Freudenberg Banks On R&D, Innovation To Keep Growth Momentum

The Freudenberg Group in India expects 7-10 percent growth in sales this year, while globally it would be 1-3 percent. All Business Groups are likely to contribute to this.  The global technology group recorded 3.7 percent increase in sales from Rs 1,497 crore in 2014 to Rs 1,553 crore in 2015, despite the worldwide challenging conditions. About 40 percent of the company’s total India business came from the automotive sector – both from OEMs and the aftermarket.  Global growth was 7.6 percent to Euro 7.57 billion (Rs 53,730 crore), based on pro-rata consolidation of joint ventures. The Freudenberg Group Regional Representative India, Jörg Matthias Grossmann, in an interview, told T Murrali of AutoParts Asia, that the group wants to have two digit percentage annual growth for the next 10 years in India.    The edited excerpts:

Q: Freudenberg has been in India for several years. How was the journey so far?

Grossmann: We have completed another year of profitable and sustainable growth. And our companies in India will continue to grow, much faster than in most other regions. Our India share in total global sales would be increasing disproportionally. As of December last year, Freudenberg employed about 2,800 full-time associates at around 50 locations in India in four R&D centres and 14 production sites. Globally, Freudenberg employed 40,474 people.

Q: What was the investment made by Freudenberg in 2015?

Grossmann: Freudenberg invested in India Euro 9.4 million (about Rs 68 crore) in 2015 to upgrade and expand the existing manufacturing as well as research and development facilities at almost all business groups. The biggest investment was made in the state-of-the-art production site, labs and warehouse in the speciality chemicals factory in Mysore. The facility was inaugurated in August and is owned by Klüber Lubrication India.

Freudenberg Sealing Technologies also expanded its commitment in India. The company has been active in the market through its Indo-German-Japanese joint venture, Sigma Freudenberg NOK, in Mohali, (Punjab), since 2001. In February 2015 a second, completely new factory was opened in Basma, (near Rajpura in Punjab), where some 2,000 employees manufacture seals for the Indian market and for export.

These two major investments, worth about Rs 290 crore in the recent past, underscore our long-term commitment to India. Together with our partners, we will expand our presence and continue to invest in India. We have high expectations as we have invested to prepare Freudenberg in India for the future.

Q: How do you see the growth prospects for your company in India and globally?

Grossmann: On the basis of the current assessment, despite all the challenges, the Freudenberg Group in India expects growth in sales between seven and 10 percent above the previous year’s figure. All business groups are likely to contribute to this performance. On a global basis Freudenberg expects stable development in its sales, between one and three percent, and profit from operations slightly above the previous year’s figure.

Q: What are the key drivers of growth for Freudenberg group in India? 

Grossmann: If we are talking about the growth of GDP in India, then it is necessary to split it into the three areas of agriculture, services and manufacturing. From our perspective of industrial production, the manufacturing GDP is the relevant KPI, key performance index, for Freudenberg in India, as a basis for assessment. We are concentrating on this area in every country.

Freudenberg for the last five years has grown from Rs 950 crore to Rs 1,600 crore. The growth of 3.7 percentage points in 2015 was not as good as in the previous year. We can argue that the overall development, which was the basis for our business in India, was not that good. We had a high consumer price index, high inflation and high interest rates etc., which were not very positive for our business development last year.

 Q: What are your expectations? 

Grossmann: In general our expectation is to grow with two digit percentage number year- on- year.  This is what we have in our strategy and this is what I expect for the next 10 years.

 Q: The segments of the automotive industry in India have been witnessing different levels of growth. How does this impact Freudenberg in India?

Grossmann: Freudenberg is doing business in many sectors. Our priority sectors in India are automotive and construction. If I talk on development on a global basis, the passenger car segment is the most important one. We are not neglecting the two-wheeler market and the commercial vehicle segment. Freudenberg, as an innovative company, has its strengths in the passenger vehicle segment.

 Q: How about the two-wheeler segment in India?

