Could the tide be turning already?
16 April 2009
Tim Fryer had the opportunity of catching up with Ron Jakeman, Managing Director of Electrolube, about the electronics industry in the downturn and how the green shoots might be starting to show already.
Tim Fryer: How are you seeing the market at the moment?
Ron Jakeman: I think we are in a much better position this month than we were at the back end of last year. We have obviously seen reductions in sales like most people, particularly automotive, but quite a lot of it has started to come back quite strongly in February and March and we have now got the best order book we have had for several months, which is good news. We actually started to notice the first effects of the downturn back in March and April of last year.
Tim Fryer: The first signs of the downturn were about this time last year – where did you see it bite first?
Ron Jakeman: It was in the automotive sector and that has been progressive in our view. Don’t forget we are a long way back in the supply chain, we have got two or three or four people ahead of us before our product actually gets there. We saw it first in France and Germany where it had a big effect and in Brazil where we have got quite a lot of automotive business. So we took steps. We are always looking at ways to increase our operational efficiency and we put a lot of work into it last year which in retrospect was exactly the right thing to do and we are getting the benefits from that now.
Tim Fryer: And what form did this take?
Ron Jakeman: It was a complete business re-organisation across every level from sales and marketing to operations. We looked at everything very tightly and we took quite a lot of cost out which is giving us good benefit now. One of the advantages that we have got is that we are on several continents, so it is pretty well spread and even though it is all in electronics there are different sectors that are doing well, particularly in China where we are still seeing double figure increases in terms of turnover. They have been hit but not as badly as people imagine.
Tim Fryer: So have you migrated more products to China as a consequence?
Ron Jakeman: The exchange rates are giving us issues like most people. So we have in fact brought some of our products back to the UK that we previously manufactured in China because of cost – we have the flexibility to do that. We can manufacture here [Derbyshire in the UK], in China or in Brazil.
Tim Fryer: What sort of split do you have in your manufacturing?
Ron Jakeman: It's about 45% UK, 35% China and the remaining 20% in Brazil. The way we have developed our product range in each geography really goes back to when we started in China. We had a warehouse and shipped products to it. When certain volumes of a product became viable we started manufacturing it there and then shipped it back to Europe after we had established the manufacturing there. The products are pretty similar that we are selling worldwide. Resins, thermal pastes and conformal coatings are the three biggest ones.
Tim Fryer: How have you restructured the company?
Ron Jakeman: We used typical models to take cost out. There had been an element that we were building certain areas expecting to have increased earning from them which just didn’t work out and so that is some of the activity that we just cut back on, mostly in Europe to be frank.
Tim Fryer: You said you first started noticing problems in the market last spring; was this in any particular sectors of the market?
Ron Jakeman: Again, it started with automotive and then it started to ripple through and obviously hit our catalogue distributors at the end of last year, and there is no doubt that everyone is suffering from this. But the good thing is that after the period of de-stocking, which we think happened in November, December, January, and into February, our catalogue distributors are coming back very strongly. We now have the best order book that we have had for many months and that is across the board; with the exception of automotive!
Tim Fryer: So you mentioned there had been a substantial destocking – is this because there was a substantial decrease in manufacturing volumes in the December to January period?
Ron Jakeman: Yes – it was particularly noticeable with the catalogue distributors. But I think that has been true of everyone, including us. We are all trying to take stock out of the system and that means reducing stock and keeping it down to more appropriate levels than we would keep during the good times. It is very easy in the good times to cover up any inefficiencies by holding more stock. As we have overhauled our system and taken the stock out we have seen the holes left behind that we needed to fill and it has left us a lot stronger at the end of the day.
Tim Fryer: A resurgence in February and March – is that because people have ‘destocked’ and are now buying again, or is business better than the media is telling us it is?
Ron Jakeman: I think in terms of automotive it is going to take a long time to recover, but in many other areas of the business there has been a lot of talking the industry down – all the stories about collapse of the manufacturing industry and no-one wanting to buy anything – it is just not true. There are opportunities out there, lots of opportunities, and we are finding more and more each day. So I think to a large extent it is the media that has done quite a bit of damage in terms of people’s views and attitudes to what is going on.
Tim Fryer: But none the less, it becomes a reality if consumer confidence does become affected.
Ron Jakeman: Absolutely, the whole thing is about confidence and we haven’t made the right moves to put the confidence back. I don’t think the Government’s behaved well in all of this, particularly for small and medium sized companies – the help they say they are offering just isn’t there. One of the typical examples is the enterprise guarantee scheme. The way the banks are implementing it means that you [the company owner] are actually giving a 100% personal guarantee, so the 75% Government guarantee means very little at the end of the day.
Tim Fryer: So what do you think the Government could have done to improve confidence?
