Company or factory?

Published on July, 2004


Just think for a moment. The stone industry is one in which the word Company and Factory are used interchangeably, almost always, and a conversation with any business owner will, inevitably, sooner or later, focus on the machines he has installed, the production capacity they have, the problems they may give. Even when he makes rough valuation of the company, almost the entire effort is focused on the value of the land and the machines. If the machines are working at full capacity, the businessman is happy, if they are lying idle, for lack of orders, tension and stress is the order of the day.

Now all this would simply be a question of semantics if not for the very dramatic structural shift that is taking place in the stone industry all over the world and which is forcing European companies to re-think every aspect of their business, and for some has become nothing less than a question of survival. The new forces of change are well known to all- the emergence in recent years of Brazil, India and China as granite processors, of Turkey, Egypt and even Iran as important extractors and processors in limestone. A strong Euro has not helped either in competing with companies from these countries.

In Spain, particularly, after a prolonged construction boom which began in 1998 and is only showing the first signs of a slowdown with a corresponding decline in demand for stone, the factory managers are more worried than ever about the future. In the granite industry, for example, almost 80 % of the production is sold in the local market, and cheaper slabs and tiles from the other countries are entering in ever greater quantities at the expense of local production. Does this mean all those modern factories will now shut down, (as happened more than a decade ago in Japan)? In the world of limestone, ever-greater quantities of beige, white and other materials are being imported, not only in blocks but also in finished form, and are providing stiff competition in the international markets to the Spanish producers.

The thing to remember is the changes taking place are structural, not cyclical. That time when the developing countries would restrict to extracting blocks while the elaboration was done in Europe has long passed. The complacent assumption that only European factories could produce a quality product has clearly been proved to be nonsense, has not convinced the buyers of stone in the world as an argument, and only reflects a poor understanding of reality. So all assumptions must be re-examined if a viable strategy of survival is to be developed.

In the Spanish context, the logical question for a stone company manager is-if the local market is going to suffer from lower demand in the next few years (most businessmen think so), and, moreover, if a growing and significant part of the demand is fulfilled by cheaper imports, does this mean my company is condemned to go bankrupt? How will I compete with cheaper slabs from Brazil with its cheap real, or slabs from China which, almost by definition seems unbeatable, or from Turkey or Egypt with even weaker currencies?

One answer for anyone preparing for the future, say, the next five years (that, in today's fast world is very long term), is to make a distinction between the “factory” with its gangsaws or block cutters etc. and the “company”, which encompasses many more concepts and intangibles. The company owner or manager should remember he has clients, he may have warehouses, he has knowledgeable and experienced employees, he has market knowledge, the company may have a good name in the market, it may have financial muscle, all these and others form part of and what constitutes a `company`, not just machines. This distinction between differentiating the production assets and the rest, is the key aspect to recognise, for herein may lie the strategy for the future.

Even the most competitive and modern factories in Europe recognise they have a problem in matching prices of stones from some developing countries. An exceptionally cheap currency in many of these countries can make them extremely competitive in international markets even if a factory there has old machines, outdated production methods and all kinds of inefficiencies unthinkable in the context of a modern stone industry. Given that reality there is only way to confront reality - by not denying it.

If a company X, my competitor from country Y, makes a certain stone product cheaper than I can do so, then I should have no hesitation in buying it from him. If I do not do this, inevitably someone else will do so, with the result I will lose an order or a client. The important thing is not to be obsessed with keeping the machines in the factory working, the obsession should be with keeping the client.

This change of focus has dramatic consequences- it can mean becoming as much an intermediary or trader, or whatever name you prefer to give, as a manufacturer. It can mean a competitor becoming a supplier. It means understanding that the clients of the company are more important than the machines. (This may seem obvious to many, but in many companies the basic premise is still production). Recognising the primacy of the client does not mean attempts to set up factories in other countries should be abandoned, or looking for exclusive materials is not worthwhile, or setting up warehouses to open new markets is not a valid proposition. It simply means a strategy based on becoming the lowest cost producer (which has dominated the thinking in Spain in the last decade), is insufficient, and may even be a losing strategy if not accompanied by other elements.

To be fair, the thinking of many businessmen in the stone industry in Spain has changed over the last year or so in recognition of the new ground realties. But so strong has been the influence of measuring competitiveness only in terms of lowering the cost in Euros/sq metre, there are many businessmen who still have not realised their company consists of much more than that. The sooner they realise this, greater is their chance for survival in an environment that only seems to get more difficult and complicated by the day.