Grossmann: We are present in the two-wheeler segment also. For instance we are involved in tyres for two-wheelers. In addition, we are in the specialised lubricants.

Q: Lubricant is a unique segment that seldom sees drop in sales. How has it been for Freudenberg?

Grossmann:  For lubricants, more than 80 percent of our business is not based on crude oil but on synthetic raw material. There we are a niche player and as a specialist we are the number one worldwide. We are not present in the motor oil or commodity areas. We are an OEM partner for special requirements in lubrication and that is the basis and one of the success factors of our business.

Q: What about aftermarket?

Grossmann: We are present in OEMs and aftermarket. The OEM business is for sure, and is much more than our aftermarket business. But 2008 and 2009 gave a clear indication that it was a clever strategy to be involved in the aftermarket business as well. For example the tyre business, where prices in the aftermarket are much better than in the OEM market.

Q: For the lubricants business in India, is growth limited to the mineral-based products?

Grossmann: We are in specialty lubricants where we address the requirements of special parts in vehicles. Klüber Lubrication India manufactures various specialty lubricating oils, greases, pastes, aerosols and release agents under the brand names of the Chem-Trend, OKS, and of Klüber Lubrication. Our lubricants are meant for several special applications such as window regulators, electrical seat adjusters etc.

Q: About 26 percent of your global revenue is from new products which were   in the market for a maximum of only four years. Is it a self-diktat of Freudenberg?

Grossmann: When we coined the new global brand of our company, ‘Freudenberg – Innovating Together’, it has to be more than lip service. We have to be recognised as a future-oriented OEM partner for all our customers. Therefore, we focus on R&D and innovation which results in a constant flow of new products.

Q: Generally, no company can work on innovation in isolation, they need OEM partners. How about Freudenberg?

Grossmann: I can simplify that. Our sales people, mostly engineers, come back from our customers with new ideas. These ideas are the basis for our 26 percent share of revenue coming from the products developed within the last four years. We are not in the commodity business and that is a relevant reason for us, and that is why we said in our strategy that we strengthen our research and development activities. The inputs into R&D are measured as R&D intensity, which is the R&D spend as a percentage of sales. We are interested in the output this generates.  While all our businesses globally grew more than seven percent, we increased the share of R&D spend by 0.4 percentage points and the people in R&D by about 200. There is a lot of effort behind innovations. It is our intention to be always ahead in different areas. The one KPI to measure all these is the share of revenue from new products.

Q: Can you explain your new product development methodology?

Grossmann: A new product is a new product; it is developed from scratch. It can also be a market application, which is not there today. Secondly, it could be something used in a totally new way. It is not a substitution of a raw material, which we do not consider as a new product. For example, the existing raw material may not be available in the future and therefore, we have to look at new raw materials for the same product. These are not taken into account as new products.

Q: Do you make your own product obsolete to introduce new ones?

Grossmann: Let’s think about an India application – ‘the no-dust broom.’ There was a broom but ‘no-dust broom’ was not available. This is a new and innovative application. This is, for us, a new product. It was very successful. We could not keep pace with the demand which was higher than the supply. There the share of the new product was growing over-proportionately in that business group.

Freudenberg invested more than ever in innovation during 2015. For instance, the Group conducted research and development activities worth Rs 2,237 crore (previous year: Rs 2,183 crore). On a Euro basis this corresponds to 4.2 percent of sales (previous year: 3.8 percent). The objective of all activities is to increase the share of the new products in sales.

Q: What is the role of the Freudenberg Tech Centres in India?

Grossmann: First of all the priority of the Tech Centres in India is to take up the regional responsibility –Asia Pacific. However, there is one exception, Eagle Burgmann, which has a design centre that works for the global organisation. When we enter a country our strategy is to start by exporting to that country and then we set up a sales organisation. After achieving a certain size we start local production and thereafter set up local tech centres and R&D.

Q: Do you see the Tech Centres in India evolving as a centre of excellence for any particular aspects of your business portfolio?

