Knauf Drywall

Going Long on Russia

Manfred Grundke knows his gypsum from drywall. Source: Handelsblatt
Manfred Grundke knows his gypsum from drywall.
  • Why it matters

    Why it matters

    Knauf, a German maker of gypsum drywall and other building products, employs about 5,400 workers in Russia.

  • Facts

    Facts

    • In 1932, brothers Alfons and Karl Knauf secured gypsum mining rights along the Obermosel River – establishing the Knauf Group.
    • The firm, based in Iphofen in Bavaria, employs 24,000 employees worldwide and had 2014 sales of €6.4 billion, or $7 billion.
    • Knauf last year acquired U.S.-based Guardian, a maker of fiberglass and insulation.
  • Audio

    Audio

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Manfred Grundke is the head of the Knauf Group, a global leader in gypsum drywall and other building products. Mr. Grundke attracted the attention of the Knauf family while leading the engineering specialist Bosch Rexroth in nearby Lohr on the Main. In 2008, the mechanical engineer became the first non-family member to lead Knauf. Today, Mr. Grundke, who is 59 years old, guides the company together with Alexander Knauf, the grandson of one of the founders. Mr. Grundke’s contract runs to 2018.

Handelsblatt: Mr. Grundke, do you still like to read newspapers?

Manfred Grundke: Yes, why not?

Because leading stories are often about the Russian crisis and your company Knauf is extremely active in the former Soviet Union. Is it true that it doesn’t worry you that carmaker Opel is retreating from Russia?

That is possibly a fundamental decision of the parent company General Motors. As we have found out, GM is going to strengthen its production in Uzbekistan, where GM has already invested.

So no alarm signals for Knauf?

No. We do not intend to reduce our engagement. Naturally, our business there is not going as well as before. We are adjusting our cost situation – like other market participants.

What does that mean?

Because the ruble is falling in value, we have to pay higher prices for materials from euro countries for manufacturing in Russia. So we to regionalize the sourcing of materials – to buy more primary products in Russia. For example, we have been shipping our plaster from Western Europe. Now we are looking for Russian producers for that. We also had planned to replace the energy source at our St. Petersburg plant with a turbine from Siemens. But that has become 40 percent more expensive because the euro has risen so much against the ruble. So we will not purchase a German turbine, but rather one from Russia.

Is there one of equal quality?

No, definitely not. But probably of sufficient quality.

You had 7,000 Russian employees. Now you have about 5,400.

We had been reducing the number of employees in past years. This process is being speeded up by the crisis. We are growing as before, calculated in rubles. But converted to euros, sales have dropped. Losses are in the hundreds of millions.

That is no trifling matter. Nikolaus Knauf, one of the two company owners, went to St. Petersburg in 1993 and knows the Russian president well. What does he report from his talks with Vladimir Putin?

We have the same information as all German companies, even when there are good contacts to the Russian authorities. Knauf does not get any special treatment.

Nikolaus Knauf has always advertised for investments in Russia. Does that fit into an era in which Western sanctions are straining business?

We are investing more. Right now, we are trying to gain a firmer footing in private residential construction in Russia. We are working with the Russian company Sveza, which belongs to the Mordashov group. Together, we want to build modular homes with production methods similar to the automobile industry.

The construction industry is complaining about the crisis.

The financial sanctions have greatly limited financing for big projects, particularly in construction.

Have the Russians reached the limits of their resilience?

No, one should not underestimate the willingness and ability of Russians to suffer. They can tighten their belts more tightly than we could imagine for ourselves. Sanctions are not helping us.

Of course, they are not helpful for your business …

No, generally not. A year ago, a poll found that Russians generally counted Germans as friends. That is no longer the case. I am in Russia at least every other month. Our leadership team confirms that there has been a change in mood, even in our workforce.

“It has always been a Knauf principle not to be dependent on banks and the financial market. That has proven itself in the financial crisis”

Manfred Grundke

Russia is a very important market for the Knauf Group. Can you compensate for the slump there?