Ron Jakeman: I personally thought that the Government should have been much stronger with Northern Rock in the early days because that would have set the pattern – if they had said that they guaranteed the depositors it would have saved us from a lot of what happened thereafter and it would have put the Government in a different light. Whereas at the moment it just seems to be reacting to events.
Tim Fryer: What about ‘Quantative Easing’, printing money, what do you make of that?
Ron Jakeman: Well that is it, its just printing money, but with interest rates where they are there is not much else you can do if you want to get liquidity back in the system. It was something that was tried in Japan at the end of their recession, but nobody knows the true effect of it, but to a certain extent we are all moving into unknown territory.
Tim Fryer: So going back to your own fortunes, what are the sectors that are showing promise?
Ron Jakeman: In terms of the UK it has been mostly through the catalogue distributors and we don’t necessarily know where that is going. In terms of our Chinese operation we have seen a lot of the joint ventures go – a lot of the Western companies have pulled back but the actual domestic industry is quite strong. China is still very much a consumer society and people still want to buy things there. So we think most of our increases there are coming from domestic manufacturers.
Tim Fryer: You also set-up in the USA, didn’t you?
Ron Jakeman: Yes, we set up in the US over a year ago and it has taken that amount of time to get things moving and get the people trained, and now there are a lot of very interesting projects coming from the US. There are indications that when it comes back it will come back in the USA first and there is a lot of activity there even now. We are really quite surprised.
Tim Fryer: Do you think that, beyond the very real troubles in the financial markets, they have allowed themselves to talk themselves into recession in the same way as we have?
Ron Jakeman: I think they probably have been but what we can now see is that things are starting to move again. It was difficult last year and around September/October we wondered if we had done the right thing by being there, but now the prospects that are coming through, particularly from Mexico, are very, very good business. So again I think it is a case of it being talked down, but if you look underneath, there are some good opportunities.
Tim Fryer: So when do you think that we can confidently expect a recovery to be underway?
Ron Jakeman: I think we would need a few consecutive months of sales at last year’s levels before people had the confidence to plan forwards. When you are on these reduced levels of turnover it is very difficult to plan business and know what you should be doing. But I am much more optimistic this month than I was last month. I think we may have turned.
Tim Fryer: Any sectors of industry that are promising?
Ron Jakeman: The area of the business that we have invested most into is the environmentally friendly products – getting rid of solvents and so on. And we are doing pretty well with the conformal coating products that we launched at Productronica a few years ago. So these are areas that are showing promise, particularly in the Far East where they are looking to get rid of toxic products.
Tim Fryer: Do you find that they are as diligent in the Far East as we are in the UK about following environmental legislation?
Ron Jakeman: They are becoming more so. You still hear horror stories of people emptying solvents into fields at the bottom of the factory, but the Government, particularly around the time of the Olympics, put in a whole lot of new policies which they have continued. They really do have an interest in trying to clean up the country and this is a genuine interest, not just a commercial one. And the Government is investing a lot of money into trying to clean up the rivers and reclaim the polluted land that has crept in over the last 80 or so years.
Tim Fryer: Is that being driven by legislation?
Ron Jakeman: It is not as formalised as the European legislation but you can see it getting there. Sometimes they go to the extremes and are tighter than they are in Europe in some areas. There is a genuine will to do that and this will benefit a good many of our products, which is why it is a promising area of development for us.
Tim Fryer: So is the UK and Western Europe still a core market for you?
Ron Jakeman: We need to be very careful. We talk about the large scale manufacture in the Far East but the specification is still done here in Europe and we have to maintain the sales teams and our presence to make sure that we do get our products specified in. We are not yet at the stage when the Far East specify their own consumables.
Tim Fryer: So Electrolube is still keeping it's head above water?
Ron Jakeman: Yes. We put a lot of investment into our five year plan and we had to claw some of that back as we saw our turnover shift. We were on quite an ambitious expansion plan that started two and a half years ago. We have had to cut it back in line with what is happening, but it is there ready to move.
Tim Fryer: Was the plan concerned with products or manufacturing strategy?
Ron Jakeman: It was in terms of the company, moving it up to the next level of turnover by expanding into new markets – primarily USA and India. We have done the USA one but held back on the Indian one. We have still put investments in there but not at the level we were proposing to. We have also moved factories in China. We have got a brand new facility there just outside Beijing of 60,00ftsq that we move into in July. And we are moving from this site. We have been trying to move for three years but experienced a few problems locally, but we are over those now. I’ve got a conditional contract for sale of the site and I’ve got new premises lined up to move into around the summer time. The new site is only three kilometres from here – a similar size but a brand new building. This is a turn of the century building that we need to move on from. So we are not stopping still. There is still a lot going on.
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