16 March 2012

Tough times, new thinking - IPL and the productivity challenge

American Chamber of Commerce in Australia: James Fazzino, Managing Director & CEO, Incitec Pivot

I thought today I would talk about two aspects of Incitec Pivot’s business to compare and contrast broader issues and opportunities in both Australia and North America with a specific focus on manufacturing.

Let me start by telling you a little about Simsbury, Connecticut, which is classic small town USA. It was founded in the mid 1600s and is nestled in a sweeping green valley with oak-lined streets of mock classical public buildings and gracious Georgian homes.

Simsbury’s 24,000 citizens are proud of the various minor league sports stars they’ve produced; they lay claim to that the largest tree in Connecticut, and they are proud that the first coins ever minted in America were struck there. As an aside, the coins were not official King’s coin so they carried the phase “value me as you please” which ironically reflects the global currency fluctuations impacting manufacturing in Australia today.

But that’s not why I mention Simsbury in the context of a speech about manufacturing. In May last year, the Incitec Pivot Executive Team visited our plant at Simsbury. It was a company transforming experience. But more on that later.

Manufacturing is the national “BBQ stopper” and productivity is the logical sub-text. To paraphrase, our colourful former PM, Paul Keating, the pet shop’s resident galah is talking about manufacturing these days.

The death of Australian manufacturing seems to be forecast in the media day after day when factories are closing and thousands of workers laid off. We read of the challenges facing Australian manufacturing such as the high Aussie dollar, high input costs, and the war for talent, the cost of running and of constructing manufacturing plants.

The challenges are real. Let me give you one example. I was in China last week and saw a fertiliser plant constructed at a cost of $500 million in one year. A similar plant is Australia would be four times the cost and four times the construction time! That’s our competition. We know what it takes to be world class.

But why is it that the future, indeed the survival of manufacturing, is such a hot public issue in Australia? Obviously, it is about employment and the tragic social impact of job losses. Additionally, manufacturing is the value-adding life-blood of any balanced economy through downstream wealth creation and import replacement.

I’m not going to suggest this is an easy problem to resolve but one that will require the coordinated efforts of both the private and public sectors.

What is our response as Australia’s largest chemical manufacturer? In Incitec Pivot, we have the concept of “my 50%”. In other words, what is our contribution to solving the problem. Our 50% is to focus on the controllables. The two big controllables for companies like us are strategy and execution. No surprises there.

On strategy, we believe that we are ahead of the game. Five years ago, we focussed on three key elements:

  1. We wanted to be exposed to the compelling thematic of the industrialisation of Asia particularly China;
  2. We wanted to be in manufacturing which leveraged one of Australia’s competitive advantages which is access to abundant natural resources
  3. We wanted to align ourselves with customers who were world class. We service Australia’s resources and agricultural industries, our two great export industries.

Moving to execution, which is where the rubber hits the road, I’m a firm believer that the greatest value for shareholders is delivered from the businesses you already own.

Incitec Pivot is recognised by the investment community for our efficiency programs and productivity programs. I’ve personally led programs at Orica and Incitec Pivot which have delivered hundreds of millions in sustainable efficiencies. However, a truism in business is that you can’t cut your way to greatness; and make no mistake, our objective is to be a great company!

The first step in creating a truly great company is to ensure it is run safely. Our goal at Incitec Pivot is zero harm. Anything less is unacceptable.

The next step is about our people. I strongly contend that people provide the only sustainable competitive advantage in any business that cannot be copied or replicated. Our competitors may copy our manufacturing plants and our logistics but cannot match our people.

For the past three years, we have been investing millions of dollars in developing our leaders at all levels of the organisation. More than 20% of our 5000 employees have participated in leadership development programs, including me.

The rationale for this is based upon research over many years which shows a clear link between leadership and outstanding companies. Outstanding companies are those with a fully engaged workforce - that is, employees who put in discretionary effort. This is not about asking people to work harder but to engage them in the day-to-day decisions which impact upon the results of their work.

Safety and leadership are the foundations for execution. This enables you to pursue productivity and that’s where we journey back to Connecticut and Simsbury.

At Simsbury, we have a factory, which produces a range of initiating systems, commonly known as detonators. I have visited Simsbury many times and the way work is performed at the plant is a practical representation of my vision for the entire organisation.

