December 14, 2015, 00:10 / Business / Interview

“The situation in Russia is always volatile”

Why effective demand now worries foreign businesses more than the investment climate, and what the company is gearing up for in 2016, Pierre-André de Chalandar told Ekaterina Kravchenko S. Porter / Vedomosti

The current situation in the Russian economy does not frighten the chairman of the board of directors and general director of the French company Saint-Gobain, one of the largest players in the global construction market. Saint-Gobain calls itself a world leader in the production of high-tech and insulating materials, plasterboard and gypsum mixtures. The company is already 350 years old, it has gone through all the world's economic crises, notes Pierre-André de Chalandard philosophically. Saint-Gobain was founded by order of Louis XIV as the royal mirror manufactory in 1665 and was exclusively engaged in the production of mirrors and glass. Her first order was to decorate the hall of mirrors at the Palace of Versailles.

Saint-Gobain currently operates in 66 countries. In Russia, the company began business in 1993 with sales of thermal insulation materials, sound-absorbing suspended ceilings and wall panels; now there are already six operating factories: in Yegoryevsk (Moscow region) - factories for the production of thermal insulation materials Isover based on fiberglass and for the production of dry building materials Weber-Vetonit mixtures; in Chelyabinsk - a plant for the production of thermal insulation materials Isover based on stone wool; in Arzamas (Nizhny Novgorod region) and Polevsky (Sverdlovsk region) - factories for the production of dry building mixtures Weber-Vetonit; in Gomzovo (Nizhny Novgorod region) - a plant for the production of Gyproc plasterboard. In 2012, in an interview with Vedomosti, de Chalandard spoke about the unusually rapid growth rate of business turnover in Russia - 20% per year versus 5% worldwide. The Russian crisis adjusted the company's development trajectory in this market. By the end of 2015, Saint-Gobain expects a reduction of 15-20% in segments of the construction market where the company has an established position (including finishing plasters or fiberglass-based thermal insulation), but in some niches where the company began to operate recently ( plasterboard or facades), an increase of 15–30% is expected.

De Chalandard predicts that next year will be difficult for the Russian economy and prefers not to give medium-term forecasts. However, he is confident in the long-term potential of the Russian market. Saint-Gobain does not intend to reduce operations on the Russian market; it recently opened a new R&D center here, but has postponed the decision on new investment projects in Russia until 2017.

– What measures is Saint-Gobain taking in response to the crisis? Most foreign companies intend to reduce operations in Russia. Are you not stopping your investments and moving in the opposite direction?

– No, we did not change our investment plans for Russia, we only adjusted the timing of their implementation. Now we have taken a break, we intend to wait, but we are not reducing operations. Existing factories will remain operational.

– How long do you intend to wait?

- For some time. It is impossible to predict how the situation on the oil market will develop. When prices return to their previous levels, everything may change in the economy.

– Do you believe that oil prices can return to $100 per barrel?

– Who could have predicted a couple of years ago that prices would fall so much? Top managers of oil companies - BP, Shell, etc. - did not even allow such a thought. But everything has changed. Although one cannot help but say that the period of low prices is favorable: the economy must adapt and the course of the Russian government is correct - it is necessary to produce more in Russia and depend less on oil prices. Now the dependence is high and it persists. I'm not saying that low prices are good, because it has led to a slowdown or decline in many industries, including construction, where we work. But it could benefit the Russian economy.

– What is your forecast for the development of the situation in the Russian economy?

– 2016 will continue to be difficult. We don't expect a good next year.

– What are your expectations after 2016?

– At the moment it is difficult to make any forecasts.

– So you will wait at least until 2017 to adjust your plans?

- Yes. Saint-Gobain is already 350 years old, and we have gone through all the world's economic crises. That's why we know how to wait.

