FACE TO FACE INTERVIEW

NAME: Remi Charachon

POSITION: Managing director

COMPANY: Air Liquide China

EDUCATION: Hautes Etudes Commerciales(HEC), Jouy-en-Josas, France. Third year of Specialization in International Program of Management, Barcelona (Spain) and Berkley(US)

IN HIS POCKET: Air Liquide ID Card, cash, mobile phone with picture of six-year-old son Paul (youngest child of five), pen, keys

One of the most exciting aspects of modern business is that due to advancements in transportation and technology, an average piece of equipment in your office or daily life is made with the input of perhaps thousands of people from all over the globe. A cell phone or a computer could be the product of hundreds of subcontractors, with even one computer chip requiring everything from the extraction of silicon, the engineering, and the actual imprinting of the chip – which in itself requires resources from several other subcontractors.

Air Liquide, the world’s largest provider of medical and industrial gases, is at the heart of hundreds of production processes. From computer chips to steel, medical equipment to oil production, special gases provided by Air Liquide are used all across the value chain.

CIB sat down with Remi Charachon, Air Liquide’s China head, to find out how China is using his company’s products, and how industrial gases are the paving the way for cleaner air and less CO2 in the future.

Can you explain what exactly Air Liquide does?

Our business is a bit complicated because you can’t see our final products . . . gases are invisible! But our products are everywhere, in everything from computer chips, flat screen TVs, cars, beverages, and metals in all products that you may use. We’re primarily B2B and supply directly to manufacturing plants and hospitals. Our main products are air gases, which are oxygen, nitrogen, argon, or even gases like krypton, xenon — used in headlights, and helium — which can be used to inflate balloons. But we also provide other gases such as hydrogen.

What is the scope of your business in China?

Our core gas business, which I am responsible for in China (Air Liquide China), can be divided into four segments:1.) Electronics; where we supply high purity gases to chip-makers such as Hynix in Wuxi or SMIC in Wuhan, or for liquid crystal display clients such as BOE-OT in Beijing. High purity gases mean we guarantee one impurity per billion particles.2.) Large industries; where we supply large quantities of air gases via pipeline, for instance to a subsidiary of Korean giant steel maker POSCO in Zhangjiagang in Jiangsu Province or to chemical and petrochemical companies in Shanghai Chemical Park such as BP and Sinopec.3.) Industrial merchant; where we deliver gases to small- and medium-sized users such as for the automotive industry or metal fabrication in either gas or liquid form via cylinders, on-site plants, or in tanks – depending on their need;4.) Healthcare; where we deliver gases to hospitals and directly to patients at their home to treat respiratory disorders (homecare).We also have related activities such as engineering and welding equipment.

Can you tell us about the history of your company in Asia, and in China specifically?

Air Liquide has been in China since 1916. We pulled out of the Chinese mainland during the war, but kept some operations in Hong Kong. Our current business started in 1991, when we were asked by Philips Semiconductors (now ASMC) to supply high-purity gases for their chip-making operation in Caohejing Hi-Tech Park in Shanghai. We built a plant a few blocks from this Shanghai office for Philips.

Are your plants very capital intensive to build?

Yes, Air Liquide is in a very capital-intensive business. For every one RMB of sales, we have to invest about two RMB. This is why we have long-term contracts, up to 15 years. We also carry out very thorough site assessments, so that even if the original client goes out of business, the site and the plant can service other clients. For example, Philips Semiconductors no longer owns the plant we built here in Shanghai. However, from our original plant we are now supplying three separate customers through a network of pipelines of a few kilometers, thus bringing efficiencies. We have continued to upgrade the original plant over the years.

How many plants do you have in China?

In terms of large- to medium-sized plants, Air Liquide China will operate 31 in 2009. In 2004, we had only six of these plants, so you can see our rate of growth right there. For the smaller plants, we currently have 60 in China. These plants are manufactured in China by our engineering division, Air Liquide Hangzhou, a joint venture with Hang Yang Group which started in 1995. They also sell plants for those clients who still want to operate their own plant and not outsource their needs. It’s called third-party sale. They offer a team of highly-qualified engineers to tailor-design the plants to the client’s needs and specifications.

What impact do your plants have on the environment?