We are not investing only in Russia. We recently acquired our third insulation company in the United States, where 15 to 20 percent of our sales come from. Europe, including Russia, accounts for 75 to 80 percent of sales. Asia is still relatively weak with 5 percent.

And that should change?

Yes. If all goes well, in 10 years U.S. sales will be 30 to 35 percent, Europe 50 percent and Asia 15 to 20 percent. Meanwhile, we are building a drywall plant in Vietnam and have purchased one in Indonesia. Knauf is also present in Thailand, China and Australia. And we are interested in other Southeast Asian countries.

Knauf seems to be a quiet, expanding world group from Iphofen in Bavaria that hardly anyone knows.

That is not a problem for us. There is no premium for vanity. We have nearly 300 companies that belong to the group, and they are run in a decentralized manner. Young junior staff can quickly prove themselves as entrepreneurs.

What figures do you use to guide the global Knauf Group?

Profits before interest, taxes and write offs – Ebitda, so to speak – is a very important baseline number for us. And we orient ourselves to how quickly we can earn back the employed capital.

You supposedly make at least €350 million in profits per year.

Sorry, as you know, we are not going to discuss that. But you can compare our Ebitda earnings next to our biggest competitors.

In 2014, you only increased sales lightly, to €6.4 billion. Can you beat that this year?

Only with effort. The cause is mainly the currency drop in the Russian ruble. However, we are investing more than before.

How do you finance the investments?

From our own resources. We have a very respectable equity ratio. It has always been a Knauf principle not to be dependent on banks and the financial market. That has proven itself in the financial crisis.

In 2008, you became the first outside manager to lead Knauf. How has the family company changed since then?

I brought a few experiences from my former jobs that were perhaps useful. When one combines the methodology of big industry with the entrepreneurial gene of the family, one can be very successful. With that, we survived situations that were not so pretty.

You mean lawsuits by thousands of homebuilders in the United States over defective drywall from China?

For compensation, we had to pay a very high sum.

At the minimum, $390 million.

It was a lot. We said: We are standing behind our product. We will settle damages, in case there were actual damages, out of goodwill. But we are not admitting any fault – because there was none. And we will use all legal possibilities, if someone does not agree with us.

What did you learn from that debacle?

We have once again intensified our whole quality assurance system. And we pay more attention to the special rules of the game in the U.S. market.

Succession is often a problem in a family business. You have been leading Knauf as an outsider, together with Alexander Knauf, a third generation founder’s grandson. Is that an ideal model?

It works well. I take care of all the regions that are east of Germany. He takes care of everything, including Germany, to the west. Clear rules of the game are important. There are no special rights for family members. The board of partners keeps itself out of business operations, the operative business leadership is a complementary body.

But the third generation is pressing into business.

Yes, on the level of group managing directors, there are two family members, Isabel and Beatrix Knauf. Others work in levels below. Knauf fills positions solely according to qualification and suitability.

What role do the old partners, Nikolaus and Baldwin Knauf, still play?

They alternate every year as chair of the board of partners. And they contribute 40 years of experience regarding strategic questions. As the company history shows, there have been more correct decisions made than wrong ones.

For example?

Years ago, Knauf decided to build a large drywall plant in Irkutsk. That is in the middle of Siberia – with temperature swings from minus 40 to plus 40 degrees Celsius. Had others invested there? Hardly. Today, the plant is very busy and profitable.

And the family is happy about the high distributions …

The family is modest. Mostly they leave the main share of the profits in the company. All members of the Knauf family are either independently employed or active themselves as entrepreneurs, independent of the distributions.

Mr. Grundke, thank you for the interview.

Hans-Jürgen Jakobs is the co-editor in chief of Handelsblatt. Georg Weishaupt is a Handelsblatt editor responsible for the construction and alternative energy industries. To contact them: jakobs@handelsblatt.com and weishaupt@handelsblatt.com

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