Grossmann: Let me take Klüber Lubricants as an example. It has evolved as a Centre of Excellence and a Global Competence Centre for the cement industry for the whole world.  This is because we have a strong position in the local market here. Construction is an extremely important market segment in India and so we have garnered a lot of expertise. India has highly qualified people and therefore, it was decided to give Klüber India the world-wide responsibility.

Q: Growth in Asia seems to be slowing down and some segments are down owing to falling crude oil prices. What is Freudenberg’s growth prospect?

Grossmann: Allow me to correct you; Asia is not slowing down. We are used to having growth rates of 12 to 14 percent in China, which is now at about seven percent. This is similar to what India has. In the case of crude oil, our group is relatively independent of it.

Q: Can you elaborate on your plan to increase the local content in your products?

Grossmann: It is our strategy to increase our local content particularly to hedge against devaluation. For example when goods worth Euro 100 are imported, it is worth Rs 7,500. In 2013 the Indian rupee deteriorated by 20 percent within eight weeks. That means, in about eight weeks Rs 9,000 would have to be paid for the import of goods for 100 Euros. To manage the delta of Rs 1,500 there are two options: Either increase the local price by 20 percent, which the customers may not be willing to pay, or add value through localisation.

A solid local base gives stability. We could call it a natural hedge. This will help in the mid and long-term, not being that dependent on the effects of the forex rates. So this is our strategy, and this is valid not only for India. We are doing 19 percent of our business in Asia; we have huge operations in China and growing operations in India. These are the stabilising factors for doing business in these countries. Therefore, localisation is a natural hedging strategy.

Q: How strong is India’s potential for localisation?

Grossmann: There is no comparison with the other regions of the world. First of all, Freudenberg is a highly diversified group and that is not by accident but by purpose. This is part of the larger strategy. There are four huge business areas – Seals and Vibration Control Technology, Nonwovens and Filtration, Household Products, Specialties and others – representing 90 percent of the total sales. All these businesses contribute in an excellent way to Freudenberg’s profitability.

It is important that all the groups are doing business in India and in all the business groups Freudenberg holds majority shareholding. All these business groups have been consistently growing. We have a solid base for the future growth and we have invested a lot in creating the required infrastructure and we are well prepared to serve the Indian customers.

Q: What is Freudenberg’s strategy for alternative materials?

Grossmann: I am not able to talk about our strategy in 25 years from now but you can be assured that we are working on that. The `Project E square’ talks about education and environment. We are playing a supporting role in developing the society as a whole.

Q: Will you be replicating the training centre that you have created in Nagapattinam, in South India?

Grossmann: No, that is not our intention. The Freudenberg Training Centre in Nagapattinam has been up-and-running for eight years. So far, some 400 young people have completed vocational training courses on site. The Training Centre’s curriculum is about to be expanded to include the profession of electrician.

The Training Centre was established as an aid-project in 2008, to give young people a foundation for a better future. The region was badly affected by the tsunami in December, 2004. Right at the start, there was a vision: To provide a career and skill-oriented vocational training for young people. Since then, the Centre has come a long way. Today, it offers government-approved training in welding, fitting, machining and motor mechanics. In addition, the first electrician trade students will be enrolled from this academic year. There should also be an increase in the number of female students at the Training Centre. We are continuing the journey that we started almost ten years ago. We faced challenges and hurdles, but when I see the young people who are being trained here, I’m convinced that we are on the right track.

At the moment, we have the challenge in Germany with refugees. This is quite a big challenge. Here again we want to act as a reliable and responsible citizen. If there is something elsewhere, we will be there. Freudenberg is a global player and we think we have to be responsible around the globe.

Q: Is the group happy with its performance?

Grossmann: The seven percent growth of our group in 2015 was an excellent outcome. However, there are always areas we can do better. Naturally the development in the oil and gas sector was not up to expectations, but that is the huge advantage of a highly diversified group. We are not dependent on a single region or a single sector or a single business group and could still perform well overall.  (APA)

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