I am inspired by the people at the plant and their individual commitment to continuous improvement, to constantly challenging the status quo in ways that are both large and small.

I asked the question: how can we harness the same collective commitment of all 5000 of our people in the Incitec Pivot Group? After all, they know where to make improvements in product quality, in logistics, in operational efficiency.

The first step in the delivery of my vision was to gain the support and commitment of my Executive Team. So, last year, I took them to the site. They, like me, were struck by the ingrained approach to productivity and efficiency that animated the staff at that plant.

Simsbury is a winner of the prestigious Shingo Prize for Operational Excellence in Lean manufacturing. A basis of Lean Manufacturing is that every employee, whatever their nominal role, is empowered to challenge every process, identify every aspect of waste or inefficiency and to standardise new procedure.

LEAN principles are not new – they have their basis in the work of Frederick Winslow Taylor in the early 20th century who wrote “Whenever a workman proposes an improvement, it should be the policy of management to make a careful analysis of the new method, and....whenever the new method is found to be markedly superior to the old, it should be adopted as the standard for the whole establishment”.

This thinking was further developed by the likes of Australian Fred Emery and his colleagues. The best known example is the Toyota Production System, which transformed Toyota into the global leading car company a decade ago.

Now, Incitec Pivot is starting on the next wave of productivity improvements which builds upon this extensive body of work. We call it BEx for Business Excellence.

BEx is about moving to a new way of doing business. BEx will transform Incitec Pivot and create a long-term, year-on-year productivity lever in the business – something that many Australian companies are struggling to do.

BEx will literally turn Incitec Pivot on its head where the shop floor or mine bench is recognised as the place where value is created in the business and the role of leadership changes from managing to supporting the value adders. That’s why leadership development at all levels of the organisation is so important.

A major transformation like this is not easy. It needs financial resources as well as organisational commitment. This year, we will commit some $35 million with a significant portion of the spend on employing around 170 people – or about 4% of our global workforce - to focus on continuous improvement.

This will be an ongoing investment in productivity which will enable everyone at Incitec Pivot to share in the success, particularly employees, who will drive the productivity outcomes. We have only just begun on the BEx journey. But even at this very early stage, we are starting to see examples where BEx is being adopted to produce results. Brisbane Operations at Gibson Island is a case in point. Last year, the manufacturing shut team applied BEx principles and had the plant up and running in 12 and a half days – 2 and a half days ahead of schedule.The dollar value of this was in the order of $2 million.

BEx is a key element of Incitec Pivot’s 50% contribution to the productivity challenge for manufacturing. Where’s the other 50% solution? In truth, there are many elements. Let me address a couple.

Firstly, I want to tell you a tale of two plants – one proposed for the US, the other potentially in Australia. If we decide to proceed, these plants would manufacture ammonia – the key input of bulk explosives and also, fertilisers. Construction of an ammonia plant costs around half a billion dollars and employs hundreds in construction and about a hundred in operation, and as a rule of thumb, five or more people outside the plant.

The development in the US may happen. The plant in Australia won’t happen. Why? There are a number of reasons but one of the most critical is gas – remembering that natural resources is one of Australia’s competitive advantages. Gas is the raw material for making ammonia. Both the United States and Australia have booming gas industries. But let’s look at the different approaches.

President Obama made energy a major theme in his 2012 State of the Union address. He said:"We have a supply of natural gas that can last America nearly 100 years, and my Administration will take every possible action to safely develop this energy. Experts believe this will support more than 600,000 jobs by the end of the decade."

In contrast, in Australia, we too have abundant gas but our lack of vision means it will be processed through giant refrigerators to send overseas for others to value-add. The export of gas creates a three-time value-add. If we used some of Australia’s gas for high value-added manufacturing we would achieve a return on investment, in the case of Incitec Pivot, of up to 20 times - and that number does not include the further value-add when our products are used in the agriculture and resources industries in Australia.

The global head of Dow Chemicals, Andrew Liveris, is a proud Aussie and a proud manufacturer. Dow has 197 sites in 36 countries across the globe. Andrew has a clear line of sight to countries where manufacturing flourishes. He says it is in those countries which identify and exploit their natural resources, in particular energy.