We don’t have a significant impact on the environment as we generate no waste. Our core business is indeed to separate oxygen, nitrogen, and argon from the air. Yes, we use power, electricity or steam, but more and more efficiently through advanced technologies and larger plants to supply multiple customers. Outside of that, our processes are actually very helpful to the environment; for example, using oxygen in combustion leads to drastically reduced emissions of Nitrogen Oxide. We are also developing techniques to capture carbon dioxide. There is a huge potential in China today. So in terms of long-term environmental benefit, Air Liquide can make a huge difference thanks to our technologies and highly energy efficient plants.

What are the trends you see for industrial and medical gases?

New applications for oxygen, hydrogen and other gases are being constantly developed for efficiency, environmental or healthcare reasons. People are finally realizing that certain resources are limited and the environment must be protected. We see a strong development in gasification, which is converting coal to chemicals and coal to liquid, such as diesel fuel. There are more coal reserves than oil reserves, especially in China, so the rising cost of oil [has been increasing demand in these areas]. These processes require huge quantities of oxygen and are going to be done more and more regularly. Secondly, there has been a movement to limit carbon dioxide [emissions], and new techniques are being developed for using oxygen to capture CO2. Thirdly, there is a drive to develop photovoltaic technology, which requires high purity gases such as nitrogen or silane. At this time, the cost of solar energy and photovoltaic cells is still high, but it is coming down as technology improves and the cells are widely distributed. Fourthly we see a potential for hydrogen in fuel-cell powered cars with lower CO2 emissions when you consider the whole “well to wheel” chain (from the fuel production site to the car). Overall, there will be focus on a slower depletion of resources.

What are the trends you see in China?

Awareness of the environment is increasing from the top to the layman, even though there is still a big battle to change people’s mindsets. There has been more localization of certain industries in China because of the market size and increased technological prowess. For semiconductors, 70% of new plants will be built in Asia. For TFT or flat screen display, 100% will be made in Asia. As high-tech manufacturing grows and new needs emerge on top of the more traditional ones, [there will be] a lot of opportunities for our company. With this in mind, Air Liquide invested EUR 100 million per year in China between 2004-2006 and has a program to invest more than EUR 300 million per year between 2007-2011. Although China’s portion of Air Liquide Group’s sales currently stands at just 2%, its portion of investment represents 15%.

How has the rise in energy costs affected your business?

It does not affect our profit margin directly because our long-term contracts have built-in price indexation. It is affecting, however, our transportation service, and we have had to raise prices. It is also creating opportunities as oxygen is helping to reduce fuel consumption in glassmaking.

What is the size of your business in China? Are you the industry leader?

Last year, the company had total revenue of EUR 250 million. Our growth rate for the past four years has been 40% per year. Although Linde/BOC still has a relatively higher market share in China for historical reasons, we are estimated to be the leader in growth.

What is the competition like?

We are competing against international companies: Linde, which is German, Praxair & Air Products, which are American, etc. In addition there are a lot of local competitors but they are not competing in all the segments.

Why is there no local competition in certain segments?

It’s a very capital-intensive business and requires highly-specialized expertise. If someone is investing, say, several billion USD in a semiconductor plant, where technology is changing very fast, that client wants a very fast payback and must maximize the production capacity. They cannot afford any glitches and need the plant running 24 hours a day. And these kinds of clients want very highly professional and reliable gas suppliers. There are a lot of local players in the traditional cylinder or liquid business but on the whole, they have not been able to offer what we’re known for: reliability, efficiency and safety. Many local customers still like to own their own Air Separation Unit, but in the last few years we’ve been winning a lot of these companies [over] because they realize that they can benefit from our worldwide operational experience and technological support. Unavailability of a product can cause a catastrophic loss of income if you’re for example, generating 10 million ton of steel a year, as Shagang Steel in Zhanjiagang does.

There has been a wave of mergers and acquisitions in your industry, most notably the merger of Linde and BOC. Is this changing your business?

Air Liquide has also been involved in acquiring companies. It is one of the ways to grow and strengthen competences. Recently the Group acquired Lurgi, a famous German engineering company specialized in hydrogen and gasification.

What advice would you offer to managers doing business in China?

The best advice I received when I first arrived in China was from my finance director who told me that everything is possible in China, but everything is also very complex. And he was absolutely right. For example, we have built a new plant in 19 months, which is in record time, but in other instances issues with land and power supply have created real headaches. So when I start to get too optimistic, I remind myself that everything is complex. When I start to feel desperate, I remind myself that everything is possible. And sometimes, “good enough” is not a bad motto to adopt in a growing economy.