?

Nothing could be farther from the truth, however. The fact is, if actual production can be calculated on the basis of grit and steel blades consumption, that Italy "s sector remains three times bigger as compared to Spain. In 1992 the difference between the two was 4:1 in favour of Italy, so while Spain"s sector has evidently grown in recent years by no means has it caught up with Italy. Examining the exports of the two countries provides a partial explanation

Italy " s exports of finished granite in 1997 were an estimated   approximately US$ 670 million. In contrast exports from Spain last year were only in the range of approximately US$ 120 million. In other words, Italy still exports almost five times as much finished granite as Spain, in spite of the sector being only three times bigger. So, if as is generally assumed, the Spanish granite sector is more if not at least as competitive as compared to Italy and is showing more dynamism does it mean that Spain can, to put forward a challenge, double its capacity once again in the next five years ? What must happen to increase the size so dramatically and what are the risks involved ? That is the fascinating question we now turn our attention to.

THE ROAD AHEAD

Let those who have had a chance of visiting the Spanish factories try to imagine the physical lay out. What strikes the eyes is that after all those one by one gangsaw addition, in many of them there is hardly any space left for adding more machines, unless one manages to obtain permission to install them on the road. This physical limitation suggests that the next phase of expansion will come about through the setting up several new factories in different locations and not just expanding the current installations. This is not to suggest that new people will automatically enter the granite sector though this too may well happen. The granite industry, in fact the stone sector, is now more than a dot on the economic map and is bound to attract the interest of outside investors and entrepreneurs.

But further growth in the form of new factories or whatever also means the need for more qualified and experienced people, not only production managers, but also qualified workers able to manage the sophisticated machines and it also means knowledgeable sales people. Where are all these people going to from , is a question worth answering. Try hiring an experienced Sales or Export Manager or a Production Manager for a typical granite factory in Spain - it is difficult, almost impossible to do so unless you are prepared to pinch one from the competition. Experienced managers and also qualified and knowledgeable workers are among the highly prized and scarce assets that the Spanish companies have, a sharp contrast to the situation in Italy where any factory looking for sales or technical people can choose from any number of them. So the lack of human resources may well be a serious bottleneck in the next phase of growth unless training of those who are already currently working in these companies and of those who wish to do so is taken more seriously.

But growth is not only a matter of setting up factories with the latest machines. If the increased production from the new installations is directed basically towards the Spanish market then the only certainty is the sector will re-enter rapidly a situation of crisis destroying the profitability of everyone. Once again let us look at the export statistics because it provides us with a partial solution. If Italy is exporting 100,000 million pesetas of finished granite as compared to only 15000 million pesetas from Spain then it is obvious what the Spaniards have to do if they wish to keep on growing. Italian exports just to Germany were about 40000 million pesetas ( US$ 260 million ), more than twice the total of exports from Spain. Italy exports almost 10000 million pesetas (US$ 65 million ) to USA in sharp contrast to Spain which exports a negligible amount to that country, less than 1000 million pesetas( US$ 6.5 million). An increased focus on exports and improving international sales networks at a time when the internal market looks so attractive might seem a contradiction but is probably the only way to maintain a strong growth of the sector without falling into the trap of boom and bust cycles.

The Spanish sector still depends far too much on standardised products and a limited range of materials. Too many companies turn away from complex cut to size products, and there are still far too many materials which the Spaniards are not able to supply competitively. Selling in some markets needs a far more sophisticated approach than simply sending a super salesman on a business trip to USA for two weeks. Serious thought will have to be given to investing in warehouses abroad, or setting up technical offices in the most interesting markets. In Italy there are so many commercially minded people without factory or even an office but roaming the world and fetching orders for the factories. That kind of commercial spirit is not visible in the Spanish industry where the approach is still production oriented.

Will the Spanish sector be able to live up to the challenge ? Clearly the opportunities are there, the environment is favourable. One can sense when speaking to the businessmen that they are feeling confident, beginning to dream big, aiming for what they would not have dared to do so till recently. But they need to remember the lessons of the last few years - step by step was the approach that made them grow big without making serious mistakes for the world remains a very unstable place. Their efforts in the international markets were successful because they were competitive and not because the buyer liked the paella he was invited to. They must also be conscious that they have ignored far too many markets up to now. They will need to keep on promoting granite in Spain among the architects and even among the public. They need to delegate more responsibilities among their subordinates, managing a 500 million pesetas is not the same thing as managing one that bills four times as much. They need to find and train good people and know how to keep them. Do all this and a glorious century awaits them. The sky is the limit for the bold and the daring.

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