Pierre-André de Chalandard

Chairman of the Board of Directors of Saint-Gobain Born in 1958 in Vichy (France). In 1979 he graduated from the Higher School of Economic and Commercial Sciences, in 1983 from the National School of Administration 1983 Inspector at the General Inspectorate of Finance of France 1988 Head of the Directorate of Energy and Raw Materials at the French Ministry of Industry 1989 Began his career at Saint-Gobain as Vice President in corporate planning 2007 CEO of Saint-Gobain, since 2010 - Chairman of the Board and CEO of Saint-Gobain - Geopolitical risks have come to the fore in many economies. How serious are they for the business of an international company?

– The geopolitical situation is difficult all over the world, and this gives rise to concern. I'm not a political expert, but there are indeed concerns everywhere, and it is very difficult to predict the situation. Risks are present in many countries. That is why our philosophy is to diversify production: we need to distribute risks and have many reference points.

“There are good opportunities for acquisitions”

– How does the situation in Russia differ from this difficult background?

– The situation in Russia is always more volatile: very good years are followed by bad ones. But in the long term, this is a promising country for our company: the market potential is very high.

– Are the market growth prospects also promising in terms of green building potential?

- Yes, I hope. This is a global trend, and Russia is unlikely to remain on the sidelines.

– Are you not interested in the CIS markets?

– We currently produce products only in Russia: we have six factories here, from where we deliver, including to the CIS countries.

Regarding the prospects in Russia, I think that perhaps in the next two years there will be opportunities for purchases in Russia. Many companies are going through difficult times, so from this point of view there have been good opportunities for acquisitions.

– You have targets – who do you want to buy?

– We always have targets (laughs).

– Do you keep an eye on when companies in difficult situations will get even worse and will have no choice but to sell?

- Certainly.

– Are there many such victims?

- Yes, a whole list.

– Are these Russian or foreign companies?

– Russian.

“At meetings with regional leadership, we always saw support”

– Three years ago, in an interview with Vedomosti, you said that the investment climate had improved. What do you say now?

– The investment climate remains good. There were growth prospects then, but there are none in the next two years. We have invested significantly in the last five years, and for us the investment climate is not the main factor now. We are concerned about effective demand and what its dynamics will be.

– What is the share of Russian operations in the company’s business?

- It's still small.

– In the regions, what are the main problems – bureaucratic ones or relations with governors?

– We have good relations with local authorities. Regional management always tries to help so that the project is implemented according to plan. Sometimes everything just goes slowly, but we always manage to get the help of local administrations so that everything is completed on time. At all meetings with regional leadership, we always saw support.

– In which regions did you feel the most support?

– In all regions where we operate.

– These are difficult times in the Russian economy, but you have opened a new R&D center. For what?

– This is dictated by the need of the production process. We have a fairly extensive presence in Russia and need to conduct research to produce products that best suit the needs of the local market. The quality of raw materials varies everywhere. Take sand. It’s a simple thing, but its composition is different in different regions, this must be taken into account. Climate, construction features in the region - all these are important factors that need to be taken into account when developing materials, so we conduct relevant research.

- But why are you opening it here?

– Russian universities have a good scientific base, and we can use this advantage. Previously, we did research for the Russian market in Finland, and it took up to a year and a half, but now we have reached the volume of operations in Russia that creating our own R&D base has become justified. This will allow us to reduce the research period to six months; here we are closer to the market and can better focus on its needs.

– Will you hire Russian employees?

– Yes, the Russians will work. In five years we plan to increase the staff to 25 people.

– Will you close the center in Finland?

- No, it will also work. We have a very wide network of R&D centers around the world - more than 100: from the largest, interdisciplinary, to small, highly specialized. They are all interconnected. We simply think about creating added value. The construction industry in Russia is developing well, but there is room for improvement. There are many good buildings, but sometimes everyone is chasing deadlines for the construction of the object and does not take into account important things, and as a result the quality suffers.

“We must be Russian in Russia, French in France, German in Germany”

– Are you planning to focus on residential or industrial construction?

– Both in the commercial and residential sectors.

– Do you see a large field for work in Moscow?

– If we talk about new construction, there are very good buildings, but there are also those that could be much better.

– Are they worse than in the center of Paris, where you live?

– In European capitals there are generally few new buildings. The main market for Saint-Gobain is the renovation of buildings, especially in Paris.