We need to think again about how we value gas and the natural resources which belong to our nation. In the words of a correspondent to the Financial Review last month, would any Government consider the export of water during a drought, no matter what price we received?

Importantly, only the Government can optimise the total gas value chain - hence the need for a Government response. Let me add that Incitec Pivot is talking to Governments in Australia about options.

Another area for Governments in Australia to help manufacturing is by removing unnecessary and artificial burdens that add to the cost of doing business in Australia. But as many commentators have observed, Governments are adding them! The Australian Government’s imposition of a Carbon Tax is often mentioned as an example of a burden added.

While I personally support action on carbon reduction, I object to a penalty on Australian manufacturers which is not carried by our international competitors. Furthermore, this is a tax on energy, a natural competitive advantage which Australia should be promoting, not penalising.

The sad irony of the Carbon Tax, in the context of fertiliser manufacturing, is that our international competitors, such as China, don’t apply a Carbon Tax and yet most of their fertiliser manufacturing plants are substantially more carbon-intensive than ours! This can’t be the outcome that the Australian Government is seeking!

Governments make a difference to the economic environment and while I’m on an AmCham platform, it would be remiss of me not to make some brief comments about my view of the US economy, particularly as we own a substantial business there. There are many who have been writing off the US economy particularly as it has been making a painfully slow climb out of the GFC. I recognise that there are many challenges for the US economy including the revival of the housing market.

I’m of the view that the US economy is turning the corner. In contrast to Australia, the recovery is being led by manufacturing where a quarter of a million jobs were added in 2011. From a direct Incitec Pivot perspective, our Dyno Nobel business delivered a record profit last year and is performing well this year.

What gives me greater confidence for the future are some fundamentals where the US continues to lead the world. Some of them were outlined in a recent article by the American economist, Irwin Stelzer, who writes for a range of prestigious international publications. Let me briefly touch on some those fundamentals here.

In 2010, the value of goods and services produced in the US was equal to the combined value of the next three largest economies – China, Japan and Germany. Additionally, America’s per capita GDP substantially exceeds that of emerging rivals. It exceeds China’s by 10 times and India’s by almost 50 times.

Essential demographics favour the US economy in the long term. The US population is continuing to grow and even better, growing younger by comparison with Europe and Asia. In 2050, one in three citizens of most developed nations in both Europe and East Asia will be over 65 years of age. In America, the number is one in five.

And if we believe that productivity and prosperity are the end result of innovation and inventiveness, then the number of patents issued is surely an indicator of future success. Between 1997 and 2010, Americans received more than two million patents, with Germany a far distant second with less than 300 thousand.

Unlike those ringing the death knell for manufacturing in Australia, I’m an optimist. The source of my optimism is Australia’s resources base. Ironically, the resources boom is blamed by many for the problems of Australian manufacturing through the high Aussie dollar, the high cost of energy and other inputs, the wages explosion, and the like. I don’t share their view and look to a brighter future if we seize the opportunities.

At Incitec Pivot, we are seizing those opportunities through the development of a one billion dollar ammonium nitrate plant in Queensland’s Bowen Basin, which comes on line this year, and by committing to a feasibility study into an ammonium nitrate plant at Newcastle which, if it proceeds, will start to service the Hunter Valley in three years.

I strongly believe that we should be able to have our cake and eat it too. The key lies in supporting manufacturing which leverages Australia’s competitive advantage in natural resources. And if we deliver, everyone wins.

As manufacturers in Australia, we need to act. But I don’t underestimate the size of the challenge. It was encapsulated a century ago by the father of modern manufacturing, Henry Ford, who said: “Make the best quality of goods possible, at the lowest cost possible, paying the highest wages possible”.

It will take courage and commitment. Our 50% is the tens of millions we are committing to leadership and productivity. That financial commitment takes management courage in a tough environment when others are cutting costs and shedding people.
So what’s the other 50% solution? As I have outlined, that’s a question for our collective society: Government, industry, the community – and the choices being made, or not.

In a decade or so, when my two children, Stefan and Sienna, are entering the workforce, I want them to have unlimited opportunities in Australia. If we make the right choices, that’s the outcome we’ll achieve.

Thank you.