– But now in Europe they are not very actively involved in the renovation of buildings due to the crisis, there is simply no money for it. Due to the recession in Europe, are you forced to focus on emerging markets?

– No, the recession in Europe is over! In the Nordic countries the situation is good, Spain is growing, Italy is recovering. Yes, it’s still difficult in France, but in Germany things are going well.

– When you talk about several pillars for a business, where do you think the company’s main pillar is – in the European market or emerging markets? Economies have been repositioned in terms of development rates and prospects, this must be taken into account.

– Traditionally, Europe is the largest market, but thanks to diversification we have managed to balance our activity in many emerging markets too.

– With rising taxes, some French companies chose to change jurisdiction. Your headquarters are in Paris. What keeps you in France?

– We are historically a French company and have no plans to move anywhere. We do not redistribute resources to the best markets, but work everywhere, regardless of the current situation. But we must be Russian in Russia, French in France, German in Germany, etc.

– One of Saint-Gobain’s latest transactions was with Sika, a leading manufacturer of construction chemicals. What did it give you?

– We bought a controlling stake in a company that produces construction chemicals; this is a related industry to ours. The deal fits into our strategy - we prefer to either buy new technologies or acquire companies in new markets to expand our activities.

– Which market is the most promising for Saint-Gobain?

– You can’t look at just one market. I don't like putting everything in one basket. All markets are good in their own way.

You can save energy resources equal to annual gas production

– You took part in the recent Foreign Investment Advisory Council. Considering the complexity of relations between Russia and the Western community, what are your impressions?

– The conversation was very interesting. The Advisory Council is generally a very good initiative of the Russian government. I think most countries should have similar meetings. This is a good opportunity for governments to learn about the problems faced by foreign companies and how legislation works and what needs to be adjusted.

– Doesn’t the government know?

– The government, of course, usually knows, but the prime minister is not always aware of everything. Such meetings allow us to get a complete picture.

– Does the Russian government hear investors?

- Yes. Two years ago we raised the need to improve energy efficiency in buildings and we see that the government is listening, this topic has been included in the priority areas of the advisory council.

– But in Russia energy efficiency leaves much to be desired.

– Of course, Russia has a lot of cheap energy resources and therefore the problem is not a priority, but it needs to be dealt with. It is important to understand here that reducing energy consumption is by no means an additional burden on the budget. On the contrary, this can become a good driver for the socio-economic development of the country.

According to our estimates, if a set of measures to improve energy efficiency is implemented in Russia, this will lead to additional GDP growth of 0.7% per year, the creation of about 500,000 direct new jobs and at least twice as many indirect jobs. Plus will allow you to save energy resources in volumes comparable to annual gas production. This entire volume can be exported and receive additional income.

– But Europe, for example, is not eager to buy more Russian gas: the course is to diversify and search for suppliers alternative to Russia.

– No, Europe is happy to buy Russian gas.

- Fine. How do you propose to improve energy efficiency in Russia?

– It is necessary to introduce new standards for the construction and reconstruction of buildings, eliminate technical and regulatory barriers, create economic incentives for the construction of buildings with low energy consumption and energy-efficient renovation of residential buildings, and create a system for monitoring the implementation of building rules and regulations in construction. Two years ago, I just raised this issue and advocated that we need to do this. Then the conversation was more general and it was decided that criteria needed to be developed.

– Specific measures?

- Yes. We need to set standards and formulate a road map. We are already holding consultations with the Ministry of Construction - with Mr. Men (Mikhail Men - Minister of Construction of Russia - Vedomosti) on the issue of creating a roadmap for increasing energy efficiency in buildings.

– How long might this take?

– Depends on the measures. Some of them can be adopted quite quickly. But there are also many technical things that are more problematic to do. This will take longer.

– But in general, how long might it take – a year, two, five years?

“Some things can be done within a year, but other measures may take longer to implement.

– It turns out that in some countries, including Russia, foreign business, in order to solve a problem, must bring it to the level of the prime minister, there are no other ways.

– No, of course, there are many ways. But an advisory board allows many problems to be solved more effectively. I would advise other countries to apply this practice.

– Is discussing once a year an effective dialogue?

- Yes, it is quite. Then, throughout the year, work takes place within working groups. But the plenary meeting of the council itself is productive precisely because the most important points are raised at it, without unnecessary details. You can focus on the problem very clearly.

How officials talk to business

– Has the general atmosphere of meetings between foreign business and the Russian government changed after the introduction of sanctions? Perhaps the tone of the conversation has changed compared to how it happened a year ago?

– I can only compare it with the meeting two years ago; last year I did not participate. But judging by what was said, last year the general atmosphere was more emotional.

Saint-Gobain Company

Industrial group
Shareholders (voting share, data as of December 31, 2014): Wendel (19.3%), company employees (11.8%), the rest of the shares are in free float. Capitalization – 22.5 billion euros. Financial indicators (six months of 2015): revenue – 19.86 billion euros, net profit – 558 million euros.
Engaged in the production of various types of glass and building materials (industrial ceramics, plastics, insulating materials, etc.). Unites 1,500 companies in 66 countries.

– Who was more emotional then – Russian officials or foreign investors?

- And those and others. Some companies were under pressure; politicians asked them not to come to the meeting, but they eventually came.

– European politicians also did not advise top managers to travel like the Americans?

– This mainly concerned American business. Business, by its very nature, is not involved in geopolitical problems at all; that’s not our job. Companies believe that sanctions are harmful for business.

– But in general, do you think the Russian government is favorable towards foreign investors?

– The Russian government is interested in supporting foreign investment in Russia. They want to work with international companies. A key part of the council's agenda this year was the localization of production. Due to devaluation, it is now more profitable for most companies to produce here rather than import products. And the council discussed specific problems: what is preventing us from speeding up localization, what needs to be done, where are the problem areas.

Everyone admits that the economic situation in Russia is not easy now. And the main reason for this is not so much sanctions as the low price of oil. Most companies began investing in Russia before oil prices fell. The situation has changed, so some companies have to adjust plans and become more active in localization.

“We are able to assess how effectively the system works”

– Did you feel that due to the low cost of oil, Russian officials became more accommodating and more loyal to foreign business - after all, the more complicated the situation, the more incentives for friendship and compromise?

– In fact, the Russian government has always been friendly towards foreign business. There are simply a number of bureaucratic obstacles and difficulties, but the government is trying to help investors. For our company, the problem of localization is not a problem compared to other large companies: our production in Russia is 93% local.

– Why didn’t you manage to bring local production to 100%?

– We would love to produce everything 100% locally, but we simply cannot find some components for our materials in Russia, so we have to import them.

– Why did you decide to participate in the work of the advisory council only two years ago?

“We were asked to participate and make our contribution.

– What do you need to do to be asked to participate? Is it difficult to become an advisory board member?

– Of course, it’s difficult, because the largest companies in the world are involved. Saint-Gobain operates in 66 countries, so we are able to assess how effectively the system works. We are also able to help develop and bring standards to the international level. After all, for example, there is a huge difference between the level of energy consumption in Russia and the countries of Northern Europe, where the climate is approximately the same as in your country. In Russia, consumption is 50% higher. This is a huge resource! If used correctly, it can be released and used to benefit the Russian economy.

– But still, in Russia, energy efficiency is not among the top priorities; there are more pressing tasks. Why does the topic of energy efficiency inspire you so much when it comes to the Russian economy?

– This is a good topic, including from the point of view of preserving energy resources for future generations, impact on the environment and increasing the efficiency of the entire economy.

– In the north of Russia, for example in Yamal, people are forced to open windows in winter - they heat the rooms too much, and no one thinks that this way it is warm, and therefore money, in fact, flies out the window.

– We need to strengthen information support and train people. People need to understand that improving the energy efficiency of homes means simultaneously improving their quality of life through improving the quality of housing.

Corrected version. The original published version can be viewed in the Vedomosti archive (smart version)